Tea with TheMinimalist: Financial planning? Start with why!

This is a guest blog by a mysterious and wise man with the codename: TheMinimalist.

Many of us reading financial blogs such as ASSI understand the importance of planning our finances. The maxims of “Spend less than you earn”, “Invest in ETFs/Index Funds” and “Protect ourselves with insurance” immediately come to mind.

We KNOW it is critical to do all the above yet we DO NOTHING about it. Why?

It wasn’t until I met a university friend that I finally got my answer.

Recently, I was looking through my FB news feed and saw that one of my university friends changed his job recently. I didn’t really talk much to him back in school but was curious about how he is doing. It has been about 3 – 4 years since I last saw him. I decided to arrange a nice dinner with him after work.

While I was waiting for him at Raffles City Starbucks, I saw a guy that somewhat resembled him but he looked “bigger” so I looked away. Then, that guy started messaging on his iPhone. “Ok, I think that’s him” and I was spot on when I received the whatsapp on my phone. “Oh wow, you look more prosperous since I last saw you huh…” I commented. “Yeah, I have gained 6-7 kg since I started work, haven’t exercised much you see…” he explained.

My Body Mass Index (BMI) is 21.7 and falls within the normal range. However, the fear of becoming a “fattie” motivated me to take steps to lead a healthier lifestyle by:

• Exercising more frequently after work
• Opting to eat fruits and nuts for my dinner
• Controlling the amount of food intake for each meal

The ongoing efforts of such a healthy lifestyle have paid dividends and I am currently feeling “lighter” and better.

So what is the lesson here?  

 

“Humans are VISUAL creatures, we ACT by EMOTIONS, not so much with reason.”

We can read millions of books on investing, read every single blog post by AK71 and, yet, NOT be motivated to do anything about our money. However, when we SEE our peers doing much better than us during the class reunion, do we not feel something stirring in our hearts? Yes, that feeling that we are not good enough and that there’s so much more we can do in our lives. 

Now, if you are currently struggling with motivations in personal finances, I think I might just have the solution for you.

Here are two simple things you can do immediately to start turning your financial life around:

1.     Find someone who is more successful than you financially (Psst…AK71). Ask him out. Buy him a nice dinner at Tim Ho Wan. Learn as much as you can from him about budgeting, investing and insurance. Most successful people will happily oblige. After all, people LOVE to talk about themselves. Fact of life. 

2.     Find someone who is doing not so well in his or her finances and ask them out for coffee. They can be knee-deep in debt, spending more than they earn, invested in “scams” etc. Your intention is neither to mock them nor to sympathise with them.  Instead, be curious and figure out what got them into such trouble in the first place. Most of the time, it’s due to bad decisions and not by circumstances.

Ask yourself and decide (out of the two) who you want to be like in 3 years' time.  

Next, take out a piece of A5 paper and write down ONE specific thing you will DO from today onwards to better manage your finances. Then DO it.

If you need some inspiration on actionable items, here are some resources you can turn to:

Achieving level one financial security for Singaporeans.

Save 100% of your take home pay! What?

If we are not rich, don't act rich! 

Every single time you find yourself faltering, think back to the two people you have just met. Who do you want to be like in three years’ time? The answer (to your future) is in your hands.

Go try it and share your experience in the comment box below or FB. I look forward to your response to my debut guest blog! J 

AK's note:
I think I have been blogging too hard lately. I might take a long trip overseas to take a break. I should be un-contactable by all modern communication devices then. So, unless courier pigeons are available, invitations to have dinner at the atas tim sum restaurant might not reach this fatty.  -.-"

FREE Investment Linked Policies or Term Life Policies?

I took down this blog post after it was put up for only slightly more than an hour at 8am this morning. 

In that short period of time, it received about 400 page views and several comments from readers, a couple of which were more than unpleasant. 

After deleting the blog post, I received a few comments and PMs from readers in FB who missed reading it.

Often, we are presented with charts and tables by advisers which do not show the complete picture. I am not claiming that I am presenting the complete picture here. 

I most certainly am not but I believe I have illustrated quite simply in the blog post why ILPs are not cost efficient for consumers. 

They are overpriced life insurance products and as investment tools to help grow our wealth, they are mediocre at best.

I am quite mindful of my blog's louder voice and the potential backlash I might be subjected to. 

Despite what some people might think, I am not crazy. I wouldn't want to get into trouble. 

However, sometimes, we just have to say it as it is and this is what AK is known for doing. Right?





Feel free to disagree but please be civil about it.

However, if you think that what I have done is worthwhile and if you agree that more people should know about this, please share this with your family and friends. 

So, come what may, resurrected, here it is:

----------------------------------

A reader told me that his classmate from school who is trying to get him to buy an ILP told him that, basically, after 20 years, he will break even on that ILP. It means that he would have received 20 years of life insurance for FREE! 

Sounds really attractive when the word FREE is thrown in, doesn't it?

$1,000,000 life insurance coverage with a premium of $13,000 a year. That is quite a bit of money.





Anyway, because I have been blogging so much about buying term life insurance lately, the reader was quite torn as to what should he do.

So, my simple brain churned out some simple numbers.

If he were to buy a $1,000,000 term life insurance instead, he would pay less than $2,000 a year, being in his early 30s, for the next 20 years. 

That means a savings of more than $11,000 a year.





For ease of calculation (i.e. my ease of calculation), let us assume that the term life insurance premium is $3,000 a year and that the savings is only $10,000 a year. 

Yah, only $10,000.

It is time for some magic!

Now, assuming that the reader were to invest the yearly savings of $10,000 into stocks of fundamentally sound businesses that have a dividend yield of 5%, he would, in 20 years, receive in dividends, from year 1 to year 20, the following:

$500
$1000
$1500
$2000
$2500

$3000
$3500
$4000
$4500
$5000

$5500
$6000
$6500
$7000
$7500

$8000
$8500
$9000
$9500
$10000

Total pocket money (nothing reinvested) collected in 20 years: $105,000.







Pause.

Sinking in.

Pause.

Sinking in.

Pause.

Sinking in.

Stunned? Banana...

$105,000 is more than enough to pay for 20 years of premiums for a $1,000,000 term life insurance! 

In fact, it is about twice as much as the hypothetical premiums and probably thrice as much as the real premiums! 

So, isn't this a FREE life insurance as well? 





In fact, it is better than FREE since there is a lot of money leftover!

Chances are that the $200,000 worth of investment would still be intact 20 years later and it would continue to generate income year after year. 

That is $10,000 a year, year after year.





I know this is a simplistic example but it makes the whole matter of why an ILP is not a good choice so much easier to see. 

I believe that the assumption of a static 5% yield on investment is not over the top either. In fact, it could be quite unrealistic, in a good way.

Anyway, I believe I created another problem for the reader after our chat. 





He said:

"thanks, and i having some headaches how to reject my friend now..."

Oh, dear. Sorry. -.-"

Related posts:
1. Term life insurance: Some lessons.
2. Term life insurance: Why buy term?
3. Whole life insurance and investing.
4. Investing for income: An important element.
5. The best insurance to have in life.