Important things to do before we start investing.

It might come as a surprise to some but it is very common for me to see people who are very excited about starting their journeys as investors and neglecting matters of personal finance. Of course, regular readers would know that I always tell people that they must get their personal finances in order before thinking about investing in the stock market.

So, the question is whether we have overlooked essentials in financial planning in our haste to invest? What could possibly be the most overlooked area of financial planning? Not surprisingly, it is the area of insurance. Insurance is an expense that many would like to dispense with but we really shouldn't.

Many people are attracted by the high returns investments could potentially provide but fail to understand enough what it takes to become an investor. Many jump into the sea of investments and end up drowning. Fear strikes me when my peers get overly excited about “investment opportunities” or when they are too eager to begin investing before taking care of the essentials.

As with everything in life, we should prioritise and take care of what are most important first:

Debts - In our financial plans, we know that we first have to take care of our debts. (Do you know that many Credit Cards effective interest rate is at 24.9% per annum now?) It would not be logical for us to invest before clearing these debts, loans and cash lines with high interest rates that we might have. How could we achieve 24.9% investment returns per annum?

Emergency Savings - Emergency savings of at least 6 months of our monthly expenses is recommended. This is important in case of a stoppage of our income which could happen, for example, in a retrenchment. Emergency savings is also critical to cover unexpected expenses such as medical expenses for our loved ones, household, vehicle repairs and other unfortunate events.

Essential Expenses - If we expect some essential expenses to come our way such as hosting a wedding banquet, having our home renovated or planning to have a child, then, we should save up for these expenses. These are all expenses which could end up being five figure sums. This is money we should not invest with because it is money we cannot afford to lose. We do not want to have to liquidate our investments at a time and price not of our own choosing.

Insurance - We must get sufficient insurance coverage where it matters. Bad things do sometimes happen in life and we should not think that bad things happen only to other people. Without proper insurance coverage, we could see plans for retirement adequacy or financial independence derailed.

Examples of Financial Risks

Medical bills:  How would we deal with hefty medical bills if we did not have sufficient savings?

Loss of income due to medical crisis or death: If we should die or be disabled due to some illness, who is going to provide for our dependents?

These are all real issues which have to be dealt with. The good news is that it is possible for us to be adequately insured at a low cost if we purchase the right insurance products.

If you are wondering what kind of coverage and what type of insurance you should be buying, have a look at the following table:

Seems like there are many types of insurance we have to buy. Does it have to cost an arm and a leg? No, it is possible for a person aged 35 years old to be adequately insured for as little as S$200+ a month.

Where & How to Plan for Insurance?

You could easily calculate your insurance needs:
Click here to find out your life insurance needs
and
Click here to find out your critical illness needs.

To compare and purchase insurance, DIYInsurance –Singapore’s First Life Insurance Comparison Web Portal by Providend Ltd aggregates products from various insurance companies and provides 30% commission rebates in addition to ongoing promotions.

Staff from DIYInsurance are all paid a fixed salary and do not participate in sales-based compensation or incentives of any kind. Not being remunerated on a commission-basis means they are independent and there is no hard-selling and over-selling.

If you require any advice on your insurance needs, do contact them and seek their expertise. Visit www.diyinsurance.com.sg and request a quote for what you require.

Have you planned for the above must-dos?

If you have not, please do so as soon as you can. We do not want to risk having our savings and investment gains wiped out due to our carelessness when it comes to personal finance matters. We have to protect our assets and also plan ahead for any unexpected events.

It probably pays to be patient before diving into the stock markets. We will not only be doing ourselves a favour but a very important favour for our loved ones as well.

The is a sponsored blog post by the good people at DIYInsurance.

Related post:
6 questions to ask about your insurance.

What makes an undervalued and thoughtful gift?

UPDATE:
I remember some people of rather limited imagination calling me a cheapskate after reading my blog post. Well, at least I did not "re-gift".

"HAPPY HOLIDAYS AND MAY ALL YOUR PROBLEMS BECOME SOMEONE ELSE'S."
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I know someone who orders canned green tea at coffee shops all the time. He says it is a healthier option compared to carbonated soft drinks. 

Well, I told him that canned green tea has lots of sugar too and that they are not necessarily much healthier alternatives. (AK can be very sensible about food too, you know.)

Anyway, for his birthday, I gave him a box of green tea. I told him that he just needs to bring a tea bag a day to work and he would be able to save $30 a month from not ordering canned green tea during lunch! His office has a hot water dispenser, I am sure.

Definitely a healthier alternative with lots of anti-oxidants and no sugar too!

When I told a friend what I did, he said I was a cheapskate! 

Oh, dear. Why did he say that? Actually, did you think the same way? 

Now, now, you can be honest with AK. I promise to listen.

Anyway, I told him it was a $80 gift! That puzzled my friend. He wondered if I bought some atas green tea from Japan. 

No, of course I didn't buy expensive green tea from Japan.

Then, what did I do? I explained:

Well, that box of green tea (which is a product of Japan, by the way) costs me a bit more than $5.00 and has enough tea bags to last about 2.5 months. 

So, the recipient of the gift is going to save $75.00 in those 2.5 months assuming that he pays $1.50 for a can of green tea during his lunch breaks (i.e. 50 days x $1.50).

Genmaicha.

In fact, if the habit grows on him, he would continue to save money during his lunch breaks forever.

The gift might not be costly but it is worth a lot more than it looks. 

It is an undervalued and thoughtful gift from AK. 

Remember the difference between price and value?

Well, I hope my friend appreciates it.

Related posts:
1. The price of convenience.
2. Genmaicha.

Do I need a bigger home and what to do if I do?

Housing is a topic that is close to our hearts. It would not be wrong to say that most people tend to be somewhat emotional when talking about our homes. After all, home is where the heart is.

So, being objective which means not being emotional about our homes when it comes to viewing it simply as an asset or liability is not easy for many people. 

Fortunately, for some reason, AK is quite emotionless when it comes to his home or so his friends have observed.

Here, we have an example of AK dishing out some objectivity on a reader's housing situation:

Hi AK,

Hope this email finds you well.

Thank you very much for taking your time responding to our queries in relation to giving us your honest opinion in matters of money management.

I have a "worry".

Currently, we bought a condo and owing about $400k+ with the bank and paying our monthly mortgage still at $2000/month. Its a one bedroom small condo and small enough that we feel we needed a bigger place given that we just had a baby a few months ago.

option
1) Sell condo now and wait for 2 years before we are "allowed" to go into Econdo and might take another 4-5 years before TOP. In practicality, i feel its not practical to wait that long because we will need a bed for our 5 year old grown up boy but pros are we could save up "more" before buying into a bigger econdo home for a 3 member family. So more time for us to save up for something more value for the money e.g econdo, hdb. We made the mistake of buying to condo initally.

2) sell this condo now and buy into another bigger place with our current savings of $250k, meaning take out our savings and buy a bigger place, something like a 2+1 bedroom private condo. pros we can take opportunity of the low condo price now and "hope" in few years it shall provide us some asset appreciation. Note: Selling our current 1 Bedroom condo will make a 50-60k loss because of the low demand in current market now. we would have made 25% loss on our initial downpayment.

3) take our savings and stay vested so we could have more passive income (my idea actually). If stay vested with REITS e.g saizen of $250k. we could have about 1-2k per month passive income. Cons is we wont have a bigger place (will need to stay with our parents) and there is risk of an economic downfall (my wife's worry) and i am not sure during the last subprime recession how much did Saizen drop to? Meaning if i used my savings for buying a property at least the pros is i could have something physical at hand during economic downturn. Am i making any sense?

4) lower our debt ratio and sell off when the market improves then rip the profit--> then buy in to a bigger place. ( by then may be the property market and outlook would have improved)

I know nobody can tell the future but i would sincerely hope if you can share your experience and expertise on the subject i have at hand currently.

Sincerely
B

Hi B,

All of us need a roof over our heads. How big or pricey a roof? That depends on each person's circumstances.

I like to approach situations such as yours by thinking about the needs:

In your case, the first question to ask is whether you really need more space or could you make do with what you have (i.e. your current one bedder condo)? If you could somehow make do with what you have, then, no issues. Think about possibly refinancing the housing loan if that could bring down the cost of servicing the loan.

If you absolutely cannot make do with what you have and really need more space now, then, sell your current place only if you are able to find a good value for money offer in a larger condo somewhere. Don't buy a larger condo unit just because you can afford it, always bearing in mind that our homes are consumption items and not investments. What about buying a resale HDB flat instead?

If you think you don't need more space now but will need more space in the future, then, selling your condo and moving in with your parents first while waiting for a couple of years before you could buy an Executive Condominium from a developer (or a BTO HDB flat if your combined salaries are not too high) will most probably give you the best value for money. In the meantime, you could invest some of the money in the stock market for some extra income.

In summary, what you decide to do at the end of the day should consider:

1. What you need.
2. When you need it.
3. What kind of housing is acceptable.

I hope my talking to myself is helpful to you. :)

Best wishes,
AK

Related posts:
1. Affordability and value for money.
2. Buying an apartment: Considerations.
3. Buying a property as an owner-occupier?