SAVINGS, investments, wills, and insurance policies are vital components of any financial plan. Most people intuitively know this.
However, they might not be able to articulate why they believe those four components or elements of responsible financial planning are important. Just in case you fall in that large group, permit me to outline why they are critical to our financial health — for markedly different reasons.
Savings: We save money for two reasons:
1. To grant us financial stability; and
2. More importantly, to inject emotional stability into our hearts and minds.
Investments: We build up investments over time for two very different reasons from saving money.
1. To try to grow our money faster than inflation erodes its purchasing power over time; and
2. To also attempt to grow our money faster than the aggregate taxes we're all inflicted with erode our wealth's true value.
Wills: All adults — and, sadly, too many children, as well — have come to learn that an inescapable part of life is death. The sequential expirations of our loved ones make us increasingly aware of the inevitability of our eventual own demise. The frailty and brevity of human life underscore the importance of estate planning in every individual's holistic financial planning journey.
Insurance: A fascinating human invention based on Probability Theory and the related predictive nature of the Law of Large Numbers that allows us to transfer life-associated risks like untimely illness, injury, and death to entities called insurance companies in exchange for monetary payments, namely insurance policy premiums.
All four components of a personal financial plan are, as mentioned, important. Their relative importance though often depends upon where we are in the typical human life cycle.
ADEQUATE PROTECTION
When we're children, learning to save is a useful life skill. But even if we don't internalise this lesson early in life, we can benefit from doing so at any later stage of maturity.
So, not surprisingly, in young adulthood, saving retains its importance, while making a serious start on investing can be beneficial; and purchasing the correct forms of insurance can help protect our economic potential.
In middle age, saving, investing, and insurance are crucial; and writing a will grows more important with each passing day.
Later, in the final decade of life — to the uncertain extent we can estimate when that last leg of life might start — writing or updating a will is crucial, while the three other elements remain important.
In case you think it will help you better manage your money, you're welcome to cherry pick from among the more than 430 Money Thoughts columns I've written, here at this archive link: www.nst.com.my/authors/rajen-devadason, for insights into all four components.
For now, though, take time to ask yourself whether you have adequate protective coverage stemming from four distinct forms of insurance. Those are:
1. Death insurance, which is predictably marketed as life insurance;
2. CI insurance, which stands for Critical Illness insurance against the contraction of so-called dread diseases like cancer, respiratory ailments, and heart attacks, among many others, which don't immediately lead to death;
3. H&S insurance, which provides us with important Hospital and Surgical coverage to help us deal with the often debilitating expenses of hospital stays and operations; and
4. PA insurance, which is Personal Accident insurance in case of severe total permanent disability (TPD) or death from accidents.
American Congresswoman Jan Schakowsky once made a compelling observation about CI and H&S protective coverage:
"Without health insurance, getting sick or injured could mean going bankrupt, going without needed care, or even dying needlessly."
Also, there are other important forms of insurance like motor, fire, and professional indemnity coverage that many of us need. Therefore, working with a licensed financial planner, a well-informed financial advisor, or a seasoned life or general insurance agent can be helpful.
BE RESPONSIBLE
Quite unsurprisingly, the first form of insurance most of us are exposed to, usually by enthusiastic agents, is life insurance. While not everyone needs it, most of us do. Financial guru Suze Orman has explained why:
"If a child, a spouse, a life partner, or a parent depends on you and your income, you need life insurance."
It takes time to build sizeable wealth through steady saving and investing, typically decades. And terminal mishaps can occur anytime, which is why every person who (1) has at least one economic dependant, and (2) who isn't yet wealthy enough to be self-insured, should talk to a reputable life insurance agent from a robust insurance company before seeking out coverage in the other forms of insurance I have outlined above.
Since I don't sell insurance policies, but only analyse and then advise my clients on how much coverage they require, it makes it easier for me to earnestly and unbiasedly say life insurance and the other forms of risk transferring coverage we've explored here are super important.
Now, having made my points as clearly as I know how, only one important step remains — for you to act responsibly for the benefit of your family and yourself.
© 2024 Rajen Devadason
Rajen Devadason, CFP, is a securities commission-licensed Financial Planner, professional speaker and author. Read his free articles at www.FreeCoolArticles.com; he may be connected with on LinkedIn at www.linkedin.com/in/rajendevadason, or via rajen@RajenDevadason.com. You may also follow him on Twitter @Rajen Devadason and on YouTube (Rajen Devadason).