Five Common Mistakes People Make with Their Personal Finances March 19, 2021

At some point, people will make mistakes with their personal finances. I have personally seen too many examples. In my five years working as a financial advisory consultant, I have helped over a thousand people plan their finances. Some things which I have heard or seen have stuck with me, leaving me pondering, “Why do people do that”?

Here are five of the most common mistakes people make with their personal finances, curated from my five years of experience.

1. Assuming they are young and healthy and won’t need insurance

You may be healthy now but anything that can happen, will happen. Remember Murphy’s Law? Buying insurance after you discover a medical condition is akin to jumping out of the airplane without the parachute, only realising it when you are in free fall. Your realisation is one second too late. And time cannot be reversed.

I have seen one too many clients frantically asking around if they can buy insurance after uncovering a condition during a medical check-up. Yes, they can apply. But there may be exclusions or premium loading, or even a decline of coverage, depending on the underwriting outcome. Insurance is your seatbelt, air bag and shock absorber during your journey through life’s roads. You wear it and it stays invisible and silent, until something happens and it’s there to mitigate the shock. It protects you from unforeseen financial distress. The ‘unsinkable’ Titanic still sailed with lifeboats (just too few). Why? Because the unexpected can happen.

2. Not realising that income is at the core of your finances

This isn’t really a mistake but I wish more people are fully aware of it. Pause for a moment to consider this: your income is at the heart of your life. It determines the food you eat, the house you stay in, the clothes you wear. One day, that income will stop. You will either retire or fall sick and become unable to work. Yet, your income must keep coming to you. That is why you need assets that produce income.

Build your income streams, both guaranteed and non-guaranteed. Guaranteed income ensures that you will always have money coming to you. Non-guaranteed income ensures that in good times, you have abundance. In lean times, you can still fall back on your guaranteed income.

In 2020, many companies slashed or suspended their dividend pay-outs as a result of the pandemic. When you buy your groceries, store owners don’t accept bitcoins or DBS shares as payment. They want cold hard cash, which you need to get from your income-producing assets.

3. Overemphasis on fees

Fees are NOT everything. Lower fees don’t mean higher returns. Sure, if you have two STI ETFs from two fund houses, lower fees from one fund house should theoretically result in a higher return, all else being equal. But what if I told you that there are funds out there which outperform their benchmark ETFs and by quite a lot as well? Why is this so? Simple. Active management is not dead. Markets are still inefficient, especially in the Asia Pacific region.

It’s not about finding the investment or advisor with the lowest fees. It’s about finding the investment or advisor who is worth the fee!

4. Not optimising their coverage and watching their cash flows

A prospect of mine bought a term plan to support his friend, even though his plan was more expensive than a similar one I proposed by over S$500 a year. Over 40 years, that chalks up to over S$20,000 more for the exact same coverage! Without comparing his options, he ended up not optimising his dollars on the essential coverage that he needed.

As a consultant from an independent financial advisory firm, I am able to help my clients optimise their coverage by comparing and finding the most cost-efficient plan, tailor made for their needs. This helps them to have more funds for retirement planning needs.

I have also seen people over-commit to savings and endowments, thinking that they would be able to service the premiums down the road. Personally, going by my 4-3-2-1 budgeting rule, I would allocate at least 20% to investing or saving. Even then, not all that 20% goes to commitments that must be kept, such as retirement income plans. Things can and will go wrong, people can get retrenched or be forced to take pay cuts. And suddenly, cash flows become very tight. Check out my Money Matters video on Personal Budgeting: 4-3-2-1 Rule here.

5. Lack of understanding and urgency in retirement planning (or planning in general)

People are living longer and longer. Saving, investing and capitalising on CPF alone are not going to get you through your golden years, unless you have crunched your numbers very solidly and realistically. People need proper retirement planning, which is a structured way of determining your retirement income goals and coming up with the right financial strategies to reach those goals.

Retirement planning is not something you do the year before you retire. Starting early allows compounding to kick in. Starting early allows you to know your targets and whether you are on track to maintain the lifestyle you envision for retirement. If you don’t build a holistic plan to tackle all aspects and risks of retirement early, life could throw you a curveball right before you retire.

Many people also fail to understand that as much as planning is about increasing your wealth, it is also about how you distribute it in retirement. How will you structure your layers of income such that you receive what you need, when you need it?

And on the topic of urgency, the ball is actually in people’s courts most of the time. Not the consultant. If you sit on something too long, the situation changes. If you intend to take action by getting your coverage done up or your retirement planned out, act now. Sitting around doesn’t help you achieve anything, and you might in future be unable to get coverage because of health issues, or miss out on the next bull run.

If you are certain that you want to do something – sort out your retirement, settle your insurance, open an account to start investing etc, then see it through. Don’t stop halfway or you are back to square one. If you aren’t certain that you want to do something, that’s okay too. Take action only when you are certain but see it through.

For an in-depth version of this article, click here.

Contributor:

Elijah Lee

Financial Services Consultant

Phillip Securities Pte Ltd (A member of PhillipCapital)

Email address: elijahleest@phillip.com.sg