Tan Kin Lian's Blog: Flexible Savings Plan

Monday, December 03, 2007

Flexible Savings Plan

Dear Mr. Tan,

You recommend Term and invest the difference. Some people will not invest the difference and will spend the money away. Surely this is a bad idea? It is better to get them to save in an endowment or whole life policy.

REPLY

I wish to educate people on the following:

1. Buy Term to get the insurance protection at low cost
2. Invest 10% to 15% of the earnings in a low cost investment fund
3. Invest more, if you can.
4. Be frugal in your expenditure.
5. You can withdraw from your savings to meet important life events

Look for a unit trust that allow you to invest 100% of your savings and have low expense ratio. If the unit trust requires a minimum sum for top-up, you can save in a saving account and invest a bigger sum once or twice a year.

For example, if you wish to invest in the STI exchange traded fund, you have to buy a minimum of 100 shares (about $3,500). If you accumulate this sum over a few months, you can buy 100 units at that time. This ETF has low expense ratio of 0.3% only.

Lesson: Have a flexible savings plan, and the discipline to manage your savings.

9 comments:

Priyadi said...: discipline cannot be bought. if the person is not discipline in the first place, he will let the policy lapse anyway. i know this exactly because i've been in this situation before.

in order to get some discipline, people need proper reward. investing $500/mo to get an effective $200/mo at the end of the year is never a reward. it will only make the matter worse. people will lose confidence and some will let the policy lapse at a large loss. it doesn't matter if they argue that the policy has protection. without any transparency, people will think only in terms of the policy's cash value.

trust what mr. tan said: buy a diversified low cost fund. if $100 you invested 1 year ago become $110 now, it is all the reward you need to become discipline.; December 02, 2007 4:33 PM
Anonymous said...: Insurance agents like to tell you that discipline to save is in whole life or endowment. Let me ask what is percentage of lapse from this kind of policies.As large as 70% go on APL(automatic premium loan) before 7 years and as few as 5% keep beyond the 20 years. What discipline? Why? They say you need insurance for whole life. The only insurance I know that they will have for whole life is H&S medical, medishield.( It's compulsory and not discipline)
By 50 many do not have insurance not because they don't need any more but because they feel burdened. Discipline is personal. How strong you believe what you are doing and how badly you desire the goal to succeed.
My question is WHY BUY WHOLE LIFE PLAN when there is no intention to hold for whole life. It must be the insurance agent's idea, right?; December 02, 2007 6:23 PM
Anonymous said...: To help you with the discipline get a good and honest adviser to come alongside you.Whether it is investing or insurance planning the adviser is your guide and navigator. You should not do it alone.
I emphasise good adviser because you don't want a salesman who thinks not of your interest but only thinking of selling every product his company manufactures, good or bad.; December 03, 2007 10:37 AM
Unknown said...: Feel free to spend, its yr hard-earned dough anyway.Take a break, you really need a gd holiday vacation..; December 03, 2007 12:45 PM
Anonymous said...: The liquidity for STI ETF is pathetic... i ordered 2 lots this morning 10am, and till now (2.15pm), still in queue... so far, the buy vol is only 19 lots, sell volume only 3 lots!!!; December 03, 2007 2:14 PM
Tan Kin Lian said...: If you by at the seller's price, you will be able to get liquidity. The fund manager will make the market at their price. (I hope that the spread is narrow).; December 03, 2007 5:33 PM
Tan Kin Lian said...: This comment has been removed by the author.; December 03, 2007 5:33 PM
Anonymous said...: I would like to add to the first commentor: "discipline cannot be bought. if the person is not discipline in the first place, he will let the policy lapse anyway."

It is true about. if you lapse a term insurance, you lose the premiums only. it's not a big deal, after it's only a cheap term.; December 04, 2007 1:25 AM
hongjun said...: For a ETF, the buy and sell volume is not significant. You should be able to buy your lots if you buy it at the sell price. As what Mr Tan has mentioned, the fund manager makes the market.

hongjun; December 05, 2007 12:39 AM