Tan Kin Lian's Blog: Financial planning

Wednesday, July 21, 2010

Financial planning - tips for young people

First posted in December 2009. Re-posted in July 2010

The most important advice in financial planning is to save 15% to 25% of your earnings, in addition to CPF. This personal savings can be used for emergencies and for your retirement. If you draw down on your savings, you pay 0% interest. If you have to borrow from a bank for your urgent cash needs, you have to pay up to 24% interest.

Keep your savings in liquid form. It is all right to keep in a bank to earn 1% interest. When you have accumulated sufficient savings, you can invest in the an exchange traded fund, e.g. STI ETF, to enjoy diversification and professional management, or in a low cost unit trust (look for one with annual charge of less than 1%).

When you have started a family, you can buy term insurance for 5 to 10 years of your income. Do not pay more than 1% of your income in this insurance premium. If you are not able to get term insurance at a low cost or it is too troublesome to get it, you can buy personal accident insurance for this amount. At a young age, the biggest risk is due to accident which can be covered under this policy. You can change to a term insurance when it is readily available.

Do not worry about the other types of insurance. An insurance agent may tell you that they are necessary, but for most young people, you can live without them. It is more important that you have savings that can be withdrawn easily to meet unexpected cash needs. Even if you have invested in an ETF, you can withdraw it by paying only a small charge (i.e without paying the high penalty in a life insurance policy).

Join FISCA and attend the educational classes on financial planning. You can also read my financial planning book, which will be given to all FISCA members. This will be available in January.

Tan Kin Lian

13 comments:

Anonymous said...: Stop being conned by insurance agents. They are are all salesmen and women out to make a sale out of you only. They don't know about financial planning. They don't plan. They sell and peddle products. They only traffic products with high commission so that they can qualify for mdrt or incentive trips of their company. They don't add values.
Do you have existing insurance policies that you want to know whether you have been conned into buying? Visit FISCA and get proper and objective and independent advice.
Find out what is limited payment living policy. Is it just another tweaking of an old product to make it look like new? Is it suitable for you? Are you short changed by this product? All these can be answered and you will be shocked to find out that it is another way of fleecing your hard earned money.
A clever 'innovation' to peddle product.
Join FISCA and be freed from the unscrupulous insurance agents who don't put your interest FIRST.; December 28, 2009 10:04 AM
Achieva Links said...: Thanks for sharing Mr. Tan.; December 28, 2009 11:51 AM
Anonymous said...: Hi Mr Tan,

Is annual expense ratio another type of charges incurred by investor, is it possible to explain what is it all about?

I browsed through the annual management charge of all unit trust in FSM, there isn't many ut with annual charge less than 1%, most ut are bonds. For equity, most of them are around 1.5%.

Thanks.; December 28, 2009 12:52 PM
Garrett said...: Some advice may be good but difficult to implement here in Singapore

"low cost unit trust (look for one with annual charge of less than 1%)" - I have yet to find a unit trust that has less than 1% ER. In fact the ER for bond UT is usually 1-2% and equity UT is >2%. So basically, you are limited to ETFs, but purchasing ETF from US stock market is subjected to a heavy death tax, which may complicate estate planning for some.

"Do not pay more than 1% of your income in this insurance premium" - This is a typo right? If the insurance premium cost $1200/yr, the person must earn $120k/yr??? Shouldn't it be 10%?

Finally, Mr Tan you should recommend youngsters to start saving up an emergency fund (6mth or more) ASAP. In my opinion, retirement money should never be tapped unless it's a financial Armageddon scenario. Losing one's job is not a financial Armageddon btw, but something that needs to be planned for financially.; December 28, 2009 2:51 PM
Tan Kin Lian said...: If you cannot find any unit trust with less than 1% in annual charge, you should invest in exchange traded fund, where the annual charge can be as low as 0.3% per annum.

You do not need to spend 10% of your income to get a term insurance cover of 5 to 10 years of your salary. You can get this cover for 1% of your salary. You can find some benchmark premium rates from www.tankinlian.com/faq; December 28, 2009 6:57 PM
Anonymous said...: Don't forget the expense ratio oe wholelife and endwoment products.They are so high that they eat into the return which has no chance making a decent rate.
Remember that COST IS THE ENEMY OF RETURN and this applies to any investment products whcih include your wholelife and endwoment.; December 28, 2009 7:33 PM
Ardi said...: Nice tips...

If I can also share some info about tips on finance, they can be found at www.findtipsonline.info

Or to get daily tips join their online community at www.facebook.com/findtipsonline; December 28, 2009 10:12 PM
Achieva Links said...: While I do agreed that most of the insurance agents are product peddlers but I cannot denied there are still a group of practitioners who are doing financial planning correctly.

The problem over here is that there are a lot people who need insurance for protection but they did not encounter the right advisor to provide them a good plan.

The current practice by the insurers and their respective superiors' are generally recruiting new bloods. All they want from these new recruits are to get sales from people around them. They claim that they will train them. Training provided to the newbies is a question mark to me ?What sort of training ? Product training ? Ethics training or what ? Well if you are working for a tied agency then you can only promote the in house products. So you think the insurers or his superior will train and tell the newbies, hey boy, this product is very costly as compared to other insurers please refer your client to XXX insurance company? No way, because as long as in the financial need analysis report which justified that this customer need this product to meet his objective and he can earned high commission then where is ethics now ? What sort of training are we talking now ? Product training catered by the insurance companies are generally not training to me is more like teaching. What the newbies needs is skill and wide knowledge of comparison to ensure that they can feed back to their respective why are their product more costly then others ? Well till this far no one bother if you start questioning then let me assure you, you will suffer with lost of income whereas smart agents will just promote products they can receive high commission.

Lets be fair to the serious agents or planners who are serious in their business and they want to ensure their customers to get value for money product. But as long as you are working with a tied agency you have no choice even you realised this product you going to recommend is costly as compared to other similar product in the market, you will have to push for it. They are like you and me, they have a family to take care. But they did provide customer a comprehensive financial plan in which they can achieve the customer objective from year to year.

The real problem is caused by the capitalistic management. Our MAS play an important role to pre-empt and ensure the customers are not getting costly insurance plan. But what the authorities can do is limited. Our capitalist ego must be achieved to make sure a country GDP is healthy. MAS cannot control what the design and cost of the product but at least I am sure they can ensure a value for money basic insurance plan is catered into the market ? Our cooperative supposed to play this role but sad to say that it turn to social enterprise which mean I go along with the practice in the market so that profit is earned to sustain the operational cost.Bottom line for a business is profit and market share ! So do you think a agent from tied agency can provide you a impartial advise and has the ability to provide you a product which is of equal value from other insurers ?

The word Financial Planning is generally abuse by a group of so called planners in the market. Be very careful guys, If you need financial planning advise come to this blog. Do not do a financial review and ended up buying a costly product if you have not done your homework.

Lastly, I would think financial planner should just be given a fee and should not recommend product. The customer should go for product shopping after getting the financial planning report to fit their needs.; December 28, 2009 10:28 PM
Anonymous said...: We must get the regulator to recognise that product trafficking is harmful to consumers. This happens with tied agents who peddle anything and products the company produces without conducting due diligence. Compounded by high commission of the products the tied agents unethically traffic them to their own unwary policyholders and friends. This leads to consumers having a store of useless products.; December 29, 2009 10:07 AM
Anonymous said...: I was in senior management in MNC and after retirement decided to join an Financial Adviser firm to learn about investment and financial planning [FA] to look after my own saving. I stay there for 3 years and the experience there is an eyes opener for me to see how money is being milk by unscrupluous practice.

I would say that less than 5% of these so called wealth management practitioners are ture professionals. Most of them are sales personnel on a MLM scheme. The products they recommend are those that give the highest commission from the product vendors. The FA managers are only interested in recruiting "downline" Financial Adviser Representative to generate sales from their friends and relatives. Since they are not paid a salary, most will quit after sales to their friends and relatives dried up after a year.

To be fair, IFA provides better insurance advice than their counterpart in tie insurance companies because they have a wider selection of insurance product from the market than insurance companies like Prudential, GE, NTUC etc. However, if there are 2 insurance products which are suitable to a client, it is more likely that the one with the higher commission is recommended.

Financial adviser provide insurance advice and investment advice.

For investment products and planning, I'd said 80% of financial advisers do not have a clue of what is good financial planning. Partly this is due to the restrictive nature of the FA licensing which limit them to offer unit trust and insurance as the only tools for investment.

If the financial adviser market continue to be self regulated, I foresees people's money being mis-directed into wrong investments.; December 30, 2009 8:27 AM
Anonymous said...: Even people like who are not long in the industry can notice the malpractices but MAS can't.
MAS thinks all insurance agents and FA reps are qualified after passing the tikam tikam examns. You are generous to say that 80% are not qualified but I estimated 99% are NOT qualified. They are all salesmen and women out to con the poor unwary consumers.
It is sad that MAS is closing 2 eyes to all the unethical practices
instead MAS asked consumers to open their 2 eyes big big. What is MAS up to? Who is MAS protecting?; December 30, 2009 9:27 AM
Anonymous said...: " Even people like who are not long in the industry can notice the malpractices but MAS can't.
MAS thinks all insurance agents and FA reps are qualified after passing the tikam tikam examns."

It's not that they can't, but they got to protect their ass and go with the tide. Why risk the high pay job and try to revamp things set by the founder. Tired of living ? Then complacency develops overtime. Havng read through the materials and test papers, I certainly agree that those exams are nonsense. Try a few times, and once you get the type of questions asked, sure can pass.
The key problem is that MAS is reluctant to punish; be it MB or mal-practice. Usually verbal warning and the whole case is closed. Even fine is small and not deterring. I hope this will change; if not the need to change the leadership. Obama said "Change - We Need".; December 30, 2009 1:35 PM
Chetna Sharma said...: Thanks for sharing these informative tips with us. Financial advisory company; February 05, 2020 3:54 PM