This is going to be a pretty short article. It's motivated from meeting a number of clients who seem to perceive financial solutions as 'expensive'. Which is very frustrating for me because I truly believe that people in general need to have basic money management common sense regardless whether they do any financial planning or not.
Let me explain.
The default position everyone starts off with is to manage their salary on their own. You learn to set aside some of your income so that you have savings and if you believe that inflation really exists will probably try to make your money work harder. You either try to do it on your own or enlist the help of a professional to do it for you.
The idea that a financial solution is 'expensive' basically means that there is a cheaper alternative or the option of doing nothing without making your situation worse. So we need to understand the context of why anyone would consider financial solutions in the first place. It's either to buy protection plans aka insurance or grow/preserve wealth.
Which leads to the next question, are these needs or wants?
If we are making the comment that a staycation is expensive because we pay $200 a night to stay in an air-conditioned room when we probably can do the same thing at home without making our life worse... it's a valid opinion.
But saying that you don't want to buy milk powder for your growing baby because milk powder is expensive is probably absurd... because it harms the baby if we only feed him/her water or worse not feed at all... frankly medical bills are probably more expensive.
Likewise, what if I tell you that not using financial solutions is more expensive?
How much does it cost to go without financial solutions?
In the context of why people use financial solutions in the first place - to mitigate risk or grow their money, let's see how much it costs to achieve these goals on their own without financial instruments.
Protection planning / risk management
If we are looking at whether insurance is necessary, we typically get basic insurance to cover for death and sickness. Now, let's assume Derek, age 35, earns $5,000 a month and has 2 kids. His wife is also not working as she's taking care of their kids. Their household expenses is about $3,000 monthly.
Derek passes away
If Derek were to suddenly pass away at 40, Derek's wife and kids would suddenly lose his $5,000 income. Given that Derek is expected to retire at 65 and contribute to the household income till then, this means that his family just lost 25 years of income which amounts to $1,500,000. This also means that the family suddenly has a need to cover $3,000 monthly expenses on their own.
An insurance plan can cost as low as $1,300 a year to provide Derek's family with $1,500,000 of Derek's lost income. On the other hand, Derek would need to set aside $300,000 a year if he knew he was dying in 5 years. In fact, Derek would need to set aside $6,000 per month if he wanted to provide a buffer of 10 years worth of living expenses (assuming no inflation) at 40. In all the above scenarios, Derek can only afford $1,300/year in insurance premiums because the savings he needs to set aside is way above his salary. In this case, which is more expensive?
What if Derek falls ill?
Let's assume Derek had a massive stroke at 45, and his medical bills amount to $100,000 in total treatment cost. On top of which, he is unable to work for 1 year due to partial paralysis. His total insurance premiums to cover for his lost of income and medical bills would be at most $4,000/year. However, it would cost Derek $16,000/year in savings to ensure that he has this amount saved up to pay for his medical bills and lost of income. This is not even accounting for potential extra help needed when he is partially paralysed at home. Above all, Derek can't spend the $16,000 he sets aside if not he won't have the money available for his healthcare needs. Now, if you are Derek, do you prefer not touching $4,000 or $16,000 each year?
Wealth Accumulation/Preservation
What if Derek is healthy and he wants to retire with the same expenses?
Without factoring in inflation, Derek needs to not touch $720,000 minimally if he retires from 65 to 85. If he wants to factor in a longer life expectancy, he would need $1,260,000 with no inflation accounted for. This means that Derek needs to not spend $24,000 - $42,000 a year till he retires depending on long he thinks his life expectancy will be.
Now is $24,000 - $42,000 a year expensive for someone who earns $5,000 a month?
However, if Derek uses a financial planning instrument, he only needs to set aside $16,000 - $28,000 per year at a 3% return or $12,000 - $20,000 a year at a 5% return to achieve the same outcome.
In this case, both scenarios require Derek to leave a sum of money untouched. Doing it on his own simply cost him a lot more. Imagine how much more this effort is multiplied if we account for inflation...
Putting things into perspective
I can go on about child education cost and all other financial goals but the math would arrive at the same conclusion. The truth is, as long as financial instruments give a better return than bank deposits, the effort will always be cheaper.
People only find paying for these needs expensive relative to having FREE CASH FLOW. Yet as shown in the examples above, the idea of FREE CASH FLOW is an illusion. If the money is spent, you have none available for contingencies. However, if you compared the cost of paying for financial solutions to your real freedom to spend the rest of your monies freely, using financial instruments to achieve your goals is so much cheaper!
Read also: The Best Christmas Gift For Your Future Self
After reading this article, you may have some questions or may want to get started on a financial planning. You can reach me by dropping me a message.
Be sure to share the article if you feel this information is helpful. You will enable a lot more people to learn about financial planning.
About Janice
I specialize in portfolio optimization (ensuring you get maximum value for every dollar you put in) and retirement planning. Clients look for me primarily to outsource their retirement planning needs so that they can focus on other aspects of life that interests them. Many of whom are very good in earning their incomes in their respective professions and wish to ensure their monies continue to work harder while they focus on what they are good at. Refer to client testimonials here.
I've helped many clients who are referred to me reduce the costs they are paying for their insurance or help provide solutions when they deem they are stuck with huge commitments bought when they were younger but unsuitable for their present life stages. You can reach me at 94313076 or my social media accounts on Facebook and Instagram.
Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.
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