Debunking personal finance myths
By Lorna Tan
With the plethora of financial information available at our fingertips, it is no wonder that we sometimes feel overwhelmed. This is particularly so during this period when there is so much noise due to the market volatility, no thanks to the COVID-19 pandemic.
This information overload may paralyse some of us to a state where we procrastinate in acting on our finances because we lack clarity on what is appropriate for us. It is important to get our money management beliefs right because how we think shape our behaviour and actions.
What’s fact and what’s fiction? Here are 4 common personal finance myths.
Myth 1: Only those with high pay can afford to set up a financial plan
It is not how much you earn but what you do with your pay. Some of you may think that whatever you set aside is too small to make a difference. But remember that little drops of water make the mighty ocean. If the saving habit does not come naturally to you, start by differentiating between your needs and wants and set up small savings goals of at last 10% of your pay and most of your bonuses. Learn that by “paying yourself first” (save first before paying expenses), you will be able to build your hard-earned savings to a nice pile which you invest, after setting aside emergency funds and getting some essential protection like healthcare.
With the help of online calculators and digital tools, there is really no reason why you cannot up your game in money management.
Myth 2: Financial planning works in a linear manner
Some of you may believe that financial planning works in a sequential manner, that is, it progresses from one stage to another in a series of steps. That is not true. For instance, some people wrongly believe they can only start retirement planning after they have set aside what’s needed for their kids’ education. They do not realise how this decision will impact other areas of their financial plan and adversely impact their future.
By then, their resources would be drained, and they may end up working longer, lowering their retirement lifestyle expectations and/or turning to their kids for financial assistance.
This is partly due to the magic of compounding. The earlier you start, the harder your money can work for you. Even the difference of just 10 years can be significant. Let’s assume you are age 25 and invest S$500 in an investment that earns 8%, and can top-up S$50 a month. At age 65, the investment would have grown to about S$186,700. If you wait until you’re 35, however, and do the same thing, you’ll have less than half as much, or about S$80,000.
Myth 3: I shouldn’t invest beyond age 55
It is likely that most of our great grandparents and grandparents did not have to grapple with the undesirable prospect of outliving their financial resources. Most of them would have retired in their 50s or 60s and pass away about a decade later. But not for some of us.
By 2030, the number of Singaporeans aged 65 and above is projected to double to 900,000. By then, 1 in 4 Singaporeans will be in that age group. Do you know that there are more than 1,600 Singapore residents who are aged 100 and older?
The “double whammy” that we face of possibly living past 100 and the adverse impact of inflation which shrinks our idle money’s purchasing power, can be daunting. This is unless we take financial planning seriously and start acting early to be well prepared for a long lifespan and build multiple sustainable income streams to fund our golden years.
The old adage of shifting all our assets to safer and low risk investments or to cease investing altogether when we reach 55 may not work for some of us who have long lifespans. It means we need to have a portion of our savings invested for the longer-term to take care of that scenario. What we invest in will depend on our diversification approach, risk profile and our understanding of investment products.
If you’re planning to retire in the next few years, especially when a recession looks like it could be coming, it is prudent to have your first few years of income flows in cash or in near cash instruments. But don’t shy away from equities in your portfolio. Those are usually where you will get the most returns that can hedge against inflation.
Myth 4: Estate planning is for seniors
Estate planning involves preparing for the smooth distribution of our wealth and assets (savings, insurance proceeds, property, personal belongings) upon our death. It also includes appointing responsible representatives who will manage our financial matters and property in the event we become mentally incapacitated.
The tools that facilitate estate planning extend beyond writing a will and they include CPF Nomination, Lasting Power of Attorney (LPA) and Advance Medical Directive. A good estate plan will ensure that there are enough financial resources for our loved ones to carry on when we are no longer around or are mentally unable to care for ourselves.
It is a fallacy that estate planning is only useful for older people because firstly, we don’t know when we may become mentally incapacitated or die. Secondly, if we have not set up, say an LPA, our loved ones will have limited or no access to our insurance proceeds and payouts without the Court’s consent, should we suffer from mental incapacity.