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AK: Know What is Financially Manageable and Guaranteed!
Aspire, Thought Leaders | 06 October 2015
By: AK(ASSI)
Articles (41) Profile

As investors, we recognise that we could make investment mistakes. So, it is important to size our positions appropriately so that if an investment turned out to be a mistake, it would not sink our entire portfolio.

It is partly about making losses financially manageable. So, what is financially manageable?

Well, a more prudent way of interpreting whether something is financially manageable is in terms of cash flow. I know we could also interpret whether something is financially manageable by how much we have in savings.

Well, it is nice to have more assets (and cash is an asset) than liabilities but if we should be in a situation that requires us to draw upon our assets to fund commitments, then, we could find ourselves in trouble in future.

So, before we make financial commitments, ask if our cash flow is adequate and not just whether we have enough savings to see us through, especially if it is going to be a long term commitment that is quite demanding.

What led me to say all these?
A couple of readers sent me a link to this article:
Admin executive paid yearly insurance premiums higher than annual pay.

57 year old Mdm. Han bought a Prudential endowment policy from UOB a couple of years ago. She now discovers that the maturity benefit is not 100% guaranteed. In fact, she might get a sum that is actually lower than the total premiums she would have paid at maturity.

Pertinent question 1:
How did she get the impression that the maturity benefit is 100% guaranteed?

The actual guaranteed sum is only $54, 000, which is even less than the total premiums.

Pertinent question 2:

Why would she commit to a $40,000 annual premium when her salary is about $30,000 a year? She might have been persuaded by the free air-fryer and steamer.

Pertinent question 3:
Was a thorough fact finding session conducted with Mdm. Han or was someone just in a hurry to sell a policy with a fat annual premium?

I don’t have the answers to these questions, of course, but these questions aside, if Mdm. Han had asked the important question “Is this financially manageable?” and knew how to answer the question, she would have avoided such a situation.

Please note that I am not even talking about whether the insurance product is suitable for Mdm. Han. That is another topic altogether.

AK is a Singaporean stock market investor and a popular blogger. His blog was created with the intention of educating investors and sharing his investing journey with the target of having a more secure financial future in an uncertain world by creating a stream of reliable passive income with high yields.

Please click here for more information about this author.


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