Savings & Protection

So it has finally happened. I have been contemplating for a while whether to add my views on topics related to adulting: mortgages, finance, careers and all that jazz. I’ve been working on the series on infrastructure which honestly have been my niche. I want to be able to help young talents find their interests in areas of the new economy that is not just the usual data analytics, digital stuff.

Singapore is definitely in need of IT talents, in the digital space – there are many niche areas that offer lots of opportunities including kdb+ developers (finance-related, pays really well – I’ve got a friend in there), distributed ledgers (read: the technology powering cryptocurrencies which have tonnes of many other applications), cybersecurity and cloud computing. Wait a minute, almost all those I listed there have good and strong applications in finance which will pay well. But there are other areas as well; including full stack development (which essentially is web-development, ranging from web apps, portals for various industry use), graphic user interface designs, machine-learning (which involves a whole host of different niche areas that you can get into). The list goes on.

But infrastructure space has its opportunities too! The industry is seriously in need of people who are into finance but dealing with longer term capital deployment, appreciative of risks factors, not captured through understanding financial statements but translating them from real world elements. It requires a lot of technical skills involving engineering, design, and also the ability to manage projects, optimise operations. The usual soft skills in typical general management and middle management, or sales environment is necessary in business development for infrastructure because information tends to be lacking and one needs all the social skills one can muster to obtain information from people and through observation. Being a good analyst or Business Development Assistant/Support for an infrastructure developer would build up the skills for that.

What a detour from the original topic of this piece! Actually, I had wanted to talk about savings versus insurance and how we need to consider them separately. What I really want to leave with you in this article, is this: “Savings makes for poor protection/insurance, and protection/insurance makes for poor savings” So please don’t mix up the 2 despite what the life insurance industry in Singapore hopes for you to. This is not about the whole life versus term life debate but I may allocate some time to write a piece on that. But this is about savings which in some sense is ‘self-insurance’ versus getting insurance.

The layman have problems understanding insurance because you’re buying something you cannot see. The agent may tell you it’s buying a peace of mind and then start sharing hypothetical scenarios that disturbs that peace so that the insurance he’s trying to sell you seem to be worth so much more. Other times, we say insurance is protection; and the reason is that it helps ‘protect’ you from certain financial downsides when an adverse event occurs. So health insurance doesn’t protect you from ill health but it can provide a payout that protects you from the financial downside of an illness. Usually the protection won’t be full – either because there’s some co-payment element or that you did not get full coverage. That is fine, and it is normal. So what happens is that the remainder of the financial hit have to be borne by you. What do you use to cover that? Most probably savings.

So what happens when you don’t have the insurance at all? You will have to cover them with your savings (or borrowings if you lack sufficient savings). Now what are savings for? You parents may tell you, there’s different kinds: there’s the type for your education, or for your marriage, for your house, car, and one for… rainy days. That rainy day portion, is in some sense, your self-insurance. The more events where you have insurance cover for, the smaller your rainy day fund can be to tide you through most of life’s events. If you keep the rainy day fund small, and lack insurance, then of course you will have to drain down the savings for your car, house, etc when bad things hit.

And if you buy too much insurance, obviously, you may decide you don’t need to keep a rainy day fund. But quite likely, if that occurs, you might have bought too much insurance and the premium payment eats into the potential savings you can have, whether it’s for your dream wedding or dream house. So to a certain extent, your savings and protection draws from the same financial resources, but behaves slightly differently. Savings should ideally be targeted, directed at some goals, and with a reasonable amount for contingency.

Protection should and must be procured to prevent extremely adverse downside risks (Total permanent disability, critical illnesses, etc.) The time horizon of coverage needs to be determined; life and health insurances becomes increasingly expensive with age; and term life has a time limit. It’s true that many things have to be nailed down at the point of contracting and there’s little room for flexibility after that but the good news is you don’t have to commit big all at once. You could start small, with something affordable and then build up subsequently when spending power is higher.

In the market now, there are insurance products that includes saving components (such as endowment) or investment component (investment-linked products). My 2 cents is to get away from them. Reason is that protection is a poor way to save, and savings is a poor way to protect. And of course, don’t even think of insurance as investment. It isn’t. Insurance is an expense – it is something to prevent you from suffering extreme downside. Just as you buy elbow guards and knee guards for use when you are roller-blading, especially when you first start out. The roller blades may be considered an investment to pick up a new skill which would be useful, but those elbow guards and knee guards, they are there to protect you from hurting yourself too much. The analogy goes further: it doesn’t prevent injury completely, it just helps buffer you from the extreme downside. No one thinks they are investing in knee guards. But buying those guards sure allows you to have more confidence to roller-blade.

It used to be that the only reason you should get into an endowment product is when you have no discipline to save, and you need someone to take that money off your hands at fixed frequently to put it aside from you so you’ll eventually have a lump sum. But today, that’s not even a reason because you could use a regular savings plan with one of the banks that regularly invests a fixed sum of your choosing into an index fund or a blue chip. This provides a better return and has lower costs involved than getting an endowment. It gives you the flexibility of liquidating if you really need the money urgently (albeit with potential downside due to market timing) but has no fixed time horizon so you can keep growing your money if you have no need for the lump sum even when a certain time horizon is up. There are of course more sophisticated robo-advisors and all to help you do the same at a lower risk level than investing in a market fund. All of these serves as better instruments for savings than endowment.

Thanks so much for reading all the way to this point. It can be a really bland subject and I have no infographics for you. Hope to be able to improve this over time!