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Financial Planning Tip #4: Settle Your Basic Financial Planning

Financial Planning Tip #4 is to settle your basic Financial Planning needs before even talking about specialist financial services like taxation advice and investment management.

What Are Your Basic Financial Planning Needs?

If you do not know what they are and their priority, there is a simple model for you to remember, as you can refer to the picture below:

Financial Planning is like building a house
Financial Planning is like building a house

So how can you refer to the simple house model above?

Below any of your dream house can be built, you have to have the foundation set up first. So in this case, it will be in terms of your planning for your

  1. Life Protection for Critical Illness and Disability
  2. Health Insurance for huge Medical Bills

Why are they important?

Before you can have your luxurious interior design, furniture and such, you have to set up the foundation, the whole structure of the house, the fixtures and fittings first. These are of the highest importance to ensure the stability of the house. The initial cost for setting up these are high and you have to set aside huge amount of commitment before you get to enjoy the rest of the house later.

Therefore the same principle applies to Life Protection and Health Insurance. These two areas are of the highest importance. You can have the highest paid job or the most rewarding business but you have to be physically alive and healthy in order to enjoy all the benefits (moving up the scale to retirement, savings, dreams & ambitions and achievements).

Your Health Has An Impact On Your Financial Planning

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What You Need To Know About Dollar Cost Averaging In Today’s Market

Been a week since I have last posted, to my readers here, my sincere apologies as I was preparing to get my papers in General Insurance done. Luckily for me, I was able to clear the Basic Insurance Concepts and Principles (BCP) and Personal General Insurance (PGI) in one sitting!

What this mean is that I can recommend other range of products (Motor insurance, especially) on top of the usual life insurance products. :)

Beside that, I have been consulting a few clients in the area of investment and was able to convince them on the importance of Dollar Cost Averaging (DCA) in today’s kind of market (down, down, down and hoping for a up soon?).

So are you using this concept to your advantage or are you still scratching your head over the meaning and significance of Dollar Cost Averaging? I hope to clear this with this post.

The Meaning Of Dollar Cost Averaging

To explain the meaning of Dollar Cost Averaging to my clients, I will always explain in simple terms like when prices are low, you buy more units; when prices are high, you buy less units. With this kind of constant buying, you bring down or average the value of prices down, e.g. Price of $5 and Price of $3, the average is $4 now and when the market is at $4.50, you are already in profit of $0.50 per unit share.

If this is still confusing to you, then think of this “Fish-Ball” concept:

Imagine that you like to buy fish ball every month and is willing to set aside only $1 per month to buy. The current price for a fish ball is also at $1 each. Therefore with your $1, you can buy only 1 fish ball.

Therefore your $1 = 1 fish ball

But suddenly due to an economy downturn, the prices of everything start going down and your $1 fish ball is now $0.50 each. Whereas with your usual $1, you can get more fish balls like in this case:

Your $1 = 2 fish ball (at $0.50 each), so total invested is $2 for 3 fish balls

When the economy starts picking up, your $0.50 fish ball is restored back to $1 each.

So you $1 = 1 fish ball, so the total invested amount is $3 for 4 fish balls.

If you are to sell off your 4 fish balls at $1 each (please disregard the acutal possibility of selling fish balls at your own accord), your actual return from this sale is $4. From the initial investment of $3, you have made a profit of $1 ($4 – $3).

If you are clear about this fish ball concept, you are slowly grasping the real meaning of the benefits behind Dollar Cost Averaging.

With this in mind, will you like to take a personal test to see if you are ready to tap on the concept of Dollar Cost Averaging to help you make your money work harder?

There are three graphs that are very typical of an investment chart below:

Share Prices Are Going Up, Up and Up...
1. Share Prices Are Going Up, Up and Up
2. Market is Going Down and Up
2. Market is Going Down and Up
3. Varying Market Trend
3. Varying Market Trend

Take your pick and decide for yourself, in which investment chart will you be able to fully utilize the concept of dollar cost averaging and make your monthly saving work to the full benefit?

If you like, you can work it out on your own, based on $100 per month, for a full 12 months, prices varying (you can click on the image to get the different prices), and based on your total investment, how much returns will you be getting. If you are ready to for the answer… read on..

The Analysis

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Financial Planning #3: Start Today, Not Tomorrow

If you like to plan well for a good retirement, to achieve your dreams early and make your this life fruitful, you’ll need to take this financial planning tip seriously and do your planning today and not tomorrow.

Planning Early For Protection and Hospitalization

Everybody, in any of the life stages, will definitely need some form of protection plan (to replace loss of income) against any Critical Illness, e.g Cancer and a good hospitalization plan (on standby) to help cover most of the hospital charges, should you seek any form of treatment in a hospital. It has been statistically proven that most people will become bankrupt because of sickness and those heavy hospital bills associated with that sickness.

Therefore the two main factors for planning early for these two areas are: Saving Money In The Long Term and Acceptance.

Saving Money In The Long Term

For protection against any loss of income or to have a lump sum of money on standby against any critical illness, it’ll be good to plan early as you are able to save lots of money in the long term.

Consider that an average person earns a monthly income of around $2,000 in life and should there be any unforeseen circumstance of striking a critical illness, you may need 5 years (of not being to work) to recover from this, you may need around $120,000 of coverage.

Then consider this, should you decide to get a whole life protection plan (with cash value) with limited premium term of 20 years:

At The Age of 1, you could be expecting a monthly premium of around $100 for that coverage of $120,000, whereas if you should decide to get this plan at age of 30, you could be expecting the monthly premium to be above $300 for the similar coverage. The difference of the around $200 per month, which amounts to $200 x 12 x 20 = $48,000, could actually be a good help to you, getting a good retirement and achieving your dreams early.

*Note: Please check with your financial planner with the actual premium rates needed for the $120,000 coverage. The rates may not be the same for every insurance company.

With this in mind, you can actually see that you will get to save a lot of money, should you decide to plan early for this.

Acceptance By Insurance Company

Insurance company is only willing to take you into any protection plan, as long as you are a healthy person. Many people decide to postpone their planning because they feel that they’ll be healthy throughout their life and protection planning is simply just a waste of their time and money. They’ll only start to consider when they feel that their health is no longer in good condition or that someone close to them has a sudden change of health and they saw the impact that this person has to their current lifestyle and to the dependents.

Also, these people with poor health, may be subjected to loading, exclusion and even being declined by the insurance company. A fact to know, if you’re obese today and should you decide to get a protection plan and a hospitalization plan, be expected to get this:

  • You will be loaded at least 125% more in your monthly premium for your protection plan.
  • You will not be allowed to take up any hospitalization plan till your BMI is lower than 30.

Therefore planning early while you are still in a pink of health, will ensure that you’ll be accepted by the insurance company. Should your health fails you in the future, at least you know you had your planning done and that the risk is transferred to the insurance company.

Planning Early For Retirement And Savings

If you are interested to have a good retirement or even to make your money work harder for you, the tip here, as you know it, is: Start Today!

Rather than have me blabbing all over, let me just show you a good illustration:

Assuming Joe and Jane are planning to save $2,400 per year into a plan that generates a definite 10% per annual return for the next 30 years. Joe decides to start first while Jane plans to do so after 10 years later.

Joe and Jane have different characters as well – Joe decides to save only for the next 10 years, will stop and just let the money roll over; Jane is more disciplined, will continue to save continuously but just need to wait 10 years later.

So, do you want to see who is the actual winner in having a higher savings return?

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