What To Do With Your Money?
If you have a lump sum of cash on hand or thinking of going into a monthly savings plan either into a
- Endowment plans,
- Single premium (endowment or investment-linked) plans or into
- Monthly Savings into a investment linked plans (ILPs)
– and simply having queries which will be the better options (in terms of returns) for you, then this post will just help you to make a better decision.
Are You Ready For It?
Before you put your money away into a Savings/Investment Plan, you have to ask yourself whether you are ready or disciplined enough to put aside a certain amount of money for a certain time frame. If you can set aside that sum of money without affecting your lifestyle, then you are ready!
What Is Your Objective, Goals, Time Frame and Risk Appetite?
You do not simply start a savings/investment plan aimlessly. You must have an objective or some goals in life to keep you motivated – like I want to become a millionaire before the age of 40 and I want to put my savings (monthly mode) into a ILPs plan to help me achieve 30-40% of my objective. I am currently 27 now, so I have 13 years (time frame) to make my money work harder for me. I can safely say my risk appetite is high so I can withstand heavy fluctuations in my 85% equity, 15% bond mix and that the 13 years can just help me to smooth out the ups and downs evenly.
So what is keeping you motivated to start savings?
Different Mode Of Savings For Your Money?
You may have been approached by many financial planners from different insurance companies trying to offer you their mixture of products like endowment plans or ILPs and with their different individual mode of explanation on the returns.
If you are still confused on the “actual” returns or like to really know the kind of returns you will be expecting from the plans you already have, continue to read below of my personal exploration. A small note is that, the below explanation is based on personal opinion, so you have to make your own judgment on which is the best option.
Lump Sum Cash, Short Time Frame
If you have a lump sum cash like around $10,000 or more and have a short time frame like 5 years, the best option to go for is Single Premium Endowment Plans.
This lump sum of money is usually buying into the performance of the insurance company for the next 5 years and for logical sense is that any insurance companies will need to make profit in order to keep the business going, make the investors and policyholders contented. For this kind of plan, there is also a guaranteed portion, which, at least make sure you get back a certain return after the end of term. The average return for such plan is around 3-4% pa.
I do not personally recommend this lump sum to go into an investment linked plan because the short time frame, especially if you meet a decline in the market economy and near to your maturity term, may not allow enough growth for your value to be back to normal. An illustration is that if your $10,000 experiences a 50% loss will need a 100% gain for the value to be back to normal.
But… if you manage to pick a good buy whereby the value of that investment has reached its bottom (which you may never know also), you may expect a good return when the market turns green!
With so much doubts, don’t you think my choice of single premium endowment plans will work well for you?
Lump Sum Cash, Long Time Frame
If you have a lump sum cash and a long time frame like 15-20 years, then my number one choice is to get into a ILP (single premium mode). The reason for this is that appreciation and inflation will help to drive the price value up. This is also how the richest investor, Warren Buffet, will invest his money – into worthy company stocks and for a long time frame.
This option is also good as well, because of the lack of commitment on the investment term as compared to taking up a single premium endowment plans. If your objective is to earn 50% more out of your investment and you achieved it within 10 years (out of your 20 years), you can always have the choice to get all the funds out or enjoy the extra 50% gain.
Do take notes of the charges involved in taking part in a ILP funds. There could be yearly deductions needed if the investment amount is below the minimum level. Also take note of the sales charges.
But… do you know that the the above option is for people who have a balanced risk appetite. If you find yourself 100% conservative in nature and decide to go into bonds only, then I would rather have you choose a single premium endowment plan.
Small Sum Cash (Monthly Mode), Short or Long Time Frame
Interestingly, I will recommend that, if you do not have a lump sum, and are ready to go into monthly savings mode, to buy into ILPs because of the Dollar Cost Averaging working magic for you. You buy more units when the prices are low and less units when the prices are high. This will help to average out the prices.
The next positive note about this savings mode is that everything is transparent in terms of the returns. Every few months or so, you can simply check into your plan to see if you are having a positive or negative return. Also, you do not have to commit to this plan and you always withdraw your profits out (highly recommended) when you have earned a certain rate of return.
Do note that for this plan to work well, always have a good mix of funds (max 2) that are opposite nature of each other and perform differently to each other in different market conditions. Also note that it will be good to visit your Planner, at least once a year, to have a discussion on the performance of your funds and consider doing switching (if needed).
Similarly, if you are a conservative person in nature, and into savings for a long term, or do not like the hassle of doing any much changes to your monthly savings plan, then a definite good choice to consider will be buying into an endowment plan (monthly mode).
Have A Good Discussion With Your Financial Planner
Whatever choices you will like to make for your savings, have a good discussion with your financial planner. Let him explain to you the sale charges needed, the average rate of returns you can expect based on your risk appetite, or even the commission he is getting – some planners may push to you a savings plan that give him a high commission but not suitable for your objective, goals, time frame and risk appetite.