Savings, Insurance And Investments: The Golden Triangle
03 November 2017
We all know people who, looking at the cost of medical insurance, the benefits offered, and the limits that apply, say this: “I’ll just save that money instead. That way if I have a health crisis, I’ll be able to pay for it. And if I don’t, I’ll be able to do something else with the money.”
Well, yes. In theory that works if you honour the promise you made to yourself to save the money, and if you’ve got good health, this approach could see you build up a generous nest egg over the years. But if you aren’t lucky, illness could be doubly devastating.
That’s the essence of the insurance-vs-savings-vs-investment dilemma. Insurance is for life’s unexpected blows. Healthy people get sick and well-protected homes get burgled. Daily life carries risk and insurance is essentially about paying an organisation to share your personal risk. Financial advisers tend to agree on the golden triangle of long-term wealth. It’s not about how much you earn that makes the critical difference, it’s how you spend it, and how much you keep. Here’s why savings, insurance and investment should all be part of your plan:
- The savings we all need. Debt gobbles up wealth. More specifically, servicing debt gobbles up wealth and it’s also demotivating and dispiriting. Financial advisers recommend that an emergency fund to the value of three to six months of monthly expenses is your best defence against debt. The thinking is that if an axe falls, for instance you’re retrenched, or your car is written off, you’d have a cushion to see you through until you’re back on your feet, or you’d be able to put down a substantial deposit and reduce installments on a replacement car. One way of building up your emergency fund is to put 10-20% of your nett income away each month until you’ve achieved the value you’re aiming for. Keep it in an instrument that carries low charges, decent interest, and instant access. Ideally you should not be able to borrow from it spontaneously. Rather structure it so you have to go through your financial advisor or go into the bank to access those funds.
- The insurance we all need. This is a hotly debated subject, but most agree on this – if you have dependents, life insurance is non-negotiable, up to a value that covers their needs for a period should you die. In an ideal world, you’d take out life insurance to a value that allows your dependents to live off the interest. That may be ambitious, but do think about what your family needs, and speak to an advisor about what that means in premiums. The other one, if you drive a car, is motoring insurance. That’s in case you bump someone’s out-of-the-box BMW. But it’s also in case someone bumps into you. The AA estimates that 65% of cars on the road have no insurance, which means even if you’re the innocent party, you are likely to end up paying for all repairs yourself. Aside from that, it’s all about how risk-averse you are, and what you’re prepared to self-insure. Medical and dread disease insurance, your home, technology, income protection all have represented valuable safety nets to millions of people globally.
- The investment we all need. Investments are a commitment from your present self to building the wealth of your future self. There are smart ways to invest, and quick ways in which a poor investment can go bad. Study after study has shown that investing in a well-managed unit trust fund, and leaving the interest to compound means you could do better over the long term than other types of investment except, potentially, your own business.
Don’t delay. There’s never a better time than now.
Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.