Seven common mistakes people make with their personal finances

This article was original a response to a question asked on Seedly. I figured it might be useful to reproduce it here to reach more people. It has been edited for clarity. This article does not constitute financial advice. Please read the disclaimer.

I have been working in my current capacity as a financial advisor for almost five years now. I must have met over a thousand people during the course of my financial planning work, and some things I have seen or heard have stuck with me, often leaving me wondering; why do people do that?

This article is just an opinion and everyone has the right to have one, so let's keep an open mind. Here are some of the most common mistakes people make with their personal finances, from the perspective of one financial consultant (i.e. me)

• Assuming they are young and healthy and won't need insurance. Sure, you are healthy now, but anything that can happen will happen. Buying insurance after you discover an existing condition is akin to jumping out of the airplane forgetting the parachute and only realizing it after you are in free fall. You realize that just that one second too late. And time cannot be reversed. Often, the most unexpected things occur when you least expect it.

I have seen one too many people ask hopefully if they can get covered after a routine medical check up uncovered a condition and they start to panic. Most likely, there will be an exclusion or a loading of some sort if it is a condition of concern to the insurer. Recently, I had a prospect approach me to get a term plan, but instead of taking action, this prospect stalled on it for a few months until a routine jog ended in a fracture after tripping. Naturally, any insurer would want to wait for the fracture to fully heal and for the doctor to give the all clear signal before being able to offer terms. It could have been avoided if the prospect had taken action and not wait for something to happen. The fracture was just a perfect example of how procrastination eventually led to something happening.

Insurance is the seatbelt/air bag/shock absorber in your drive down the road of life. You just wear it, it stays there invisible and silent, but when something unforeseen happens, it is there to mitigate the shock and prevent massive financial distress to you. Even the 'unsinkable' Titanic still set sail with lifeboats (just that there were too few). Why? Because the unexpected can happen.

• Chasing yesterday's winners. No, I am not saying that TSLA won't continue to grow. Nor am I saying that you should or should not buy TSLA. But if you are all-in on a single stock, you are either speculating (in my opinion) or have extreme conviction in that company. And you had better be very correct or pray that lady luck is on your side. If it's the former, congrats. If it's the latter, congrats. And if it is neither, then what is your backup plan?

Don't go all in on the chase for yesterday's winners. Diversify. Across sectors, regions, countries. Even if you are totally bullish on the stock market, you don't just buy one stock. And no, buying OCBC, DBS and UOB is NOT diversifying.

And while I'm on that topic, it's important to note that there is nothing wrong to go for capital gains. But when you are approaching retirement, there really isn't too much room for error. One wrong move can wipe out your portfolio....except that this time you are already in your 50s and don't have much resources and time to recover from it. Approaching retirement, it is about preserving what you have build up, not trying to chase the winners.

• Buying something they don't need for freebies (or extra interest) or not understanding what they buy. Time and again I have seen one person too many buy a savings plan or other financial product from a financial institute on the premise of extra interest for their savings account, or for some shopping vouchers. Yes, it's nice to have an extra 1% interest for 12 months....but that savings plan is something that you are going to commit for the next 10-15 years! Now if you needed that product, that's great. But if you weren't sure, 1% extra interest on your savings is not going to change your life dramatically. Neither is that $500 shopping voucher. But servicing a $1000/mth policy might put a strain on you. And if you were going to buy it, did you remember to compare your options from various insurers/product providers? After all, it is your hard earned money.

Don't buy something for freebies. That's putting the cart before the horse. Ask if you needed the policy first. And if you do, then go ahead. The extras/gifts/freebies are just that, extras. Something nice to have.

Also, please understand what you are buying. I met a lady once who asked me if she had sufficient coverage as she already had 3 policies which she bought years ago and had been servicing them for a while now. Turns out, they were all saving plans, which, while great for wealth accumulation, doesn't provide much protection at all. She simply didn't know what she bought nor how they worked, and couldn't remember what they were about. Needless to say, she was very, very underinsured.

• Not realizing that income is at the core your finances. Ok this one isn't really a mistake that people make, but I wish more people realized it. Just take a moment to think about this: Your income is at the heart of your life. It determines the food you eat, the house you stay in, even the clothes you wear.

And one day that income will stop. You will retire. Or fall sick and become unable to work. Yet your income must keep coming to you. That is why you need assets that produce income. And linking back to my 2nd point, diversify those sources. Why did the CPF board in Singapore set up CPF LIFE? Because that's INCOME for LIFE. It's still about income.

Build your income streams, both guaranteed and non-guaranteed. Guaranteed income ensures that you always have income coming to you, that you will always have something flowing in the pipe. Non-guaranteed income ensures that in good times, you have an abundance of income, and in lean times, you can still fall back on your guaranteed income (just take a look at how many companies cut or stopped dividends in the past year). Last I checked, economic rice aunties don't accept BTC or shares of DBS as payment. They want cash. And cash in your hand is a result of payouts from your income producing assets.

• Overemphasis on fees. This is probably going to be controversial. But let me state this. Fees are NOT everything. Lower fees don't mean higher returns. Sure, if you have 2 STI ETFs from two fund houses, a lower fee from one fund house should result in a higher return, ceteris paribus.

But what if I told you that, at this point of writing, based on the fact that we are looking at Singapore Equity, the Nikko AM Singapore Dividend Equity Fund outperformed the Nikko AM STI ETF? Just look at the 3 year and 5 year performance. The fund lost lesser than the ETF over 3 years, and had a higher annualized return over 5 years. And factsheet returns are nett of fund level fees like management fee, trustee fee etc. Both are invested in Singapore Equity and both are distributed by the same fund house, so why is the ETF underperforming the fund, despite the fund having a higher management fee? Simple. Active management is NOT dead. Not all funds underperform their benchmarks. Markets are still inefficient, especially in A/P.

It's not about finding the investment/advisor offering the lowest fee, but rather finding the investment/advisor worth the fee. We are all paying fees even when we buy stocks and shares, and I am not referring to brokerage and SGX clearance fees. Rather, when you buy into a REIT, for example, you need to know that the REIT managers take a fee for running the REIT. Some REITs have far higher fees than others despite underperforming in their respective sectors against their peers. I don't often seen anyone blasting REITs for their management fees, but I see that happen a lot with unit trusts.

In conclusion, lower fees does not always equate to better performance.

• Not optimizing their coverage and too frequent 'reviews'. This is not about the term vs whole life debate. This is about cash flow and personal finance. I have seen a client take a term plan with a company to support his friend, despite that company being the most expensive (and by around S$500/yr too, may I add). That's actually almost S$20K extra that he has to pay for the exact same coverage! Why did he do that? I don't know. I couldn't understand his reasoning. And the reason I say S$20K is because the plan's duration was 40 years. He had to pay S$500 more every single year for 40 years. He needed the plan, but I don't know why he wanted to go for the most expensive one. That's not optimizing his coverage per dollar spent.

The next thing to note is about cash flow. I have seen people over commit on their policies, thinking that they would be able to afford their premiums down the road. Personally, going by my 4-3-2-1 budgeting guideline, I would look at allocating 20% typically to invest or save, but not ALL of that 20% goes into commitments that must be kept, such as a retirement income plan. Things can and will go wrong, people get retrenched or take a pay cut, etc, and suddenly the situation can become very tight.

And no, there is no need to review your insurance every single year. If nothing much has changed, why would your needs change drastically year on year? I met a lady who was at her wit's end once, as she had 40% of her income being spent on insurance every month. She told me that her advisor had been reviewing her policies with her yearly since 2014, and every single year she got sold a policy like clockwork, to the extent that all her policy anniversaries were in October. Needless to say, it was a great financial burden on her.

If you aren't having a major change in life (getting married, buying a house, starting a family, massive salary jump, massive change in expenses due to commitments such as supporting retired parents), and your last review was within the past 2-4 years, you are probably going to be fine.

• Lack of understanding and lack of urgency/action for retirement planning (or planning in general). We are only going to live longer and longer. Just by saving and investing and maximizing CPF, is not going to work unless you have done your numbers and know if they actually are realistic or not. And retirement planning is not something you do the year before you retire. Starting early allows compounding to kick in. Starting early allows you to know your targets and whether you are on track or not to maintain the lifestyle you envision in retirement. If you don't build a holistic plan to tackle all the various aspects and risks of retirement, life could throw you a curveball right before you retire.

Many people also fail to understand that as much as it is about increasing your wealth, it is also about how you distribute it in retirement. How will you structure your layers of income such that you receive what you need, when you need it?

And on the topic of urgency, the ball is actually in people's court most of the time. Not the advisor. If you sit on something too long, the situation changes. No sir, the Critical Illness protection plan you were "thinking about" last year is not $1200/yr any more. You became one year older, and the premiums have gone up to $1300/yr, assuming the plan is still around. And that 2.5% p.a. guaranteed return retirement plan you asked about last year? It's no longer on the market because it was withdrawn while you were "thinking about it". So if you intend to take action, then take action. Sitting around doesn't achieve anything, other than you losing out on one year (or however long you were thinking about it).

If you were certain that you wanted to do something (sort out your retirement, get your insurance settled, open an account to start investing etc), then see it through. Don't stop halfway, or else the end result is that you are back to square one. And if you weren't certain you wanted to do something at this point, that's okay too. Take action only when you are certain you want to do something, but see it through.

So there you have it. These are probably the most common seven personal financial mistakes that I have seen people make. Still, being able to identify, acknowledge and be willing to take actions to address those issues is what helps a financial advisor to help a client improve their finances.

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