The Four Financial Planning Pillars

By Eugene Yiga

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Getting you financial house in order means building it on these four pillars:

1. Insurance

One thing that works is to only have insurance against serious losses you cannot cover yourself. So if you can cover the loss, you don’t need insurance. For example, I had the same desktop PC for six years. It wasn’t insured because if anything were to happen to it, I could afford to get a new one (at a fraction of the original cost). By not having insurance, I effectively became my own insurance company and didn’t have to fork out overhead costs that would be passed on to me.

Besides, covering everything is impossible (especially when you’re just starting out) so you have to set priorities. Consider health insurance (mostly for emergency hospitalisation if you’re healthy, but also for medicines and doctors if you’re not), short-term property insurance (for things you can’t afford to replace), and long-term life/disability insurance (especially if you have dependants).

It’s better to handle personal issues (such as healthcare or life cover) through a qualified insurance agent or broker. Things like property insurance are easier (and cheaper) when you deal directly with the insurance company. Again, this ensures you make the right decisions and don’t spend more than you absolutely need to in the process. The only thing worse than having too little insurance is having too much!

2. Taxes

“The hardest thing in the world to understand is the income tax.” – Albert Einstein

Do you get excited every time you receive a tax refund? You shouldn’t. All it means is that you effectively loaned the government money interest-free! Saving tax legitimately is one way you can increase your investment returns without increasing risk. However, saving tax should not be the driver of your decisions. It should simply be one of those pleasant side effects. In other words, it’s never a good idea to invest in something that’s losing money just to avoid paying taxes. You’re supposed to be building wealth!

Capture your expenses while they’re still fresh in your mind so you can claim all legitimate tax deductions, no matter how small. These deductions can add up over the course of years and save you a lot of money in the long-term. Keeping track will also save you an enormous amount of time and trouble when you’re getting ready to prepare your tax return.

Because the laws are incredibly complex, vary depending on where you live, and are constantly changing, it’s best to hire a tax consultant or tax strategist to help you make decisions. If the money you pay a professional is less than the money you end up saving as a result, you both win. It’s much like what happened to me when hiring a tax consultant led to additional deductions I’d missed and a refund literally twenty times larger than his fee! Who doesn’t want that?
 
3. Retirement

I never realised how many people are not prepared for the future until I read Retire Young, Retire Rich by Robert Kiyosaki. The problem here is that many are still stuck in industrial age thinking. Defined-benefit contributions were free money that the employer planted and grew for employees. Not surprisingly, they are rapidly disappearing in favour of various types of defined-contribution plans. And with advances in medical care meaning you could live for another 40 years after you retire, it’s your responsibility to make sure you aren’t caught off guard when the time comes.

Start by contributing to your company retirement account so as to get the maximum match. Some might feel that because you get a tax break on what you pay and because you’re effectively doubling your return with the company match, it makes sense to fund your account to the maximum level even if you have to borrow to do so. This is something you need to consider with a professional beforehand.

In addition to the company retirement account, it might make sense to open up an individual retirement account. Again, this is a personal decision that needs to be discussed with your financial planner. A lot depends on whether you’re an employee, self-employed, or living off passive income; whether your income is high or low; whether you’re just beginning your career or nearing retirement; and whether you want to retire early or work forever.
 
If you start saving for retirement as soon as you start working, it’s easier to reach your goals. You’ll have plenty of time to ride the market’s ups and downs, which means you can start out with a high proportion in stocks and become more conservative as you approach retirement. The key is to keep the money in the account no matter what. Fortunately, the fact that premature withdrawals are difficult or costly means retirement plans train you to invest for the long-term.

Remember, a retirement account is a good vehicle for your plan to be secure and comfortable. Because retirement plans offer tax advantages and free money, they can be a good place to park some of your money. But you have to weigh these advantages against a plan’s pre-defined retirement age, which dictates when you can withdraw your funds. And always remember that your plan to be rich needs to go much further than this.

4. Estate Planning

Do you know who will make your decisions if you’re unable to? Do the people in your life know what you’d like to happen after you pass away? I know it’s not pleasant to talk about things like death (especially when you’re young), but the sooner you iron out these intricacies with an estate planner, the better. You or your attorney should keep the original copies of any legal documents, such as your will, power of attorney, living will, or trusts. Remember, it’s not just about you but about the people you love as well. Making the process easy for them is definitely worth it.

“Wise are those who learn that the bottom line doesn’t always have to be their top priority.” – William Arthur Ward