Financial planning is often misunderstood by consumers who always hear the term, but do not fully understand what does it mean. Let’s discover the 3 biggest misconceptions consumers usually have.
Misconception number 1: Financial planning is all about INSURANCE.
How many of you are guilty of this? When you think of financial planning, your mind automatically switches to think of insurance. It is true that insurance is a component of financial planning, but that is not all there is.
Insurance is merely a component of risk management in financial planning. It’s the protection of one’s wealth. In order to manage one’s risk of losing their potential income earned in the event of death or disability, life insurance or disability insurance is used to protect the potential loss of one’s income.
There are many other components such as
1. Tax planning – An example is the depositing of excess funds from one’s income into the Supplementary Retirement Scheme (SRS) account to lower income taxes.
2. Estate planning – An example is the nomination of beneficiaries to ensure that CPF funds are being left for one’s loved ones.
3. Wealth accumulation – An example is the purchasing of endowment plans to plan for one’s retirement or children’s education.
4. Legacy planning – An example is the purchase of a legacy plan to pledge one’s assets to their beneficiaries, such as pledging $250k, but in turn being able to leave behind $500k upon one’s demise.
5. Financial management – The investment into stocks, equities, mutual funds and other investment vehicles that matches one’s risk appetite and time horizon.
To sum all the 5 points above, insurance only forms a part of financial planning.
Misconception number 2: I need LARGE SUMS of money to do my own financial planning
Ironically, it’s the low-income families and the less well-off families that will benefit the most from financial planning. Let’s put the following case in point:
A one million dollar hospital bill for this netizen’s mother, who unfortunately passed away due to cancer.
Do you honestly think a low income family can afford a bill that amounts to a million dollars without relying on a financial institution?
Love doesn’t pay for the operation your mother needs.
It’s money that does that. How else can a low-income family be protected against all these uncertainties in life?
To address the misconception, financial planning is being made affordable for all. One can easily fund an Integrated Shield Plan through MediSave, even without being extremely wealthy.
That’s the most basic plan everyone needs since we all fall sick and die one day. Furthermore, it’s affordable for everyone, since it’s way less than 5% of most people’s income.
In short, as a working adult, financial planning doesn’t cost a bomb.
Misconception number 3: I DON’T NEED financial planning if I have no dependents
Some people think financial planning is only necessary if they have dependents.
Even if you have no dependents, you still have to plan for your own finances. You still have to figure out a way to afford your medical treatment through health insurance. In addition, your retirement fund, tax savings, wealth accumulation and investments.
It’s precisely because people usually confuse life insurance as financial planning and associate it with leaving a sum of money to their beneficiaries, should they pass on.
In a nutshell, financial planning is the management of wealth that allows you to meet your financial goals. Even if you don’t have a children or a spouse, it’s still necessary for you to plan your finances.
Have you ever had any of the above misconceptions? Comment below.