This article is written as part of a DollarsAndSense.sg collaboration with For Tomorrow. For Tomorrow is brought to you by Temasek, in partnership with MoneySmart and DollarsAndSense. All views expressed in the article are the independent opinion of DollarsAndSense.sg.
Purchasing insurance and making investments are two of the most important pillars of personal finance. While investing enables us to increase the income we are able to generate through the investments that we make, insurance plays a different role, as it protects the income that we currently generate through our ability to work and earn a living for ourselves.
Both investing and insurance have major implications on our long-term financial well-being, and there is no shortage of finance professionals trying to convince us to buy such products and services from them.
Insurance is a boring topic that many Singaporeans don’t really want to spend too much time to think about, unless you happen to be an insurance agent. It’s also a bad conversation starter in group settings because discussions about it tend to centre around negative things happening in life such as death or illnesses.
In contrast, people love talking about investing. The idea of being able to make money through investing and to enjoy a higher quality of life is something that appeals to most people, even those who are not familiar with the subject.
But which is more important? And which one should we care about first when it comes to planning our finances?
What Is Insurance For?
Insurance can sometimes come across as a confusing topic for those not in the know. That’s because there are many different types of insurance policies out there, all of which are important – at least according to most insurance agents.
To make matters worse, different insurance companies sell their own “unique” products, all claiming to offer the best deals.
To help simplify insurance matters, here are the three main types of insurance policies you need to know.
Generally speaking, insurance is primarily meant for protection. For young Singaporeans entering the workforce, Good health is our biggest asset as it enables us to work efficiently for the next three to four decades.
Yet as we all know, we can never take our health for granted. Neither is it a sure bet that we will continue to remain in good health throughout our adulthood.
Buying the right types of insurance can help protect us and our loved ones from such adverse circumstances, which could rob us of our ability to work and lead us into financial hardships.
As we grow older, our income may increase. Likewise, we will also go through different life stages and have many more responsibilities and commitments. We may have children and our elderly parents to care for, a home mortgage and car loan to pay for in addition to having to think about our own retirement. Hence, it’s important to constantly review our insurance coverage and to add policies accordingly when our needs evolve.
What Is Investing For?
When we invest, our intention is to grow our money for the future. In the long run, we hope to be able to generate money for ourselves from our investment returns rather than to always work for an income.
Investment returns can come in two forms. The first way is the making of money through capital gains. For example, we may buy a stock today for $1 and sell it at $1.50 in the future, thus realising a gain of $0.50.
We can also earn returns from our investments through passive income. For example, we could buy a bond for $1 today that pays out an annual coupon rate of 5%, thus earning us $0.05 in payment each year.
Insurance Protects Our Downside. Investment Increases Our Upside
From a financial standpoint, the roles played by both insurance and investment are on opposite ends of the spectrum.
Insurance is meant to protect us financially when we are not able to work and provide a flow of income for both our families and ourselves. Investment allows us to earn additional returns on top of the salary we earn in our day jobs.
In other words, insurance protects our potential downside while investment increases our potential upside.
A Holistic Financial Plan Requires Both Insurance And Investing. However, You Should Plan Your Insurance Needs First
Having only insurance without investments means we need to rely indefinitely on the income provided in our day job, even during our retirement. If we stop working, we lose our only source of income even if we might be well-protected from adverse circumstances that prevent us from working.
Having only investments without insurance means that even though we may be able to earn more money on the side through our investments, we are always at risk of financial hardship if we encounter an unfortunate event that prevents us from working and earning an income. This is especially so if our investment earnings are insufficient to cover for the loss of income from our job.
Neither insurance nor investments are sufficient on its own, nor is one more important that the other. To truly enjoy a holistic financial plan, we need to buy both the right insurance policies and make the right investments.
However, while both insurance and investing can be seen as equally important aspects personal finance, young Singaporeans who are just starting out in their careers should prioritise getting their insurance plans in order first. The reason is simple; we are only able to start investing once we have obtained extra capital from our job. However, if health conditions do not permit us to stay employed, then we wouldn’t even be able to earn a living for our family and ourselves, let alone find the excess capital to invest.
Furthermore, our investments will take time to pay off while our insurance protection starts immediately, once we have bought our policies.
Our insurance and investment needs are never static. We need to periodically review our insurance coverage to see if it meets our requirements. Likewise, we also need to review our investment portfolio to understand if it’s in line with our investment objectives, and to adjust it accordingly if the need arises.
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Bonds and Fixed Income