Myth 1 – Invest as early as you can because the longer the time horizon the greater return.
Fact – Regardless of how early you start investing, you have to consider other greater needs such as the need to accumulate the emergency cash, budget to buy a property (which is currently sky rocketing like nobody’s business), set aside budget for marriage and family etc. All these require huge resources. My advice is set your priorities rather than listening to text book financial advisers.
Myth 2 – Critical illness insurance is the most important form of insurance.
Fact – Medical insurance is the most important. Almost everyone falls sick and if serious enough ends up in the hospital. A good medical insurance would cover most forms hospitalization whether it is due to minor injury or critical illness. On the other hand, a critical illness life insurance pays a lump sum provided you are able to meet the strict definition of critical illness. Critical illness insurance has its place but it is NOT the most important.
Myth 3 – Insurance is the most important pillar of financial planning.
Fact – Cash Flow is the most important pillar of financial planning. Without having a healthy cash flow, you cannot even buy your insurance. Most insurance advisers would tell you insurance is the most important pillar of financial planning because they cannot earn a commission just telling you to improve your cash flow.
Myth 4 – It is normal to service a loan for 30 years for my HDB flat.
Fact – While majority of Singaporeans are heavily indebted to the HDB mortgage loan, it is unfortunate that the HDB flat has no long term value. This is because it is a tightly controlled property and worst of all 99 years leasehold. If you have a chance to look at a HDB title deed, nothing is stated on the title deed to indicate that the owner is the true owner of the property. Also the HDB would eventually depreciate to zero as the leasehold approaches the expiry year. Many owners pay so much for their HDB flats and yet these assets are worthless to the next generation. The next generation cannot “inherit” the property since it is worthless and thus every generation is indebted.
Myth 5 – My life insurance is completely guaranteed by Singapore Government.
Fact – Not everything is guaranteed and there is a limit as to what amount is guarantee. For more information on MAS’ Policy Protection Fund, you can read this article here: Cover story on MAS' Policy Owners Protection Fund
Myth 6 – Estate Duty is totally abolished
Fact – It is true that Singapore government do not impose estate duty in Singapore. However, due to globalization and the prevalent usage of the Internet, a person who possesses assets in foreign countries could still be subjected to estate duty imposed by foreign governments. Sometime the death tax could be as high as 55% and the exemption amount a mere US$60,000. For Singaporeans who are particularly addicted to investing in properties, you could exceed this limit many times easily.
Myth 7 – For self-employed personnel, it is only necessary to contribute the bare legal minimum to the CPF Medisave because CPF is a redundant scheme generally.
Fact – Many self-employed personnel are also business owners and professionals. They run the risk of bankruptcy due to professional negligent and business risks. Contributing to CPF is very useful because monies in the CPF balance are generally protected from creditors. Even the annuity from CPF Life is also protected from creditors. A self-employed person can contribute to his own CPF under the CPF Voluntary Scheme and Minimum Sum Top-Up Scheme.
Myth 8 – I want a professional trust company to manage assets for my young children but setting up a private trust is only for the rich / Accredited Investors / High-networth.
Fact – This is NOT true these days. It is possible to setup a trust for your young children even with just a four figure trust size.
Myth 9 – I need to see a lawyer to write my Will
Fact – Will writing do not require a lawyer to do it. However, it is important that the Will writer is legally trained to write such a Will. Having a legally and valid Will is not the only criteria. It must be practically useful. Most Wills I’ve seen are practically nonsense. For example, I seen one Will which says that the testator wishes to give $X to Y. But when I check the testator’s true wealth, he does not even have $X. This is because he did not consult a financial consultant to do a thorough analysis. You can read more about junk Wills from this link here: What are junk Wills?
Myth 10 – XYZ company is a reputable company and hence can be trusted right?
Whether XYZ is an insurance company, investment company, bank, financial advisory firm, trust company, etc – none of them are 100% safe. Personally I don’t trust any company. After the financial crisis in 2008, it was demonstrated that no firm is safe. Many reputable companies fell and some even go bankrupt. Thus, the best one can do is to do business with firms that are regulated by the Singapore Government. If you need to do business with an overseas firm, make sure it is regulated by a foreign government that has equal or stricter regulatory requirements then Singapore. Never put your money in a firm that is unregulated – regardless of how attractive the benefits are. I am referring generally to any financial firms whether it is insurance, investments, trust company, etc. Of course, this assumes you trust the Government of the day to help you in times of crisis.
This blog first appeared on CPF Board’s IMSavvy / IM$avvy website:http://www.cpf.gov.sg/imsavvy/blog_post.asp?postid=445431529-76-187951922
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