Let’s imagine that you are a farmer who owns a hen. This hen lays golden eggs and these eggs will not hatch into chicks. Your role as a farmer is to sell the eggs in exchange for money. One day, there is a fire in your farm. The question to you is, will you save the Hen or the eggs?

What does it mean when you have chosen to save the hen?

What does it mean when you have chosen to save the eggs?

In my newsletter to you, I will share the following:

  1. What it means to save the hen
  2. What it means to save the eggs
  3. What are the solutions to each decision
  4. What is a wealth discovery process

What it means to save the hen

If you have chosen to save the hen, the likely reason could be that you see more value in the hen’s ability to lay the golden eggs compared to just the golden eggs. Now, does it ring a bell?

Whether we are employed or self-employed, our roles to our family, dependants and our loved ones are just like the hen to the farmer. Our ability to earn income is what makes us valuable.

Here are 4 questions for you to ponder:

  • What if the hen does not live till old age and die prematurely?
  • What if the hen is critically ill during the years when it should be productive?
  • What if the hen is disabled and no longer has the ability to lay eggs?
  • What if the hen is sick and requires a vet’s attention and high medical cost?

The concept of saving the hen is called risk management in professional term. The purpose of risk management is to transfer the risk that one is exposed to at different stages of his/her life.

What it means to save the eggs

If you have chosen to save the eggs, it would mean that you are probably in the stage of life where you are accumulating your wealth and assets. Although there is no rule stating it, ideally, one starts accumulation of their wealth once they have done the necessary risk management to their portfolio.

Here are questions for you to ponder:

  • What if I live way beyond my retirement age?
  • Without income, how do I financially support my expenses?
  • Based on my spending pattern, how do I sustain my lifestyle when I retire?

The concept of saving the eggs is represented by systematic savings plan (Endowment plan) or Investment plan, both on the regular basis or one time basis.

At the end of a period, i.e. maturity, there will be a single sum payout which will complement you for your future expenditures. In some cases, there will be annual payout during the period of saving.

What are the solutions to each decision:

Saving the hen (Risk management)

There are a total of 6 aspects when it comes to saving the hen (risk management):

  1. Premature death:
    • To put it simply, premature death occurs when you passed on early; usually at the period when you should be the most productive.
    • For instance, if a sole-breadwinner of a family passes on, the impact he have would have been much more compared to a retiree who does not have any dependant.
  2. Total and permanent disabilities (TPD):
    • TPD occurs when one is not capable to do or carry out any work, occupation or profession.
    • In another words, it is a form of income replacement as a result of permanently disabled by definition.
  3. Critical illnesses (CIs)
    • CI occurs when one is diagnosed with illnesses that are listed in the insurance contract. There are 43 illnesses listed.
    • Generally, there are 2 types of CIs, Early Critical Illness (ECI) and Late Stage Critical Illness (CI). The purpose of a CI cover is to provide income protection in the event one is critically ill. It can be seen as a supplement to payment of hospital bill in some circumstances.
  4. Hospital and surgical (H&S):
    • Generally, it refers to integrated Medishield plan where a portion of the premium is payable via your Medisave account.
    • The objective of H&S cover is to protect someone from the hefty hospitalization bills.
  5. Personal Accident (PA):
    • PA cover helps you to cope with life changes as a result of an accident. It provides financial assistance such as medical reimbursement from treatment as a result of accident.
    • According to Ministry of Health (MOH) in 2013, accidents represent the number 1 cause of hospitalization in Singapore.
  6. Disability income (DI):
    • DI cover provides for income replacement if you are unable to perform your primary role of your occupation as a result of disability or illnesses.
    • Unlike TPD, it does not provide a lump sum payout. It provides for up to a certain percentage of your last drawn income.

Saving the eggs (Wealth accumulations)

There are various ways when it comes to saving the eggs. Generally, the objective is to accumulate wealth, to grow over time, for long term needs such as retirement. Whatever the reason for accumulating your wealth is, it has to serve two aspects of your personal portfolio, increase your assets over time and increase your passive income.

Increase your assets

If you are a saver, i.e. you save quite a considerable portion of your income; you are actively building your assets through your savings. It is active because you derived your savings through your work, the activity you do in exchange for an income.

However, if all you do with your savings is to put it into your bank savings account, you are actually making your assets lazy. The reason is because most banks’ savings accounts provide less than 1% interest per annum. If inflation is 2% every year, it effectively means that you are being “robbed” of your wealth by putting your assets to sleep.

Increase you passive income

Have you heard of the term called financial independent? What exactly does it mean to you? Does it simply mean having more money?

Financial independent is achieved when one’s passive income is able to support his/her fixed expenses. Effectively, without working, the person is able to rely on the passive income for daily expenses.

The other aspect of wealth accumulation is to increase your passive income and it is done either through systematic savings or investment tools. In most circumstances, most people would look for a solution where it not just increases their assets but also provides for passive income to allow them to complement with their CPF retirement scheme by the time they retire.

Wealth Discovery Process

The last segment of the newsletter will introduce the wealth discovery process that every single one of us will have to walk through in our financial life. In order to build a good financial portfolio, one has to understand that the process is never about buying and acquiring products. It is about making sound financial decisions time after time at various life stages.

For a typical fresh graduate just coming into the working world, the process below is an overview of a person’s financial journey. The first step is usually about protecting the hen, risk management. Over time, it is about expanding your assets and contribution to wealth accumulation.

However, the process does not end there. At the end of the day it is about meeting the financial needs of an individual in his/her lifetime and providing the financial assistance in the event of mishap to prevent any financial catastrophe.

The image below is a typical financial journey of most people. It is a lifelong process where constant reviews have to be conducted. In most cases, many professionals failed to communicate the process across to their clients. It is only through this process that professional advice can be prescribed.

Disclaimer:

All content provided in this newsletter is for informational purposes only. The owner of this note makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site.