Sunday, August 17, 2014

Weekend Invest: Credit Cards and Insurance

Although I tend to blog and jump all over the place, going from macro viewpoints to specific economies to even individual stocks on the SGX, the heart of this blog is really personal finance.

If you are just as interested as I am about personal finance, I am sure that the Invest section of The Sunday Times is a must-read for you as well. I like read the weekday Money section, but I find that the weekend Invest section is much more.... generalised, broad and useful.

Today they talked about the rise of debit cards. Even the person being interviewed said that he does not even use credit cards at all because having debt is bad. I disagree.

From an economic point of view, everyone should have a credit card, as long as they pay off their outstanding balances. Why? Many credit cards offer discounts and promotions - this means you are paying less for something that you would be purchasing anyway. Also, having a credit card means that you are starting your credit history.

Don't get me wrong. If you have control issues and a weak mind that can lose easily to temptation, DO NOT get a credit card. If you are a reasonable person that will just replace your debit card with your credit card, you will realize that you are now enjoying a lot more savings for your same consumption. Depending on your purchase categories and your credit card, I think most people can realistically look to save about 5% a month from switching to a credit card from a debit card.

On top of that, by having a credit card it means that you are now officially starting your credit history. Why is your credit history important? Well, if you have a good credit history, you will be able to get the cheapest kind of financing when it comes to it, like for your housing mortgage. The difference between being a credit-worthy borrower and a risky credit borrower can be thousands of dollars! And to get the highest credit rating, I've been told that you need to have a good credit history, which means starting early helps.

Anyway, to each their own I suppose. If not having a credit card helps you to sleep better at night and removes the psychological temptation and uneasiness, then by all means don't have a credit card. But understand that you are potentially spending an extra 5% for all your purchases. However, I think that most responsible people that are serious about reigning their finances will find that having credit cards can help reduce your finances if you are prudent.

That aside, I have been noticing a trend of interviewers saying that they "invest" in insurance. I do not believe in investing in insurance, but that is probably due to the fact that I know a lot more about investing compared to any insurance agent that I have ever met. I just clearly do not trust my investments with them and their products.

I do believe that "investment" insurance can be good for people who really cannot be bothered with investing or are not financially educated enough to make such decisions. Then in those circumstances, sure, go for investment insurance. You are paying for your laziness in the commissions that the insurance agent takes home at the end of the day. If you are fine with hundreds and possibly thousands of dollars being flushed away, that is your prerogative. The investment portion of the insurance is not anything special that cannot be proxied or even entirely replicated by another product at a cheaper price. Anyway, for people in this group, the most important investment decision you will have to make is what is the feeder fund that your insurance is channeling your investment portion to.

Basically, for people that are even reading this blog post, this means you are looking to be your own master of your financial destiny. You might already have reached a proficient level or you are working towards it. In either case, you will realize that insurance and investments do not mix. They are often bundled and talked about together, but they are separate issues.

Anyway, that's enough for my rant about this. I am looking forward to hear the PM's speech today. I am very sure that he is going to announce some changes regarding CPF.

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