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Chiawono’s Three Rules (Part 3 – Final)

You can find the first part here and the second part here.

This is the last part of the Three Rules. And probably the most tricky one. Since I don’t plan on beating around the bush, the last thing you need to prepare is an insurance policy for each of your assets. Now, why do I say tricky?

When I say that you (and I, as well) need to prepare an insurance policy for each of your (and my) assets, we need to get straight on what can be classified as assets and why insure it. We can then start from there and build a list of the insurance policies we need. But before that, with all due respect, do not discuss your insurance needs with anyone bearing the insurance company name on his / her back. Remember, unlike your emergency fund, the insurance premium is something you spend your money on. It is something that is meant to be lost (of course, for a certain arrangement of protection). Salesman (especially insurance salesperson) will sell you things you don’t need with an amount that might or might not impact your financial plan. You don’t want that. And even more, you don’t want that to happen without you realizing it. So, let’s start from the simple ones just to get the hang on this item.

1. Property Insurance: If you have your own house, then this is a must with a minimum of protection against fire. Whether you use the place or just owning it for whatever reason, you need a property insurance for each of your properties. While there is a 99% chance that you will never get the benefit from this policy, there’s a 100% chance you’ll regret not having if something happens. You don’t need this if you’re staying at your parents’ place (but they might need one, go tell them) or renting from someone else. You don’t need this as well if you’re a hobo.

2. Auto Insurance: If you use your car more than once a year, it’s a good idea to have one (for each car). Even if you don’t plan to use your car at all, it’s still a good idea to protect it against theft. And an all risk car insurance normally would only cost like 2% – 2.5% of the car price. One bump from a motorcycle to the door and you’ll spend more than that at the repair shop.

3. Health Insurance: If you’re healthy, you need it. If you’re already at a stage 4 cancer, no point in getting one. The first point is that you need to make sure that your productivity continues in a way that is not costly to your financial situation. A box of non-prescribed antibiotics costs more than a box of pizza. And a night at the hospital with doctors and medicine costs more than most three star hotels. The second thing you need to consider is that other people’s productivity and / or financial situation can be affected by our health condition as well. We also don’t want that. So, depending on your current health status, go get one!

On a side note however, most of us are salary-men. Our employers are obliged to provide us some kind of health insurance. So this is the first thing we need to check out. What’s the coverage and how big it is. Does it cover our spouse and children as well? And in the end, maybe we don’t need to get a new one.

4. Life Insurance: Now. This is the trickiest of them all. I mean, life is an asset. That’s for sure. But for whom? Don’t get me wrong on this matter. Your life is an asset. Sure, we can agree with that. But not (only) for you. Your life is (more of) an asset for your dependents. See it this way. When you lose your house or your car or your health, you still have to pay your bills and buy your groceries for the sake of your family (your dependents). But once you lose your life, you don’t have to worry about those things anymore. The worries will be inherited to your family (dependents) along with whatever your other assets are. So when we are talking about protection, a life insurance policy protects your dependents. Not you.

Several types of life insurance you might find in the market:

  • Unit linked insurance policy: Avoid at all cost. In short it’s too expensive, too useless, and pays the salesperson way too much.
  • Term life insurance policy: It’s the kind that requires you to continually ‘renew’ (by paying a certain premium which usually is bigger as you age or have increased risk) your policy every once in a while (usually annually, like an auto insurance).
  • Whole life insurance policy: It’s the kind where you pay the premium one time (or over a period of installments) and you get a protection until a reasonably old age (like 99 years old). Usually more expensive than a term life policy.

If you are too young and have no dependent at all, you don’t need a life insurance policy (YET). If you are old and have no dependent at all, you don’t need a life insurance policy (EVER). The point of life insurance, no matter what that nicely dressed young insurance salesperson say to you, is again for the benefit of your dependents once you no longer have the means to support them anymore.

In the end, those are only four out of many kinds of widely available insurance policies. You might need less or maybe more. The important thing is that you have to have a protection so that your assets don’t turn into liabilities. So the practical steps are:
1. List down your assets and decide for yourself what are the insurance policies that you NEED. I can’t help but emphasize again that you have to buy the policies you NEED. Not the ones you’re offered.
2. Find a reputable insurance agency and a reputable insurance agent and tell him your needs.
3. Open your mind for his or her suggestion but decide for yourself with regards of your needs.
4. Do not decide at the moment. Take the proposals with you and spend some time analyzing them at your home.
5. Repeat step 2 to 4 with another insurance company. Having an option can’t do you harm.
6. Buy them. Larry Burkett once give us a guidance about the amount of money you have to spend on insurance. It’s around 5% of your monthly income (if you’re paying the premium on a monthly basis).
7. This step is very very important. Many many financial planners forget forget to inform their clients about this: Do NOT do NOT forget about the insurance policies you have bought and inform at least at least a family member or trusted relative about their whereabouts. I believe believe you know why.

I guess that’s all for now. We don’t want a long post but this concludes the basic of Chiawono’s Three Rules before You Start Investing on Anything. I hope this can give all of us a start (or maybe at least a steer) in the right direction when it comes to our financial planning. Feel free to email me chiawono (at) hotmail (dot) com or just drop a comment if you have anything to ask / say / debate. But above all, help me spread this blog post around, will you?

Thank you.

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Posted by on July 19, 2012 in Chiawonomics


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Chiawono’s Three Rules (Part 2)

If you happen to arrive at this page without reading the first part, you can do it here
Ok. So now that we have our Emergency Funds, what’s next? Can we go and talk about investments? Well, read carefully, and you will notice that what I am going to share is called “the Chiawono’s Three Rules before You Start Investing on Anything” and we have covered only the first rule so far. So here comes the second rule: zero bad debt.

Here’s the thing: there are good debts and and there are bad debts. Let’s talk about the differences some other time, but here we have several examples of bad debts:
1. If you don’t pay full payment for your credit card bill, that’s BAD debt. Especially if it’s been going on for some time.
2. If you owe the credit card issuer more than you earn, that’s BAD debt. In reality, since we have our regular spending, it’s considered bad enough if your debt is more than one third of what you earn.
3. If you borrow money from pawn shops or loan sharks, that’s BAD debt.
4. If you happen to have payday loan, that’s BAD debt.
5. You get the idea. Every debt that has ridiculously high interest rate or has no collateral whatsoever can be considered bad debt.

Editor’s Note: For Indonesian readers: ‘pawn shop’ is ‘pegadaian’, ‘loan shark’ is ‘renternir’, and ‘payday loan’ is ‘kasbon’.

So, if you happen to have bad debt(s), PAY IT OFF. NOW.  If you can’t, then work hard and pay it off as soon as possible. Here’s why:
1. Believe me, most of your bad debts will have MUCH higher interest rates (with a minimum of 2 to 3 times) than your normal investment return. So it’s IMPOSSIBLE to pay off the interest of your debts using the interest or yield of your investments.
2. Compounding interest is the world’s most powerful force (according to Albert Einstein). Most bad debts have these kinds of interest structure. So it’s better to have the force on our side (when we’re investing) rather than have the force against us (in our debts).
3. What if I put my money to a high yield investment? That’s a bigger NO-NO. While the yield probably will won’t be as high as the debt rates, you’re putting yourself in a bigger risk of losing your capital. And then, you’ll be in a deeper trouble.
4. But someone else is borrowing money from one place and invest in another place (or so you think you’ve heard)? Well, there are a lot of investors doing this stuff. It’s called carry trade. But they’re aware of the risks not to mention they are mostly much much much smarter than normal folks like me and you. So, don’t do it. Seriously.

Now, probably you’ve noticed that i use a lot of capital letters in this second part. Personally, I can’t help but try to emphasize that BAD debts are indeed BAD. Only when you’re free of bad debts that you can start to build a good financial plan. And on the other hand, there are lots of good debts as well: house mortgages, student loans, a car loan (if you need one), etc. Feel free to take them after calculating your financial health. Remember, just like our body, a healthy loan can become unhealthy if not taken care of.

See you in the third part.
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Posted by on October 13, 2011 in Chiawonomics


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An Introduction: Chiawono’s Three Rules (Part 1)

Many friends came to me for investment advices but most of them actually had no idea about what investment really meant. So I’m guessing that out there, there are actually people who needed these kinds of advices but due to the lack (or the abundance) of information, are unable to really discern what they should do.

In these kinds of situation, the salespersons from banks or investment managers or insurance companies are definitely not your number one friend (because they have their own interests and products) while financial planners are definitely not free. So I’m starting this blog in order to share some insights on investment for normal people like you and me.

So as an introduction to this blog, I’d like to share that I have what I call “the Chiawono’s Three Rules before You Start Investing on Anything” that all of us really need to read and DO. And by ‘all of us,’ I really mean all. That includes first time investors as well as regular investors.

First of all, before you start thinking about portfolio or asset allocation or simply thinking about where will this part of my money go, you need to make your own Emergency Fund. Our daily needs are paid with our earnings. But things happen. Salary-men get fired, freelances have their low order cycles, entrepreneurs realize losses sometimes, and even children get allowance cuts. I know, this may sound a bit pessimistic, but believe me, in managing your personal financial, you need to prepare for the worst. In the instance that one of those things happen, we need to make sure life goes on. That’s why everybody needs this Emergency Fund. So, if you don’t already have your own Emergency Fund, make it a top priority and set aside a portion of your income for this purpose.

Before we go deeper, we have to separate the Emergency Fund from our investments. Emergency Fund should be idle and liquid while investments (we’ll cover this later) should serve a purpose within a time frame and (therefore) not always liquid.

Now, how much money should we put into this Emergency Fund? Well, to really answer this question, we have to understand that everybody’s situation and needs are different. To really get an exact amount that suits a certain someone, you will need to consult with a financial planner. And even after that, your situation might change. So here are a few guidelines for starting your Emergency Fund:
1. Some financial planners assume the amount the amount from the expenses, while some assume the amount from the earnings. I use the latter approach. In planning for Emergency Fund, use your current income (preferably monthly) as a benchmark.
2. Understand that every source of income has different risk level. For example, a graphic design freelancer is considered to have less job security risk than an in house graphic designer in an established company.
3. Think for the whole family, not only for yourself. If you have a wife and / or children, you’ll definitely need more safety cushion when the situation where you need your Emergency Fund presents itself.
4. Always take time to evaluate your Emergency Fund periodically. Your income increases overtime and so does your expenses. It’s silly to think that the Emergency Fund may stay the same.

To make it practical, this can be your minimum starting point:
1. If you are single and employed, you should prepare 3x – 6x of your monthly salary for the Emergency Fund.
2. If you are married without any child, you should prepare 6x – 9x of your combined monthly salary for the Emergency Fund.
3. If you are married with 1 child, you should prepare at least 9x – 12x of your combined monthly salary for the Emergency Fund.
4. If you are married with 2 or more children, you should prepare at least 12x of your combined monthly salary for the Emergency Fund.
5. If you live off your pension fund, you should prepare at least 12x of your monthly pension for the Emergency Fund.
6. If you are a freelancer, you should prepare at least 12x of your average monthly income for the Emergency Fund.

Some of you might think that the numbers above are quite big. Well, they are. But in my personal view, when you’re bumping into a wall, it’s better to have an airbag popping out from your front. So while you are allowed to think that airbag and Emergency Fund are optional, we dread for the time when we regret that we don’t have them.

Well, what are the other 2 rules? Just stay around and expect them to be up as soon as possible.

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Posted by on May 30, 2011 in Chiawonomics


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