Top 5 Costly Financial Mistakes Every Millennial Needs To Know
Young, Dumb and Foolish Mistakes that caused me to lose $200,000
I became more serious about proper financial planning since I turned 24 years old. During my early 20s, I was a spender. I love shopping. I love travelling. I knew that in order for me to enjoy this lifestyle when I’m older, I need to have a proper plan. My lifestyle at that time was unsustainable.
That was when I decided to start adulting.
I made mistakes through my attempt to become a responsible adult. And now I write this to address to my 22-year-old self. Take this as a warning not to make the same costly mistakes as I did.
If you are at the beginning trying to build wealth, figuring out how to be a better steward with money; at the stage where you are starting to learn more about investing; or if you are learning how to become independent relying less on your parents. I hope there’s something that you can takeaway.
When I Just Started
I wanted to give you more background on how financial independence began for me. I started working since I was 22 years old. And I was unable to stay in a job for more than six months. I job hopped for the first two years of my career. Never had a stable income until I was 24.
Fortunately for me, I was still living with my parents. Even though my monthly expenses were kept very minimal, I was still unable to save.
My first job paid $1,200 per month. It was just barely enough to sustain my lifestyle. My salary increased when I started at a larger company, and I took home $2,000 per month. As I continue to build my career, I got better job compensation that gave me additional benefits such as 13-month bonus and performance bonus.
With the extra money, I wanted to do something about it. I vaguely knew about the concept of inflation, but I had no idea what are the options and ways to deal with money.
I dabbled in what I thought I knew — insurance is safe, and everything else like stocks are dangerous. Most of my mistakes are due to a lack of understanding. I did not know how insurance works and how to use it effectively.
I am embarrassed. Because looking back, I was not very smart with money. I wanted to believe that I was smart, but the reality is far from it. I was lazy and did not do proper research to understand the many types of financial tools in the market. It was confusing to me at that time, and I avoided educating myself.
5 Mistakes I Made:
- Buying Whole Life Insurance
- Buying Endowment and Savings Plan
- Trusting the ‘Experts’
- Lazy to Do Proper Research
- Supporting a friend
Mistake 1: Buying Whole Life Insurance
Specifically, Manulife Life Protector Plus whole life insurance. I got this lousy product when I turned 23 because my dad said that I had to get some sort of insurance in place.
The reason why I regretted this decision is because of the fact that I have to commit to paying the life insurance premiums forever. Until Death.
Other whole life insurance covers you for life and you would stop paying the premiums at a certain age — usually, it is around retirement age. It does not make sense to have life insurance that you have to keep on paying even if you retire. Where are you going to get the money from?
I bought my first insurance thinking that I was fully covered. That one whole life insurance would cover everything I need. I was naive. Without knowing that there are other areas that I needed to be insured, such as medical and accident plans.
Why did I get insurance? In case I face the following issues:
- I become very sick and I need expensive healthcare.
- I have an accident and I need expensive healthcare.
- I become disabled and I cannot provide for myself anymore.
All these issues can be addressed using life insurance, medical insurance, personal accident insurance and critical illness insurance to have adequate protection.
Having a term life insurance would actually be cheaper in the long term. This video below shares a good breakdown of the cost of whole life versus term life insurance.
I was not clear about my objective in the first place. So I let the insurance agent decide on what is ‘good’. That is, what is good for him, instead of what is good for me.
I could have spent the same amount of money getting the proper insurance policies in place. Using a cheaper term life insurance and using the remainder for medical and accident plans.
So I urge you to be very clear about what is your objective and make sure that you get the products that suit your needs.
Mistake 2: Buying Endowment and Saving Plans
This was another huge mistake for me. Now, I have three endowment plans but I am not an advocate for it. In fact, I hate them.
While endowment and saving plans might be useful to force yourself to save, I see more downside.
Reasons being:
1. Endowment Plans Are Not Liquid
There is a minimum lock-in period. You cannot tap into the money until the period ends. Endowment policies get terminated if you miss payments.
I had friends who had over-committed to endowment plans. They had to terminate their endowment plans due to an emergency. And because of that, it caused them to lose money as it was still under the lock-in period. You have to make sure that the money that you place inside endowment plans would not be touched for the next 5, 10, 15 or 20 years. Because once your money is locked inside, any withdrawal will have a penalty cost.
The insurance agent who had sold my friends the endowment plans clearly do not understand their lifestyle needs. I believe that he or she is just looking to earn more money at the expense of others.
2. Projected Returns Do Not Equate To Your Actual Returns
Some practices used by insurance agents are truly unethical, and sometimes they mislead with the complicated jargon that they use. For example, They would sell the dream of projected returns of endowment plans and hide what the actual reality is.
Rarely, you would be able to get the projected returns from the endowment plans that they have initially sold you on. Know the difference between guaranteed versus non-guaranteed. Do not be confused by the big beautiful numbers, it may all be just a dream.
3. Returns are not attractive
With my objective being retirement, I bought endowment insurance. I thought that I would be able to get good returns. However, there are many ways to get better returns, such as investing in an Index fund or Exchange-traded fund (ETF).
And as I have a Singapore social security (CPF) account, I get better returns investing my money into CPF Special Account. The scheme guarantees a minimum of 4% returns. None of the financial advisors I have met had shared with me this knowledge.
Mistake 3: Trusting the ‘experts’
My dad introduced my first insurance agent, and my dad had no clue how insurance work. I thought that since the insurance agent was an old family friend and someone who knew my parents for a long time, he would be able to advise the best product for my needs.
But no, most financial agents are just armed with knowledge on their products but not how they can properly serve your needs. You should know what you need and do your research! Do not completely trust someone just because he is an expert.
If you would have realised by now, a financial agent might have a different objective than you. First and foremost, they need to make money! I forgot to account that my first insurance agent would want to sell whichever product that maximises his income. What is good can be subjective — because what is good for the financial agent may or may not be good for you.
What I have learned is that it is no responsibility of him to educate me on proper financial planning and there is no need for him to understand what my needs are, there is simply no incentive for him to. Especially if he might lose a potential deal.
Be skeptical of any experts who have a financial incentive to mislead or omit any crucial information from you and almost no risk on their end.
Mistake 4: Lazy To do Proper Research
Yes, it is difficult to understand the complexity of insurance. And if you don’t do proper research and understand it correctly, you are just going to be at the losing end. That was what happened to me because I was lazy to educate myself.
I never thought much or seek a second opinion when it comes to purchasing insurance because I thought that since the person is someone I knew. They would be able to protect my interest.
When it comes to insurance products, a lot of the insurance companies use a method called Confusopoly a word coined by Scott Adams in his book, Loserthink.
Confusopoly is confusing marketing designed to prevent the buyer from making informed decisions.
If the sellers can confuse the consumer enough then the consumers won’t necessarily know what choice they’re making. This results in consumers being talked into just about anything. We can see this happening when people are getting overinsured and having insurance that does not fulfil their needs!
How would you know that Whole life insurance technically does not cover your whole life circumstances? It’s just a simple wording but complicated jargon and it misleads those who are uneducated about the industry.
Insurance becomes a very emotional purchase for many; because it relies on the fear of unexpected life circumstances, facing confusing terms that you don’t know and have no choice but to rely on someone you trust. In my case, I trusted fully to my financial agents without truly understanding what I am purchasing.
Furthermore, I have committed my first insurance (mistake 1) too quickly, without taking time to research and consulting second opinions. I was not insured, and I was very worried.
Mistake 5: Supporting a friend who has just started in their financial agent career
My second insurance agent was someone whom I knew from school. In Singapore, whenever someone who you have lost contact for a long time, you would usually be skeptical about why he or she is connecting with you. Most of the time, they are trying to sell you something.
Because I value relationships, I decided to meet.
Alas, she had just become an insurance agent and wanted to see if there are anyway she could help with my financial planning. That was when she recommended me to get a proper medical coverage under the Integrated Shield Plan that is available for Singaporeans. Her advice was beneficial to me.
Because I appreciated her advice and wanted to see if I could help her in any way, I ended up buying endowment insurance from her! Thinking that I will finally have a proper financial planner who will be able to be there to support my financial needs for the future.
But a few years later, she left the company.
I was bummed about this because the reason why I bought an insurance from her was that I wanted her to handle the plans. And also to have someone whom I could contact when I needed help. I would prefer to deal with someone who is likely going to be able to service my financial needs long term.
In conclusion, adulting is hard because I am sheltered throughout my life. I have always believed in the goodness of people but these experiences dealing with insurance agents did not make a good impression on me.
I’ve learned that you need to be responsible and you need to educate yourself on all your insurance plans. It is not an excuse to not know.
Now I prefer working with a financial agent who helps me compare insurance policies across multiple brands so that I can better evaluate the pros and cons of each policy. As they are not backed by any particular insurance provider, they are not as biased in recommending and acting in the best interest of their clients. Previously, I was only dealing with a representative from each brand so there was no way to compare the differences.
Only invest in things that you understand. Keep track of all of your plans and know what function it provides in your life. If you don’t learn and educate yourself about what you are buying, you will lose out in life.
