Week 5 – Term Insurance, Thinking in Percentages, Corporate Cards & A Dividend Millionaire

One Personal Finance Lesson – To Increase Your Personal Finance Awareness

Last week, we started discussing insurance. I mentioned how the industry cons us into buying the wrong products. We learnt that only two insurance products really matter. Term insurance and Health Insurance. 

This week, let’s see the key parameters one must keep in mind to buy a term insurance – 

1. It must be a no-nonsense insurance product – The insurance policy must be simple. It must payout to your dependents in case of your death. Please avoid any kind of add-on products in the form of waiver of premium, money back, accident riders or critical illness. It should be pure term policy. It should be considered as an expenditure.

2. Buy it early – There is no age for buying a term insurance. You need term insurance the day you have people dependent on you financially. 

3. Please be transparent – Let the insurer know that you are a smoker or alcoholic, in case you are. Disclose all existing diseases, if any. 

4. Only till you have dependents – The term policy is to provide for your dependents in case of your death. You must keep in mind to terminate the policy on the day you stop having anyone dependent on you. Knowing your retirement age is of help to determine the policy term. 

5. Amount of policy – Quantum of policy is always tricky to determine. Be conservative and go for 30-50 times your annual expenses. You do not know how inflation could act up in the future. 

6. One policy is enough – You really do not need more than 1 policy. It’s a myth to diversify your risk in insurance. Just go for 1 insurer. If you are still not comfortable, split it in 2 policies. 

7. Let your family know – It will never make sense that your family is unaware about your insurance protection. Let them know and always file the hard copy for easy access. 

I think I have given you a brief overview of the key parameters to keep in mind while selecting a term policy.

If you still have questions, please do reach out. 

One Idea – To Change the Way You Think About Money 

Speak to anyone who saves more than 10% of his monthly earnings and he will be very proud of it. 

Suppose you save 30% each month, it means that you are spending 70% each month (btw 30% is an achievement and you are already winning the game).

But, when we see that you are spending 70% each month, do you think that the 30% you saved this month would pay for one month’s of expense in your retirement (assuming it grows at the rate of inflation)? 

We all know the answer. It’s No. 

What must be done then? 

Increase your income. Do not increase your expenses. That way, you will eventually start moving to a 40%, 50%, 60% savings rate. 

If you fail to increase your rate of savings overtime, god bless you.

One Hack – To Add More Money To Your Bank

Most of us receive corporate credit cards. You eventually start spending large amounts on the card for your travel or for the expenses of your team. 

Why not chuck the credit card and use your personal credit card instead? 

You can start accumulating the benefits of the rewards program while you do not pay anything from your pocket. 

If you think it’s unethical, please avoid this route. It’s only for the courageous šŸ™‚

One Compounding Story – To Convince You About The Power of Compounding

This is a story of a dividend millionaire Hayford Peirce. He is a science-fiction and mystery writer by avocation.

In 1995, he made a 30 year plan to achieve an annual dividend income of $250,000 in dividends by 2025. 

He set out on this path by listing his existing dividends in 1995 which amounted to a little more than $14,000. Mind you, he was 53 years old in 1995. 

In 2017, his portfolio paid him more than $85,000 in dividends alone. This comprised of more than 50% of his annual income. He was 75 years old in 2017. The growth in dividends alone from 1995 to 2017 was a bit more than 8% which is enormous. In the 22 years to 2017, he has supposedly received more than a million dollars in dividends. 

While he may not achieve his dream of $250,000 in dividends, the current income is more than sufficient to support his lifestyle.  

Key lessons – 

1. If you have a plan, stick to it. Or get a planner to keep you on track.

2. Focus on creating passive sources of income which can pay you for a lifetime. 

3. It is never too late to start planning your finances. He did it at the age of 53. 

4. Don’t be a fool and believe that you will die early. Most of you will live to 100. You definitely need a kitty to support you. 

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