You will be able to explain why insurance and a buffer come before investing for most people.
Picture two friends who both started investing at 25. Ten years later they hold roughly the same portfolio, built from the same monthly amount. Then each of them has a bad year. One is retrenched in a downturn, the other is diagnosed with a serious illness and stops work for eight months. One of them comes through with the portfolio mostly intact. The other sells a large part of it at the bottom of the market to pay rent and hospital bills.
The difference between them was never the investments. It was what sat underneath them. This lesson is about why the buffer and protection layers come before investing for most people, and what each of them is there to do.
Investing works over long periods. Prices rise and fall, sometimes by a third or more in a bad year, and the reason long-term investors usually come out ahead is that they can wait for prices to recover. Time is doing most of the work.
So the plan rarely fails because the investments were poor. It fails when something forces you to sell at a bad time. You need cash, the only cash you have is in the portfolio, and the market happens to be down. Selling turns a temporary fall into a permanent loss, and you lose the recovery as well.
Here is how that looks with figures made up for the example. Priya has S$60,000 invested and spends S$3,500 a month on essentials. She falls ill and cannot work for eight months, so she needs 8 x S$3,500, which is S$28,000. In the same months the market falls 30%, and her S$60,000 is now worth S$42,000. She sells S$28,000 of it and is left with S$14,000. If prices later recover to where they were, her remaining holding recovers too, but the S$28,000 she sold at the low point is gone for good. Had she kept S$28,000 in cash, she would have spent that instead, and her whole portfolio would have been there for the recovery.
Bad timing like this is common because the events that hurt your finances often arrive with a weak economy. Downturns cost jobs and push prices down in the same months.
Most money worries are small. A phone screen, an aircon repair, a dental bill. They are annoying but they do not end a plan.
The events that do end plans are fewer, and they are mostly about your ability to earn. Serious illness stops your pay and adds bills at the same time. Disability can stop your pay for years or for good. The death of someone who earns for a household removes the income everyone else was counting on.
Run the arithmetic on the largest of these and the size becomes obvious. Take a 30-year-old earning S$60,000 a year, figures again made up for the example. If they could never work again, the pay they would lose before 65 is 35 years x S$60,000, which is S$2.1 million, before any pay rises. No savings account at 30 covers that, and no portfolio does either.
These are the events insurance is built for. Hospitalisation cover, term life, critical illness and disability income cover each deal with one of them, and module 4 takes you through each type and how to check what you already hold.
It helps to sort shocks by size, because each size has its own tool.
A buffer, your emergency fund, handles the small and medium ones: the repair, the medical bill that falls under your cover, three months between jobs. These happen to most people more than once, and paying for them from savings you set aside for the purpose is cheaper than insuring against each one.
Insurance handles the large ones: the events that are unlikely in any one year but would cost more than you could ever save. You pay a known premium so that a cost you could not survive becomes one you can.
Neither tool does the other's job well. Insurance for small, likely costs is expensive, because you pay the insurer's costs on top of the claims. And no realistic buffer can replace decades of income. Module 3 covers how big your buffer should be.
The cleanest setup gives each tool one job. Buy protection for the income you and your family need, keep a buffer for the shocks you can absorb, and invest what is left for long-term goals.
Plans that mix the jobs together tend to do each one less well. A policy that bundles savings and protection may leave you with less cover than you need and a lower return than you could get elsewhere, and if you need the money early, surrendering it can cost you. That does not make every combined product wrong, but it does mean you should know which job each dollar of premium is doing.
None of this means you wait years before investing. For many people the buffer and basic cover can be in place within months, and lesson 1.1, Why the order you set things up matters more than the products, explained that some steps run side by side. What matters is that the investments are never the only thing standing between you and a bad year.
So before going further, look at your own setup through this lens. Think about the shocks that would hurt you most, and about what money you have now that would actually pay when one of them happened.
List the three events that would hurt your finances most and write what currently pays if each one happens.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).