Vicious Cycle

“The more you earn, the more you’ll spend”. This is usually true to most of us who are earning a living. Recently, my younger colleagues and I had conversations on moving on to “greener pastures”. They were complaining how it is so unfair for them to get so much lower than their peers. Therefore, one of them contemplates on moving on to a job which pays better. She said that she badly needed a bigger pay because of commitments (who doesn’t??).

However, I cautioned them that with more, one will tend to spend more. This is a very natural human tendency unless one is extremely disciplined. Before you know it, the cycle continues and in less than a year with the bigger pay cheque, you will again find the need for an even bigger pay, so on and so forth. That explains the high turnover in today’s IT industry, at least.

In short, manage your spending before it manages you. I once read that it’s not how much you can earn (since it’s an endless cycle) but how much you can save that matters most. “Live below your means” sounds so simple but yet so hard to achieve.

Assurance or Insurance

Recently, I advised my mum to surrender her life insurance policy. I told her that it’s no longer necessary to pay for it. It’s because all her children are grown-ups and self-sufficient now, so why pay for something which is not needed anymore. Being a sacrificial mum as she is, she wanted all the proceeds to go to her children upon her demise. I told her that she only needs one if she still have dependents living off her income, which is not the case.

Generally, most people are very ignorant about this aspect of life. Even if one buys insurance, they are often coaxed into it by insurance agents and don’t know what they’re buying into. I’ve heard of Christians not believing in insurance but believing in God to provide for their loved ones when they’re not around. I believe God provides but I also think that this is an irresponsible mentality. Furthermore, insurance has also gotten a bad name throughout the years and this didn’t help.

To get a little technical, how much is enough and not too much? After all, we’re called to be good stewards of our God-given money. A simple and general rule of thumb to evaluate this is…

[Total expenses by your dependents per annum, excl yourself] / 0.05 = [Capital]

[Capital] – [Assets/cash you own] = [Short fall]

For example, say your dependents requires RM2k per month to cover living expenses. You currently have RM20k in savings.

[Capital] = (RM2k * 12) / 0.05
= RM480k

RM480k – RM20k = RM460k

In this example, you would require a life insurance coverage of RM460k.

The 0.05 is the expected interest rate and [Short fall] is the required sum assured to buy. Upon your demise, your beneficiar(ies) will be get the [Capital] from the [Short fall], i.e. insurance proceeds, + [Assets/cash you own]. Putting that in FD which generates 5% interest, the interest alone will be sufficient to provide for the yearly expenses required by your dependents while preserving [Capital]. However, I know the [Short fall] can be a huge amount. Therefore, I believe in working with whatever resources I have now and commit the rest which are out of my control to Him.

I believe God provides (but not out of thin air). I also believe that sometimes this statement is so over-rated. I used to hear from Christians of how God has provided for them during times of need through other people. In the same way, I believe this other people can be me taking advantage of something man has created, i.e. insurance and a little effort on my part to provide for my dependents’ welfare while I’m away permanently. I acknowledge that this does not provide for all aspects of my dependents’ needs during my absence but it certainly addresses the one of the most dreaded aspect when the sole breadwinner isn't around anymore.

We can't be ignorant and keep using "God will provide" as a "hope" or rather an excuse but should put on a more responsible mentality.