Author’s Note: This is a guest post from Kendrick Chua. Hope you enjoy this article! -Randell T.

Setting your own Rewards System

Credit Cards became this popular not only for the convenience they brought to the consumers but also because of the rewards system they offered. For every certain amount transacted, cardholders are given reward points that can later be exchanged for gift items such as gift checks, appliances, gadgets and even trips. So the more you use your card, the more points you get, the bigger your gift item is. (more…)

No.

When I am asked if people should take out a pre-need educational plan for their children, my answer is no.

Here are my reasons:

1) Too risky – too many pre-need companies have folded up so there is something seriously wrong with the way the pre-need industry operates. CAP, Pacific, Professional, Platinum… the lists goes on and on. Regulation for this industry is lax and it makes you wonder how pre-need companies design their plans.

2) Horrible returns – not all pre-need companies are unstable, there are still 2 or 3 very stable pre-need companies. However, when you compute for the internal rate of return of their plans, it isn’t really encouraging. If the inflation of tuition fees averages between 8 to 12% p.a. and the return on your educational plan is about 4% p.a., you can be sure that the benefits you will get upon maturity is severely insufficient.

3) Unfair policy provisions – if you skip your payments or decide to cash your pre-need policy, you’ll be aghast at what’s left for you, assuming you can still get any.

Pre-need proponents always argue that a pre-need product is a great program since it forces you to save. Do you know the lapsation rate of pre-need policies? It’s really, really bad – meaning, people who actually buy pre-need policies can’t fully pay their plans, or at least a lot of them. Here’s my thing: if a person can’t discipline himself to save money for something important like education, he can’t discipline himself into paying the payments of his educational plan; if a person is disciplined enough to pay his pre-need payments, he is disciplined enough to invest his money in better investment programs.

There’s a cardinal rule which finance geeks like me call the ‘risk-return’ relationship. The higher the risks are, the higher the potential yields are and vice-versa. There is no such thing as a low risk – high yield investment, you can bet that it’s a scam. On the other hand, is there such a thing as low yield – high risk investment? Who’d be in his right mind to invest his money that way? Try investing in a pre-need product… ouch!

I’ve been giving talks and lectures for many, many times. Without a doubt, the question I have been asked the most would be, “what is the best investment?” This is a question that will have an answer depending on the person being asked. If you are to ask a real estate agent, he will say real estate; a stock broker will say blue chip stocks; a banker will offer the latest bank products like a time deposit or a special savings account; a mutual fund representative will say mutual funds; an insurance agent would probably quote a variable life insurance – get the drift? However, my answer has always been consistent. The best investment for me? Well, I can’t really give an answer.

Okay, I must admit that many people give me a dumb-founded look whenever I answer them “I don’t know, it depends”. For someone who claims to be a personal finance guy who has been in the financial services industry for over 2 decades and a trainer in financial planning, I am pretty clueless ain’t I? I simply can’t tell anyone what the best investment is because there’s no such thing. My answer will always be “it depends!”

I have a simple four rule guide that I recommend to people whenever they are perplexed as to where they want to bring their hard-earned money.

1) Investment Objective – What is the investment for in the first place? Where do you plan to use it? Is it for retirement, education, purchase of a house? Or is it just to park your money while you are scouting for other investments?

2) Time Frame – When do you intend to use the money you are investing? Is it short (less than a year), medium (up to 7 years) or long term (more than 7 years)? It is unwise to put money in long term investments when you will need your money in the short term – you might end up realizing capital reduction or you may be levied with steep penalties should you liquidate your investment. It is likewise unwise to invest in short term instruments when the purpose of investment is for the long term like education or retirement – you will not realize a good appreciation of your investments as short term instruments generally give lower yields. In other words, your investment would be drastically reduced by inflation and find yourself with not much funds when you need it the most.

3) Risk Tolerance – Investors are usually conservative, moderate, or aggressive. Determine your risk tolerance first. Is liquidity and capital preservation an absolute must for you? Or are you willing to risk some potential capital loss in favor of potential capital hike? Remember the golden rule in investing – the higher the yield, the higher the risks and vice-versa.

4) Acumen – There are simple products and there are complicated products. If you are investing in the stock market and you are not familiar with some form of fundamentals, you might regret ever putting money there. If you can’t distinguish a structured note from a time deposit, you might want to reconsider your decision. I have a simple advice with regard to this – never ever invest in something you don’t understand.

Before parting with your money, I highly recommend that you go through the four-step rule first.

“But divide your investments among many places, for you do not know what risks might lie ahead.” Ecclesiastes 11:2 (NLT).