Welcome back. This week, I wish to conclude on the three remaining financial myths.
Myth 5: Self-insurance
I write at the risk of being shot by insurance industry captains. Others believe self-insurance is a must-have. Insurance is there to decrease the risk in your life, nothing more, nothing less. Yes, the less insurance you have of various kinds, the more risk you expose yourself to. It is indeed highly recommended to buy a wide variety of insurance because usually the financial cost of the insurance is low compared to what it protects you against. However, I think it tends to come down to your personal situation – if you don’t have many assets or resources to protect, there’s not much need for insurance. If you are driving a better-than-walking car, for example, comprehensive insurance is pretty much overkill.
Myth 6: Avoid debt like the plague
It is important to distinguish between good debt and bad debt. In general, bad debt has high interest rates and is used to buy stuff that does not help you generate additional income. Good debt has low interest rates and is used to generate additional revenue in your life. Student loans, for example, would be “good debt”. The problem with this dichotomy is that the line in the middle is blurry – there is a giant grey area in this dichotomy. However, the bottom line is the purpose of the debt. Will it help generate more income or it will actually drain your resources more? For example, a used-car loan to help in your business errands is a “good debt”. But a car loan to buy a Mercedes simply to show off to your girlfriend is an example of a “bad debt.”
Myth 7: A tambala saved is a tambala earned
The argument looks so convincing but a tambala saved is only worthwhile if it can earn value over time. Otherwise, you can keep your tambala today only to see it losing value over time due to inflation. But on the other hand, price really doesn’t matter compared to value when making a purchase. Does the item actually provide deep personal value to you? If the answer is yes, don’t be afraid to spend money on it. The challenge here though, is doing enough personal reflection and self-analysis so that you clearly understand what things provide value in your life and which things do not. This will help you know whether it is worth saving that tambala or use it depending on the value you see today or in future based on your needs—maximisation of utility.
I hope this has been thought-provoking enough. It will make you think about your money. Having said that, I would not advise you to follow all of the advice in my column as gospel truth—apply your ingenuity.
Blessed weekend to you and yours as you reflect on these myths.