Quora Answer: What is Most Overlooked When People Start Financial Planning?

The following is my answer to a Quora question: “What is the most overlooked thing when people start financial planning?” 

In my experience, one of the most overlooked things is the compounding effect of inflation.  If you put aside any investments, you need to consider a threshold so that your investments keep up with the rate of inflation in that investment period.  That threshold should always be higher than the official rate of inflation since that nominal rate is lower than the actual rate.  Consider this hypothetical example: when you bought a burger last year, it was $5.  This year, it is $6.00.  That inflation in price is $1.  However, you should also factor the cost of the missing slice of cheese and lesser onions.  In general, I advise clients to have their investments earn at least 2.5% per annum just to keep up.  Otherwise, they may as well just keep their money under the bed at home. 

Another factor in financial planning is the insurance aspect.  Inflation of medical cost is a lot higher than that of a lot of other things, sometimes in double digits.  This means locking in your hospitalisation and critical illness coverage early is a lot more important than most people realise.