MANILA, Philippines - Being prepared for calamities of Ondoy and Pepeng proportions does not only involve buying inflatable boats and beds or chaining appliances to the floor. It also means being financially prepared.
Start to develop a financial plan. It is like a road map. Not only will it guide you to financial security, it will also insulate you from life’s turbulences.
Let me start with the first and most fundamental step of a financial plan – Saving, Planning, and Emergency Funding.
Emergency Fund
Your starting point is to build an Emergency Fund. Emergencies—like getting sick or disabled, sudden lost of employment, or plain accidents—can impair your financial plan. You want to make sure that you always have sufficient liquid money when these emergencies occur. On the other hand, having too much funds can prevent you from earning a good return. Therefore, the solution is always having the right balance.
The rule of thumb is to set aside an amount equivalent to 3 to 6 months of your monthly expenses. Two of the key reasons are the possibility of losing your job and being disabled.
Based on studies, it takes an average person 3 to 6 months to look for another job when he is laid off from work.Secondly, most disability insurance plans available in the market now have a 6-month waiting period from the day you get disabled before its benefits take effect.
Opportunity Fund
Next, set up an “opportunity fund.” I recommend another 3 to 6 months’ equivalent of your income. This time, though, you can place it in a longer-term instrument like time deposits that have 6- to12-month term. This fund can be used for large purchases that are non-emergency in nature but are important. Examples include home repair, large item purchases like furniture, appliance, or even family travel. More importantly, this can be used for investment opportunities like purchase of stocks in a depressed period or when somebody has a fire sale on her jewellery, antiques, or rare paintings. For me, this is most useful if there is good business that comes along in rare opportunities.
What financial instruments?
There are a good number of instruments that we can recommend but the most important consideration in this case is liquidity.
Liquidity is the ability to convert your investment back to cash without losing your principal.
Banks can be a very good source of these products and an excellent starting point. Open a savings account or a checking account that can be accessed through an ATM. This bank account is for for your usual expenses, allowing you the convenience of not having to bring a lot of cash every time you go out. You can just withdraw only when you need cash. Because you need to always line up and the limited amount you can withdraw every time, this will help you reduce impulse buying.
From a practical standpoint, I recommend that you only maintain an amount – at most equivalent — to one month’s expenses or 10% less than your monthly income, which ever is lower. Again, by maintaining such amount, your will be able to avoid the temptation to withdraw more than your usual monthly spending.
The next 2 to 5 month equivalent amount can now be placed in a relatively longer bank product. I suggest a “Certificate of Deposit” or a “Time Deposit.” This product usually has a maturity of 30 days to as long as 5 years. However, in the interest of our topic, I suggest a term that is 2- to 12-month long. Try to spread your funds in products that have different periods. One-fourth can be placed for 2 months, another one-fourth will then be for 6 months, and the rest 12 months. On a worst-case scenario, you can always pre-terminate these placements without loss of principal, anyway.
Another product that you can find in a bank is Money Markets or Unit Investment Trust Funds (UITF). These products are very liquid and will earn you a little higher return than a Time Deposit. What these products do is that they pool your money with other people’s money and invest it directly in a variety of short-term instruments. Investing in these instruments allows you to earn a relatively higher return but you also bear the risk in the case of a default or non-payment of the investments.
Money Market Mutual Funds
These funds, also called MM Mutual Funds, are very similar to the product mentioned earlier. The only difference is that a Mutual Fund Company and not banks offer it. Since a company manages UITF and MM Mutual Funds, they earn by charging a management fee. Make sure you check this as different companies have different rates. Also, note that some may charge more than the management fees so make sure to ask for all those. Obviously, the lower the charge, the better it is for you.
Life Insurance
Other than protecting your family, life Insurance can also provide an excellent secondary source of fund. So when purchasing insurance, you may want to choose an insurance that has a good cash value accumulation and that is guaranteed. You can loan from this cash value at a relatively favorable rates. It’s like having a relatively cheap credit line. Whole life or endowment type insurance may be a better choice instead of Variable Life or Unit Linked Insurance since you are looking for guaranteed cash value.
How to choose a bank, financial institution?
Consider the following when you are choosing the right bank, mutual fund company, or any financial institution:
Stability. You may want to consider the bigger banks. With things being equal, bigger banks will most likely be more stable than the smaller ones. Since most of the big banks nowadays are publicly listed in the Philippine Stock Exchange, it’s easier to get information about them. Check out their websites, too.
Reputation. What are their investment and management philosophies? Are they too strict or too lenient? It is always best to ask your friends or family who have dealt with these companies. Try to also look at the reputations of the owners. Try to look at their other lines of businesses and what their business practices are.
Returns. Even if different institutions offer the same products, they may differ in the returns. Some banks may also offer some enhancements like earning some points or getting some form of a reward. Take advantage of this as this will enhance your return. For UITF and MM Mutual Funds, past performance is a good indicator in choosing. I prefer funds having more consistent returns than a fund getting high return on one year and a low return on another year. Shop around.
Lastly, Relationship, Service, and Location should also be considered. Savings is a commitment that is long term. Make sure the institutions you choose is accessible and pleasant to deal with. All in all, choose the one that you’re most comfortable dealing with.
Now, as you develop your savings plan and emergency fund, you are one step closer to achieving Financial Freedom.
Happy Wealthy Living!
Source:
A financial plan before another Ondoy strikes | ABS-CBN News Online Beta
A financial plan before another Ondoy strikes
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