A decade ago, it seems that life was simple: you go to the bank to save up money, maybe place money in time deposits to earn higher rates, or go to a life insurance agent for some insurance protection.
Now, there is an abundance of financial products, vehicles and schemes not just to secure our future, but build more wealth as well. It seems like a floodgate has opened and stock market, mutual funds, investing, forex, real estate, VULs have become bywords—a cornucopia of sorts.
Making sense of all these products and deciding which fits best for us can be daunting. So, as a financial planner, there are six bottom lines that I treat as non-negotiable for any person’s finance. Here they are:
A Healthy Cash Flow. This is the beginning of financial wellness. As a financial planner, the excess cash per month (or per year) of any individual or family is what I shall allocate for their financial goals. For instance, if the client can spare P10,000 per month or P120,000 per year, then I should be allocating that amount towards different financial instruments for them to realize their goals. Of course, I also look at the impact of my financial recommendations to the cash flow. For example, it would not good for client if the entire excess cash goes to just paying premiums and leaving nothing for other important needs.
Emergency Fund. Every person, every family, needs an emergency fund. Two income families should have an emergency fund equal to 6 months’ expenses, while one-income families, 3 months. Having an emergency fund enables continuity of the same lifestyle should events like unemployment happen, or even urgent needs like repairs. Not having an emergency fund can drive one to avail loans, which results in even further expenses in the form of interest.
Insurance coverage. Think of these: 1) How much is your insurance coverage now, and 2) How much is your monthly expense? Divide your coverage with the monthly expenses and that is how long your family will survive as if it’s still having your financial contribution. After that, what would happen to them? It is already a struggle to make ends meet with two income providers; what if there is only one provider left? How many months or years can your family carry on without hardship in case something happens to you? My take on insurance is to get the most cost-efficient product. Given your limited budget and other goals, how much can you allocate for insurance payments? If there is a big need, then consider a term insurance; but if the excess cash flow is substantial, then a variable unit-linked insurance can be a viable option. The bottom line here is to get the insurance coverage that fits your budget.
Investing and/or Trading. The bottom-line for this is the amount needed in the future, for whatever purpose. For example, I have computed the college fund needed for my newborn child. It is P1.5 million. Now, whether I go into mutual funds, real estate, forex, or trading on the stock market, the goal is to earn P1.5 million in 18 years, when my child will enter college. So I can just buy and hold a mutual fund, or trade my way for the next 18 years towards P1.5 million.
Retirement. If you are 35 years old now and expect to receive a monthly SSS pension of P8,000 a month starting age 60, it is as if you are just getting P3,000 a month in today’s value (given that inflation would be 4% moving forward). Ask yourself this question: can you survive with P3,000 per month? If you shall be having a retirement pay of, say, P5 million, and you would live for the next twenty years, then your monthly budget is P20,000 per month; but because of inflation, it’s as if you are getting just P7,800 per month. Add that up to your SSS payment, can you live with just P10,000 per month with all the anticipated living and medical expenses? Bottom line: You must make your own supplementary retirement fund as early as now.
Health. It would be a waste if all of your hard-earned money would go for just a single operation due to a heart attack; or continuous medical maintenance, like dialysis, would drain your savings. Health is wealth. And being unhealthy will make you poorer than you have ever expected. So, I recommend living a healthy lifestyle: less chances of diseases means less expenses. And you get to live your life fully, actively with all your limbs moving and your mental faculties working. To live life, to enjoy life, alone, with your friends, or with your loved ones. I think that’s the bottom line at the end of it all.
Rienzie Biolena is Registered Financial Planner of RFP Philippines. Learn more about personal financial planning at the 58th RFP program on Nov 5 – Dec 11. To register, e-mail firstname.lastname@example.org or text <name><e-mail><RFP> at 0917-9689774.
RIENZIE BIOLENA, RFP