20 November 2012

My Realizations About Our Financial Needs

Julia was hospitalized last week due to acute viral infection.  Don left for Korea on the same day I rushed Julia to the ER due to high fever (40.9!).  It was the 3rd day of fever and her pediatrician advised me to bring her to St. Luke’s QC.  We stayed there from Sunday until Thursday and I sighed with relief when I realized that I do not have to worry about the hospital bill.  Julia has a comprehensive health insurance plan (as a dependent) from Don’s employer.

I wished Don was there but I understand that he needed to work.  As I have said so many times, we are fortunate to have good and responsible employers.  I feel so blessed but my mind drifted to so many what-if questions.  Though it made me uncomfortable, I asked the question:  If something happens to Don, am I financially capable of supporting my daughter’s health care needs?  I remember Mr. Ricky So asking Don and I the same question during our first meeting.  He asked us about insurances and I confidently answered him that our employers provide life and health insurances for our family.  He then asked, “What if you lose your jobs?  What if you both die?  What will happen to Julia?”

I just stared at him.  I did not know what to answer.  Yes, we have stable jobs.  Yes, cash flow is regular.  Yes, we have money to pay for our daily expenses.  Yes, we have money set aside as savings.  But, the question is, if one of us will, for some reason, become unemployed, do we have enough on our savings to cover for our daily expenses?  For how long?  If we get sick, will that same fund be able to cover for medicines and hospitalization?  If we die now, we know that my mother in law and my brother will be more than willing to take care of her, but do they have enough savings for Julia’s education and health care expenses?

These are the questions we are not comfortable asking ourselves because we know the answers are a reflection of how unprepared we are about the uncertainties in life.  The thought is pretty scary, if you ask me.  Mr. So said that uncertainties are certain in life because they are inevitable.  But, we will become less scared if we are ready and prepared.  

As I mentioned in my previous post, Don and I are blessed to be assisted by Mr. So in our journey towards financial wellness.  Our journey is anchored on the Hierarchy of Financial Needs:

Our basic needs are covered and we have a little savings.  Our goal now is to manage our lifestyle, pay off all our loans, build our protection fund and invest more.  

Here’s Mr. So's explanation about the Hierarchy of Financial Needs.

Basic Needs (Food, Shelter, Clothing)
Like that of Maslow’s, we all have physiological needs that must be satisfied.  Some of our basic needs include food, shelter and clothing.  Unfortunately, the word basic is quite abused.  Most people expand their necessities before even putting some into protection.

Protection (Emergency Funds / Contingency Money, Insurances)
Ideally, when we are able to meet our basic needs, the next step is to build up our ‘buffer’ by setting aside contingencies and funds for protection, like health, non-life and life insurances.  However for many, after satisfying the basic needs, some luxuries are being eyed right away, like travels, signature items, latest gadget, fine dining, new car, bigger house, etc., etc. There are so many things money can be spent on.  In short, a life-style upgrade.

These would have been alright when all other aspects of the financial needs are met. We have not satisfied the other needs, why do we succumb right away to our wants?

Before, making any life-style upgrade, you should set aside 3 to 6 months worth of household expenses as a contingency. Put this into some liquid financial instruments and readily accessible.  Then, secure the assets like the breadwinner’s health and income thru an insurance coverage.  Then, secure any major assets as well.  An extra contingency fund may help, say, some readily accessible funds in an ATM.  Phase two is now complete.

Next is to level up -- not on the lifestyle part, but, THE more important part, investments.  Yes, before thinking of upgrading on some basic items, consider putting away money on investment instruments for, say, an educational fund and retirement.  An investment fund may be created for a purchase of a dream house say ten years down the road or perhaps a dream tour.  If you will reach this point of the financial journey, the realization is that the money is not enough. It is never enough really.  Hence, the supposed to be upgrade where most people get into is actually a short term gratification that ruins long term, meaningful financial goals like the ones mentioned.  These can only be realized if the first two rungs of the financial pyramid are properly handled.

In conclusion, one need not earn so much on being able to fund all the financial needs mentioned.  It can be done with any income level.  An allocation of income may be a good tactic, say, 50-30-20. Meaning, 50% of the income is allocated to basic needs, 30% to fund protection and emergency funds, and 20% for long term financial goals.  One may take any ratio and proportion of income to be allocated to the three different financial needs is perfectly okay as long as the three needs are met.  You might say, I think I can do 65-25-10 only. This is alright as well as long as you set aside a portion of our income to all three financial concerns.  For, if your income increases, it should not mean an increase in your basic needs and wants, it would mean an increased amount in contribution for your protection needs and investment needs as well.  By consistently doing this ratio, it paves the way towards your financial freedom.  

Note from Belle:  I am not endorsing a product or a company.  I am simply sharing with you my realizations and the lessons I learned (and still learning) from our journey towards financial stability and wellness.  Changing our mindset on money, savings and more importantly protection is the first and most powerful step in preparing financially for the future and of course, getting rich :-)
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