By now, you already know two (2) out of the three (3) basic principles in personal finance, which are budgeting and setting up your financial targets. Today, I will be discussing one last principle, building your safety net, which I personally considered will play vital role towards achieving your financial freedom.
The final step towards your financial freedom is building a safety net! The safety net will help you prevent any financial disasters as a result of illness, disability and death. In personal finance, there are two main types of safety nets, these includes the emergency fund, which is for short term needs, and insurance.
Do you have any emergency fund or any Insurance policy?
If you have both, then congratulations! If you have at least one or nothing, then this next post is for you!
First, let us talk about emergency fund.
In my previous post about budgeting, I suggest that you should allocate at least 10% of your salary to the fund. Emergency fund is a fund needed to cover any unforseen expenses, like car repairs, illness, sudden loss of job or other major expenses.
How much will you set aside for the emergency fund?
My mentor and most of financial planners suggest that the fund should be at least 3 months of your living expenses. For example, if you are earning Php13,000.00 a month and 50% or Php6,500.00 of are allocated to your necessary expenses, your emergency fund should be at least Php19,500.00. I recommend placing the fund in an account that you can easily withdraw, like savings or checking account as this is very important in emergency situations.
After establishing your emergency fund, let’s discuss about Insurance.
A study about Filipinos showed that 8 out of 10 still prefer to save in banks than to take up an insurance policy. Experts explained that the main reason why Filipinos do not engage to insurance is not because they don’t want to have one but the lack of knowledge about the products and benefits of it.
What is an insurance policy?
An insurance is a contract or policy in which an individual or entity receives financial protection or reimbursement againts losses from an insurance company. (Source: http://www.investopedia.com/terms/i/insurance.asp)
What are the main types of insurance policies?
In the Philippine market, there are numerous types of insurance policies to choose from depending on your needs and preferences. For this post, I will just discuss the two types that I feel every Filipino should have. These are Long term disability and Life insurance.
- Long term Disability Insurance – this will help replace your income if you are unable to work in an extended time due to illness or injury. I sugget this kind of insurance to those on the workforce or don’t have any other financial resources than their job.
- Life Insurance - is a necessity especially if you have dependents who will suffer in case of death.
How will you know if the insurance is right for you?
When shopping around for an insurance policy, you should look at the best package available that is right for you! You should consider the premium payments, claim process, coverage and other matters that will feel you comfortable.
When is the best time to have an insurance policy?
The best time is NOW! Why? Because your age is important! The premium payments are directly related to your age, the younger you are! The lower the premium payments you are required to pay! Another thing, most of the insurance policies is payable within 5 to 10 years. If you are 25 years old today, you will finish paying your premiums by 30 to 35!
For comments, questions and topics you want to discuss, do not hesitate to post it below.
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