Final Step! Your Safety Nets!

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.

  

Step 2! Make your Financial Plan!

In my previous post, we learn the importance of  Budgeting, which is the first step in achieving your financial freedom.  I believed that by now, you already assessed and made your own budget to fit your style!  

Just bear in mind and take this as a friendly reminder, you should stick to your budget for you to be a Millionaire! Like? Hehe!

Let's go to the second step in achieving your financial dreams.

   

Throughout our lives, we need a plan to achieve our goals.  If we don’t plan, we are open to mistakes and may lead to misdirection.   

So, how can we avoid it?

 

Have a financial plan!  The financial plan will serve as the blueprint and guidance in achieving your financial dreams!  Here are the steps to have a sound financial plan:

First, Identify!

You must first identify and write down your goals.  Your goal is dependent to your age and personal preferences.  For example, for young professionals, their main goal is to save and accumulate wealth while for those in the mid 30’s to late 40’s, their main goal is to pay home or car mortgage, or to support their child’s college degree.  

Next,  break down your goals!

After you identified your financial goals, you must categorize them based on the time you want the goals to achieve.  In personal finance, the three (3) main categories are as follows:

·         Short Term – you want to achieve this goal about 3 years or less.  This may include saving for a vacation or paying off a personal debt;

·         Medium Term – you want to achieve this goal around four (4) to seven (7) years.  Example of this are saving for a down payment for a house and lot or for a car, or saving for your child education; and

·         Long Term – you plan to achieve this goal around eight (8) or more years.  The best example of it saving or planning for retirement.

Next, educate yourself!  

I encourage you to read books, blogs (like this one! Hehe!), magazines or attend seminars if given a time.  By educating yourself, you will not only add value and learn but also will help you to make successful and sound decisions that will lead to the success of your financial plan.

Lastly, evaluate and monitor your plan!  

You should review your progress daily, monthly or at any point in time you are comfortable with.  By doing this, you will be able to monitor if your plan needs some adjustments or needed re-evaluation to your approach to achieve the plan.

The above steps are just the basic foundation for a sound financial plan.  The most important thing is to do it NOW! START NOW!  Why? Even if you have the best financial plan in the world, if you don't start, you will not achieve your goal.  Always remember, that the best asset to achieve your financial goal is TIME!

 For comments, questions and topics you want to discuss, just hit the comment box below.

Budgeting... First Step to Successful Financial Plan

After introducing about Personal Finance 101 last time out.  We will now go to the key areas that will help you achieve your financial goals.

Personal financial planning involves three key areas which include the following:

• Budgeting and saving – which involves monitoring of your finances that support and enjoy your life;
• Choosing and setting your financial goals – choosing your financial goals, course and targets such as buying a car and a house, sending your children to school and preparing for retirement; and
• Having insured – building a financial safety net to help you prevent any financial disasters caused by illness or other personal tragedies.

For this particular post, we will be focusing on the very first and basic foundation for a successful financial plan.  It will be a little longer but I will assure you that this is one of the key to your financial dreams and targets.

Now, why we should have a budget? 

To be able to control and monitor our expenses, we need to have a budget.  For most of us, “budget” seems to be a nightmare every mid and end of the month.  When pay day or salary day comes, most of us say “Parang dumaan lang yung sweldo ko!” or “Sweldo na ba? Di ko ata naramdaman?” Funny, right?  But if we are serious and really want to be financially free in the future, we need to control our spending.

Is salary really matter in an effective budget? 

I will share you one important thing that my mentor always remind me.  He always says “whether you make thousands or hundred thousand pesos a month, a budget is necessary as it is the first and most imporant step you can take towards achieving your financial dreams”.   At first, I don’t understand what he is trying to say, but looking deeply in the statement reveals that it is the ability of one person to manage his/her money that separate the rich, the middle class and the poor families from each other.  

So, how can we control or manage our finances? 

Used an investment jars or simply “JARS”!

I first encountered the Jar system two (2) years ago in a blog.  It was introduced by T. Harv Eker (Please click here for full biography ).  Harv emphasized that the most important thing is to separate your income or salary into different accounts for specific purposes.  

I agree with Harv’s principle that it is better to focus your time and energy on allocating amounts of your income/salary regularly through JARS than spending your hard earned money without accounting for it.  Below are Harv’s concepts of JARS:

·        

•  Necessary Expenses.  Take 50% towards paying for your necessary living expenses.  These expenses may include your daily meal, transportation, rent and other costs necessary for you to survive.
• Long Term Savings Fund.  Take 10% for long term savings funds. This fund will be used for contingency measures  to cover unexpected expenses aside from your necessary expenses.  An example of it are car repairs and home maintenance.
• Financial Freedom Account.  Take at least 15% of your monthly salary and set a financial freedom account.  This account will be then invested to different investments available like stocks, bonds or properties.  Remember, if you want to retire as a Millionaire and financially free, “You should  never, ever, ever touch the money that you invest” even the profits that come from it.
• Education. Take 10% towards saving some money for your education.  Increase your value by taking up Masteral Classes, Seminars, Training Courses, buying books.  By doing this, you will not only invest in yourself but have a potential of earning more in the future.
• GIFT.  Take 5% towards gifts and helping others.  It is also important to value others and not just your personal life. 
• PLAY.  Take 10% and put it towards an account that you can do whatever you want with, but you HAVE to SPEND it and REWARD yourself!  Does something luxurious like buying gadgets, having a travel, go to malls and other things that you want to do.

To suit it on your style, you can change the percentage to be allotted to particular account.  For me, the concept of this one helps as you actually monitor your expenses and you also automatically saving portion of your income/salary (Long term and Financial Freedom Account)

I have implemented this system, not with actual jars as suggested by Harv’s, but by putting it in the excel file, and it really helps me to remember what my actual finances should be at the end of the month.

To see how it works, let us assume you are currently earning Php 11,000.00 net of tax salary per month.

		Monthly	Yearly	5 Years
Monthly Salary		11,000.00	132,000.00	660,000.00
JARS/Account
Necessary Expenses	50%	5,500.00	66,000.00	330,000.00
Long Term Savings	10%	1,100.00	13,242.43	67,148.67
Financial Freedom	15%	1,650.00	20,542.38	121,236.81
Education	10%	1,100.00	13,200.00	66,000.00
Gift	5%	550.00	6,600.00	33,000.00
Play	10%	1,100.00	13,200.00	66,000.00
Savings Account Return	0.70%
Financial Freedom Return	8%

The good thing about the system is that you are restricted to allot portion of your salary to the savings and financial freedom account.  As you can see in the illustration above, you will have an emergency fund of Php13,242.43 after a year and a financial freedom account of Php20,542.38.  Think about this, if you don’t have a proper budget, where these funds will go?  I will just leave you the answer to the question.

Next article will focus on Step 2.  Building your financial goals.

For comments and suggestions, just post it in the comment box below.

Financial Freedom! Just Ahead!

Are you still in school, 

A young professional, 

An OFW or in mid-40?

Are you looking for other source of income, 

Buying a car, 

Buying a house or planning for an early retirement?

Welcome to Financial Freedom! Your Style!  Build your wealth and achieve in your own style and special way!   

The blog’s main objective is to help everyone to achieve their financial dreams in their own way, style and preferences.    

The team will post topics and articles that will help both those who are still starting and those with advanced investments skills in managing their personal finances which may include saving, investing, retirement planning and other matters.  The topics and articles will focus in a local or Pinoy stlye.  It is intended not only to appreciate our culture but also for us to appreciate that even in achieving our financial goals “It is more fun in the Philippines!”.  

Just to give you an idea, the next article will focus on basics for us to better understand why we need to save and be financially free.  Have you encountered the subject Personal Finance 101?  We will introduce that next to you.

For questions, do not hesitate to drop it on the comment box.

Thanks for visiting the page and we will be posting the next article as soon as possible.