Wealthy Living: Do You Have a Financial Plan?

Contributed by Melvin J. Esteban, FLMI, AFSI, RFP, CFC 

Photo courtesy of Svilen Milev

If there is anything positive about the calamities that have been happening around the world—earthquakes in Haiti, Chile and Taiwan; and our own Typhoons Ondoy and Pepang—it’s the goodwill it has generated among people. People go out of their way to help others; companies extend help to their employees; utility, credit card and insurance companies have either waived or extended their payment periods; telecom companies even allowed free use of their lines.

I also hope these disasters will help us remember the importance of being prepared. I know mothers like being prepared for anything. That’s why they usually have huge bags with everything—from a change of clothes to wipes to emergency snacks to the kitchen sink, if need be. But I’m not just talking about buying those inflatable boats and beds or chaining your appliances to the floor. Instead, I am referring to being financially prepared. If you haven’t started developing your financial plan, I hope you now take the time to start developing one.

A financial plan is like a road map. Not only will it guide you to financial security, it will also insulate you from turbulences like calamities. A financial plan can be comprehensive or specific.

I’d like to discuss the different facets of a financial plan. Let me start with the first and most fundamental step of the 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 meeting an accident 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.

 How Much Do I Save? I’m sure you have heard so many times that the rule of thumb should be three to six months’ equivalent of your monthly expenses. This is correct. But why must it be equivalent to that? There are a lot of reasons but let me share with you two of the most important ones:

• Based on studies, it takes an average person three to six months to look for another job when he is laid off from work.
• Most disability insurance plans available have a six-month waiting period from the day you get disabled before its benefits take effect.  This means you need a six-month cash flow in case you lose your job or get disabled.

Opportunity Fund. Next, set up an “opportunity fund”. I recommend another three to six months’ equivalent of your income.  This time, though, you can place it in a longer-term instrument, like a six-to-twelve month time deposit. This fund can be used for large purchases that are non-emergency in nature but are important. Examples include home repair, large ticket purchases like furniture, appliance, or even family travel. More importantly, this can be used for investment opportunities, like the 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 the rare opportunity to acquire a good business.

Next: What kind of  instruments should you use?

Melvin J. Esteban is CEO of Motivating Minds, one of the leading consultancy groups in the country. He is the first Filipino to win the prestigious “Young ASEAN Manager Award” given by the ASEAN Insurance Council in 2007; and was the youngest to achieve vice presidency during his stint in insurance at AIG and Philamlife. Melvin has over 14 years of experience in the financial services industry, working in financial services marketing, product development, and strategic business development. You can reach him at mel_esteban@yahoo.com.