Despite the well accepted fact that everybody has unique circumstances, in general each of us should do the following in order to have a solid financial management:
- Establish an emergency fund;
- Ensure sufficient insurance coverage is in place for your dependents in the event of death or at the onset of critical illness;
- Ensure you and your partner have wills on how your estate should be distributed in the event of death.
The foundation to a great financial management is that we should set aside some money or follow a disciplined effort to build up an emergency fund that is equivalent to at least 6 months of our income. For a safer and secured future, you may want a buffer of 9-12 months and more if you have a young family.
It does not always have to be an accident or hospitalisation. Many times, we associate emergency funds with these events.
There are many other forms of emergency or unexpected events such as usual sickness, retrenchment, dental issues, or when one is out of job after resigning and yet to land a new offer.
This emergency fund should be kept in a deposit or money market account, which will give ease of liquidity when it is needed.
With adequate emergency funds backing you up, things could not possibly go too wrong as you have a buffer to support you through the rough tide. Thus, it is advisable not to invest any of your savings until you have accumulated this buffer fund.
Just think about how much is needed to settle your debt today if something untoward happened to you? Most of us have mortgage, credit card, study loan (such as PTPTN), hire purchase and so on.
How will your dependents continue to survive with these challenges and financial hurdles? What’s even worse is if you’re the sole breadwinner of your family, or you contribute a huge chunk to the household income?
If you were to become ill for long-term, how much of your current income or savings can continue to support you and your family, and for how long?
That is why in financial management, we need to ensure that we have at least this amount of life insurance coverage in place. Also, ensure that you have a basic medical insurance in place, so that your emergency fund and hard-earned savings will not be wiped out overnight by hefty hospital bills.
There are many types of insurance products; some are good for you, and some are good for the one who sold you the products; so, be sure to read the fine print, and know what you’re signing for.
What’s better is to work with someone who is independent and not tied to a product provider. This way, the chances are that your best interest is likely to be more protected.
Write a Will
A Will is a legal document that sets out who is to benefit from your property and possessions (your estate) after your death.
There are a number of ways to make a Will, but to be on the safe side, it is advisable to seek the assistance of a licensed financial advisor on how your Wills should be drafted in order to cater to your unique situation and wishes.
It is important to have a Will in place as if you were to die ‘intestate’ (without a Will), there is a danger that your assets may not reach your family or beneficiaries. Furthermore, it will relatively take a longer time for the court to issue a clearance order.
Depending on your circumstances, you may wish to include guardianship arrangements in your will so that, in the event that your children are left parentless, there will be someone to take care of them: you obviously need to get the agreement of the people you intend to name as guardian(s) beforehand.
The three areas mentioned above may look unimportant to most people, or appear to be ‘simple’; however, we should not underestimate its importance for a solid financial management.
The benefit of having an emergency fund allows the person to have the ability to handle unexpected events without having to incur mental stress that usually comes when we deal with money issues.
It also reduces the chances of enlisting an external party to assist us. Moreover, if any form of loan or borrowings was involved today to address any unexpected issues, it simply means we have to pay back in the future.
Thus, having an emergency fund could help prevent these from happening. I would say the same is true with regards to having adequate insurance coverage, especially personal accident and medical insurance.
While the first two areas provide flexibility and ability for an individual to deal with unexpected events without having to trouble others, preparing a Will or paying attention to estate planning can help ensure that our family members do not have to deal with the emotional pain of losing out their family member
It also makes the process of unfreezing and distributing the estate much easier; thus, preventing them from going through more troubles, that potentially could drag up to years, or create tension and conflict among the surviving family members.
By building up this financial cushion (and taking concerted efforts to maintain it), you will protect yourself when things go the wrong way. This allows you to be in a better position to work out alternatives, in order to focus on the next important step in peace.
About the author
Kevin Neoh is a NextGen Money Coach who works with people to help them transform their relationship with money to improve their lives with the money they have. Kevin can be contacted at firstname.lastname@example.org and www.kevinneoh.my.