By Mike Aquino for Yahoo! Southeast Asia | BDO Money Matters – Mon, 20 May 2013
To have children, the author Elizabeth Stone once wrote, “is to decide forever to have your heart go walking around outside your body.”
Sleepless nights ensue—once, you were the sole subject of your financial priorities, now you’ve got your spouse and kids to worry about. Even if you’ve got things well in hand now… are you sure you’ve got everything covered, even the emergencies?
While Filipinos are generally not lacking in the sacrifice-everything-for-their-children department, most of us don’t have the financial savvy to properly prepare for a future emergency. “We have this, ‘sige, bahala na, the money’s there’ mindset,” says personal finance consultant Randell Tiongson. “A lot of people start with the life insurance policy, the educational program, all these things, but what about emergency funds?”
Tiongson believes in a certain order to laying the financial groundwork for a family emergency. “There are certain things you have to satisfy first,” explains Tiongson, pointing to your home finances and your debt. Tiongson suggests you do the following, in order:
1. Sort out your finances. “You should spend less on what you make, be able to balance your checkbook, see that you’re spending less than what you’re earning, and generating enough savings. That’s one,” says Tiongson. “If you’re in debt, then the next step is getting out of debt.”
2. Start an emergency fund. “It seems to be uncommon to a lot of us Filipinos,” says Tiongson. “But right financial planning necessitates that you set aside a certain amount of money for emergencies—what we call an emergency fund.”
Tiongson varies the amount he advises you reserve for your emergency fund, depending on your employment situation. “For employees, I’d say three months is the least,” he explains. “If you’re in business, six months to a year. In business kasi, hindi mo alam what’s going to happen.”
Emergency funds are not to be invested in stocks, property or mutual funds. “Ideally, it has to be cash or near-cash,” says Tiongson. “Time deposits are okay, if they can be cashed easily. When you put your emergency fund in, say, a bond fund, there’s that risk of fluctuation: if it fluctuates and it’s the time you need it, lugi ka.”
3. Buy life insurance. For the worst emergency of all—the kind that takes you permanently out of the picture for your kids—you’ll want to make sure they’re taken care of even in your absence. “If you have a dependent, like children, you want to cover that,” says Tiongson. As a rule of thumb, Tiongson suggests you get coverage equivalent to “between three to five times your annual salary.”
4. Cover health emergencies. If you’re an employee, chances are most of your medical expenses are covered (to a certain point) by the office HMO. But if the office HMO doesn’t cover your dependents—or fails to cover them to your satisfaction—the option to buy further coverage is always there. “You buy something that you can afford,” says Tiongson. “Of course, the really good ones are expensive. You may want a bigger room, but can you afford the premium?”
Tiongson suggests you make a priority of keeping tabs on your HMO and insurance premiums. “You also have to track that these things are being paid,” he warns. “Baka mamaya hindi naman bayad ang premium. If it’s not paid, what good is it?”
5. Get a lifeline. Tiongson advises that you use a line of credit—personal loans or credit cards—as a backup emergency fund: not to be used until all other options are exhausted.
“The idea is you start a savings program, but you keep credit handy,” explains Tiongson. “That’s why you should be very careful managing your credit—baka mamaya kung kailan mo kailangan, na-max out ang credit card mo!”
Take note, the order of these items is not interchangeable: the first two items should always be first on the agenda, though not necessarily in consecutive order. “I recommend you do this simultaneously,” says Tiongson. “Fix the way you spend, slowly get out of debt, and at the same time, build your emergency funds before you do other things like buying insurance.”