Whatever it is that you desire to save money for, if it’s “financial security” that you are looking for, then you need to look beyond affording that wedding, or that second-hand car.  You should also be looking at what kind of lifestyle you want to live by the time you are retired. 

It’s not that saving for a car, a house, a wedding, or education for your children are not important.  By all means, they are VERY important.  But so is saving for your retirement.  If you don’t appreciate what I mean, I dare you to find out exactly what it is that your company has set aside for your retirement (assuming you’re employed), or to find out exactly what your business is worth today and what it might be worth by the time you retire. 

Don’t be surprised that you’re probably like the great majority of employed and self-employed individuals.  After planning for your wedding, for your children’s education, for your car installment payments, and for your apartment rentals or home mortgages, you’ll find that you may not be ready for your retirement.  Oh, and did I mention that you might have to provide for your aging parents who, themselves, failed to prepare for their retirement?

It’s beginning to sound depressing that you may not even want to go through this very important step in planning for your future.  But, if you’re really serious, you CAN do something about it.  If, after you have defined your goal, you will discover that you have a problem because you don’t know how to ever achieve it, then be consoled in the old adage that says, a problem defined is a problem half solved.

As I said in an earlier post, there is good news!  You don’t have to be a genius to be financially prepared for your future, and you don’t have to be wealthy to begin with. 

The first step is to face the future squarely and define the challenge: decide what your goal is first and then make a plan.  Your goal will not happen just because you defined it.  But neither will an investment plan work, if you have no goal to begin with.  So, take the time to plan your goals.  Dream a dream, if you want to.  But do it.  Now.

There is only one road that leads to financial well-being and security.  It’s not an easy road to follow, because it requires making sacrifices today in exchange for security and happiness in the future.  All other roads that look attractive and easy for now will, however, lead to disaster, for yourself, or for your family in the long run.  A point will come in your life when you will certainly need funds, and unless you’ve been staying on the right course, you will fall short. 

The good news is that you don’t have to be a genius to be financially prepared for your future.  And you don’t have to be wealthy to begin with.  You just need to know a few basics, draft a plan, and be ready to stick to it, and to stay on course.  There is no guarantee that you’ll make money from all the investments that you will make. But if you get the facts about saving and investing and follow through with an intelligent plan, you should be able to gain financial security over the years and enjoy the benefits of managing your money.

Aside from being a tough road, not too many people know about this road.  And that’s why we built this blogsite.  Subscribe to this website and study the postings.  Here, you will know where you should begin, what paths you will have to take, what you have to bring with you on the journey, and what landmarks to follow, and what dangers you have to avoid.

Time after time, people of even modest means who begin the journey reach financial security and all that it promises: buying a home, educational opportunities for their children, and a comfortable retirement. If they can do it, so can you.

Go ahead.  Check out the roadmap to your financial security here.

D.  Gift Money:

As you go higher in the hierarchy of needs, you develop a need to provide for people or causes that you care deeply for.  This could be some kind of charitable institution or foundation or some family member that you want to take care of.  But the most common use for gift money is to provide for education.  Saving for education early on through long-term vehicles like mutual funds, note and bonds, or trust products, will make it more efficient and easier on the pocket.  Another typical example for this type of financial need is the desire of parents to leave a reasonable amount of estate for their children.  Again, this can be accomplished through long-term instruments.  For people whose investment horizon is short or those who may not have enough resources to accumulate a substantial estate, the best way to create one instantly is to buy life insurance.  On the other hand, for rich individuals who are more concerned with the inheritance taxes that their heirs will need to pay for, a good solution is to get a life insurance coverage equivalent to the taxes that will be incurred by their heirs.

 E.  Dream Money:

Dream money pertains to funds that you need to have for all the things that you dream of being, having, or doing.  These goals can pertain to your retirement, or the kind of lifestyle you want before or after retirement.  Normally these are funds that you will need after you have gone beyond your peak income years.  Therefore, these types of needs will require large amounts of monies.  Long-term vehicles like mutual funds, note or bonds are the best instruments for establishing your nest eggs for this purpose.  While more and more people are becoming aware of the need to save for retirement, very few people realize that a big portion of their retirement funds will be spent on medical needs.  In this regard, it is prudent to set aside funds specifically for the purpose of funding for medical expenses after retirement.

Having a structured approach in prioritizing goals will enable you to build an investment portfolio that’s tailor-fit to your needs and your available resources as well.  The important thing to remember in using this approach is that you need to establish (and maintain) your lower-end targets before going for the higher goals. Having a strong base results to a stable portfolio and keeps you away from situations where you are force to liquidated long-term placements in order to meet an immediate financial obligation.

One approach that you can take is to use the concept of Maslow’s Hierarchy of Needs.  Abraham Maslow has set up a hierarchy of five levels of basic needs (Physiological, Safety, Social, Esteem, Self Actualization). Beyond these needs, higher levels of needs exist. These include needs for understanding, esthetic appreciation and purely spiritual needs. In the levels of the five basic needs, the person does not feel the second need until the demands of the first have been satisfied, nor the third until the second has been satisfied, and so on.

Using the same concept, and translating the levels of basic needs into financial terms, we can come up with the Hierarchy of Financial Needs (Survival Money, Safety Money, Freedom Money, Gift Money, Dream Money) that can be a basis for prioritizing which of your many goals you should work on first.

                        Maslow’s Hierarchy of Needs                                                      Hierarchy of Financial Needs

A.  Survival Money: 

These are funds that you need to make ends meet.  The most basic type of survival money is the amount that your household needs for food, clothing and shelter.  Typically these funds should be in very liquid instruments for easy access.  Therefore savings or checking accounts are the best vehicles for this purpose.  A household that may have extra funds can go to short-term deposit placements in order to generate some return from these funds.

Another type of survival money is one you need for emergency situations.  A leaky pipe, the car engine unexpectedly conks out, or some minor home repair that needs to be undertaken immediately are examples of minor emergencies that you need to prepare for.  A good size emergency fund is around six to nine months worth of expenses.  Typically these funds will be in short-term instruments like, savings, checking, treasury bills, or money market mutual funds.  A stand-by loan facility from a bank might be used as part of your emergency funds.  Accident, health, and auto insurances can greatly reduce the need for liquid emergency funds.

• Specific. You need to know exactly what you want to achieve and when you want it.

General Goal:   I need to set aside money for next year’s tuition fees

Specific Goal:   I need to set aside P60,000 for next year’s tuition fee

• Measurable.   A goal should be measurable so that you know when you have achieved it.

General Goal:   I will pay off most of my credit card debt soon.

Measurable Goal:   In the next six months, I will pay three of my five credit card bills in full.

• Attainable.  Your goal should be within reasonable reach.

General Goal:   I will save money.

Attainable Goal: I will save P24,000 each year by putting aside P1,000 a week (or P200 every week day).

• Realistic.  Your goals need to be based on resources and tasks that you can reasonably accomplish.

General Goal:   By saving regularly, I will become a millionaire.

Realistic Goal:   By saving regularly, I will be debt free by next year and will have an emergency fund equal to six months of living expenses the year after next.

• Time-bound. Goals with timelines allow you to track your progress and encourage you to keep going until you reach your goal.

General Goal:   I will save money for my retirement.

Time-bound Goal:   I will save P50,000 a year for the next 10 years so I can retire comfortably.