Financial Literacy: Where Should You Start Your Journey?

Here’s the truth – we often realise the need to educate ourselves about money at different ages of our lives.

Some people realise it early in their lives, some at the middle of the road, and some due to the pressure of upcoming retirement.

With these diversities, how would we even know where to start our journey to financial literacy?

I. First, we have to understand what MONEY is.

It’s a tool, a commodity, that we use to exchange for products or services.

Money by itself is neither GOOD nor EVIL. Thus, the saying “Money is the root of evil” is a complete fallacy.

How we use it and what do we do with it is the one with morality. We either use it for good intentions or for the wrong reasons.

Firearms are used by soldiers to protect a nation. It’s also used by terrorist to spread terror. Firearms are neither good, nor bad by itself.

We use knives as a tool in cooking, to feed people. Some use it as a weapon on crimes. Knives are neither good, nor bad.

Money is a tool. Nothing more, nothing less.

II. The Goal is to have a plan.

We can look at money as grease to a machinery, and our lives as the systems to those machines.

The main goal is to keep the grease flowing (easing friction), to have sufficient grease flowing from one system to the next (Investing), while ensuring possible leaks are covered (Insurance).

In short, the goal is to look into our own lives and prepare for what’s ahead (Plan A), while looking outside and to those lives connected and dependent to us just in case life turns out different from what we have expected (Plan B).

There is no one-size-fit-all Financial Plan. That’s why it’s very important to assess ourselves – the things that we have, the things that we might have in the future, and the things that we may lose when we don’t reach the future.

III. We’ll eventually learn and look for instruments that we can use to address different areas of our lives.

Financial literacy is not just about investments, nor just about insurance, nor savings.

It’s a combination of all of these instruments in consideration to several factors of our lives – age, personality, dependents, financial resources, and more.

It’s about how to handle money as a tool, and make it work towards the attainment of what we want to happen in our lives – ensuring that they will happen, with or without us.

If you are just starting this journey, it’s true that there is still a long way ahead, with a lot of things to learn. And it will never end.

But as we go along this journey, we’ll eventually realise that it’s not really about the money. It’s really about getting it out of the way so we can focus on the things (people and relationships) that really matter.

Why Life Insurance is an Indispensable Part of Financial Planning

We all (most of us) know the mechanics of how life insurance works. You buy it, when you die, you get money.

Simple, isn’t it?

But what’s not a common knowledge is the vast uses of Life Insurance as a great tool of not only planning our own finances, but also, in protecting whatever we had gained over our lifetime.

Let’s talk about them.

Why Insurance is an Indespensible tool

1) Taking responsibility of one’s own life.

I’ve read blogs discouraging single yuppies in getting life insurance, which I think (on my personal opinion) is quite careless and irresponsible.

For one, we should stop the idea that somebody will carry the burden during an untimely death. This thought will keep this country poor.

As much as we can, let’s take responsibility on our needs when we are alive, and try not to pass the burden when we die.

How much does a yuppy who supports nobody need to stack in his life insurance? One good reference point is this article of Pesos and Sense about the cost of dying in the Philippines.

2) Ensuring that life will continue for those left behind.

Head of the family, parents supporting a family, and persons where other people (young or old) depends on. These people needs more life insurance than just by taking responsibility of their own life.

This is mostly referred to as Income Replacement.

Income, what?!?

Alright, here’s the main concept. The moment a breadwinner of the family faces death, it’s not only a loss of the physical body, it’s also a loss of income generated by that individual.

It’s computed by several means. One way is to divide the annual income provided by the breadwinner by an acceptable investment rate of return.

Let’s say the breadwinner is giving P500,000.00 to the family, and an acceptable investment rate of return is 5%.

That will be P500,000.00 divided by 5%, which will result to P10,000,000.00.

That will be the ideal insurance coverage for income replacement, which, once received by the beneficiaries, will be invested in an investment that would yield the acceptable investment rate of return (5%).

At the end of the day, what’s important is that when we say we love our family, death should not end that love.

3) Ensuring debts will not be inherited.

Ever wonder why life insurance is required when getting a Housing Loan?

Yes, creditors use Life Insurance as a sort of a collateral to ensure that debts will be paid, dead or alive.

This is referred to as Mortgage Redemption Insurance (MRI).

4) Keeping your asset, well, yours (or to your heirs)

I’ve heard an interesting statement from somewhere, just can’t remember where.

It says, “If you are purchasing an asset, especially real estate, you should stack up an additional life insurance coverage equivalent to 20% of the Market Value of that asset. Remember that everytime you purchase an asset, you are giving a burden to your heirs/family, 20% of the market value as an estate tax when you die.”

That brings up the topic of estate taxes, which should be seriously considered when an individual is slowly building up his wealth.

Life insurance ensures that cash will be readily available to beneficiaries to pay for the corresponding estate taxes.

Any case, who would want that the fruit of their lifetime hardwork falls only to the hands of the government, auctioned in a very steep discount, just to pay for the taxes?

No one.

5) Leaving a legacy

Perhaps not the best use for Life Insurance, but nevertheless, some people use life insurance as a way to leave instant wealth to their family.

Well, for a fraction of a cost, life insurance proceeds could leave millions to the heirs.

Conclusion

Life insurance is indeed an indispensable tool in our financial planning, and should not be taken lightly. It is very useful in various stages of our lives.

To learn about different life insurance options, it’s best to talk to an insurance/financial advisor. You may request a FREE quote here, our network of Financial Advisors will be keeping in touch with you.