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Monday, November 7, 2011

Hierarchy of Financial Needs


Hierarchy of Financial Needs

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 etc. 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.

Safety Money:
These are funds needed to meet life’s unexpected turns. Normally, safety monies protect whatever real assets you have accumulated in the past like your home for instance. In this regard, fire insurance will be the best investment option to protect this type of asset. General liability insurances can protect your business from unexpected developments. 

However, while there is a need to protect your assets, it is even more important to protect the person that generates these assets. This is where life insurance comes in.

Freedom Money:
While it is important to save and invest for your future, it is equally important to have funds that you can use for your non-basic needs. These are funds for activities that give you enjoyment and fulfillment. After all, life does not start after retirement.

It started on the day that you were born. Certain activities like having dinner with old friends or going to the mall with your kids, or that all-important annual family vacation should not be disregarded in order to save for long-term needs. We need to keep in mind that God did not put in this world to make a living but rather to make a life.

However, these activities will have substantial price tags attached to them and therefore it is important to actually prepare for them. For this purpose, short term instruments like savings and checking accounts, treasury bills and money market funds will be your be your best options.

Another life goal that gives you fulfillment and a high sense of security is home ownership. This is probably one of the biggest single expense that you will incur in your lifetime. Home mortgages can play a vital role for this purpose. However, you need to keep in mind that borrowing money from the bank will require you to put up approximately 20% of the value of the property and this not going to be a small amount. 

Therefore, it is an excellent idea to plan for this activity several years in advance so you can save for the banks equity requirement. Medium to long-term instruments like mutual funds, government or corporate bonds will be the best option to maximize on this type of savings.

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.

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.

In my situation, Survival money is done although six months only. Now im preparing for the next level which is safety money. I hope within this coming year 2012.
  How about you? Which Hierarchy of Financial Needs are you now?



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