Understanding Safety Nets

As their name suggest, in the financial world, safety nets are funds that cushion the impact of catastrophic events in your life. In personal financial planning, this could stand for a number of things: emergency funds, savings, and insurance plans. Emergency funds and savings are little bonuses in your budget. Ideally, you’re supposed to spend only within your capability to earn money. This means that you’re not supposed to spend more than what you regularly earn every month. Having emergency funds and savings means that you’re setting aside a specific portion of your income for unexpected expenses. This means that if you’re earning $10,000 in a month, and you only have a total of $8,000 fixed expenses, a big portion of the remaining $2,000 should be set aside for unexpected expenses in the future.

Insurance premiums are also good investments. This is especially true for medical insurance plans, because you can never tell when accidents and sickness will hit you and your loved ones. When you’re shopping for insurance plans, make sure that you’re sealing the deal with establishments you can trust. Aside from interest rates, you should research on the company’s background as well.

Defining your Financial Goals

Financial goals form the backbone of your budget scheme. Setting long term and short term financial goals sets the pace of your spending and earning habits.

Whenever you budget your money, it’s never enough for you to plan for expenses incurred on a daily basis. Long term financial goals should be set 5 to 10 years from now. For example, your long term financial goal could be to save up enough money to pay for your son’s college tuition.

What you need to do then is to find out the projected cost of sending a child through college in 5 to 10 years time. Find out the estimated inflation rate in 10 years time, and compare that to the average college tuition we have today. It’ll give you a rough idea of how much you need to set aside for your child’s education.

After gauging your long term goal of let’s say $500,000 in five years, look at your average monthly expenses, and see if it’s possible for you to set aside $100,000 annually. Short term goals are goals you set on a monthly or yearly basis to reach your bigger, long term plans.

The figures may look ridiculously impossible now, but if you have good reorganizing skills, you can surely do it. Look at your list of expense priorities again, and cross out the assets that you don’t really need.