The covid-19 pandemic hit us all. Most of us stay at home, work remotely, or just spending time with the family. Some encounter a financial crisis as employment and income are gone. Others just tight their budget and default to their emergency fund.
So, what a financial strength means?
Financial strength can be measured for individuals or companies. It can mean different things to different people. In this article I will outline the fundamental areas ones should look at when developing a financial strength.
Budget and Cash flow – Income vs. Spending, for business its sales vs. liabilities
Your ability to cover basic needs and maintain a specific standard of living is depended on your cash flow. A positive cash flow means your income is higher than your spending. That is why budget is important. A good budget take into consideration income, basic needs, and future needs, you have and make sure you do not overspend. With a positive cash flow, you can build your wealth and develop a financial strength.
A negative cash flow means your spending exceeds your income and an immediate action is needed to correct this situation. Reworking your budget by eliminating unnecessary spending, or increasing your income, are ways to move towards balanced or positive cash flow.
A failure to deal with negative cashflow will cause a decrease in one’s wealth and possibly create debt accumulation. A situation that anyone should avoid with careful financial planning.
Start with your budget, look at your income and spending habits. Can you or do you need to change something to improve your situation? If yes, make the necessary adjustments.
Emergency fund – the ability to sustain current or reduced spending for a specific period in case of a crises or hard times (liquidity)
One of the first things I recommend my clients, if they do not allready have one, is to have an emergency fund. The emergency fund should be easy to liquidate and in a non-risky investment. The fund should have at the minimum 3 months of your budget spending. At best scenarios, the emergency fund can cover somewhere between 12 to 18 months of your budget.
There are many ways to build an emergency fund considering various financial instruments and strategies. Each case has its own characteristics and might require different solutions.
Protecting your future – the ability to support your loved ones in case of death
Some people are afraid to deal with questions like What happen after you pass away? How will your survivors continue their life? At what lifestyle? Will their needs be covered? Will they be taken care of until they mature enough to take care of themselves? Or, how to transfer wealth at minimum cost?
These are important tough questions to ask as the answers shape part of your financial plan securing the future of your loved ones.
Protecting your income – the ability to get income in case your get sick or injured
Your ability to earn income is an important aspect to allow for your lifestyle and fulfilment of your financial plan. One should ask what happen if I cannot work due to illness or injury? Will I be able to pay my bills and keep my financial plan on track? While governments and employers might provide some coverage for disability normally it is not enough to cover a sustainable lifestyle. Self employed are not covered at all under government programs.
Exploring your current coverages and looking at a few complimentary plans or alternatives is important as part of your financial plan activity.
Protecting yourself – the ability to sustain your wealth if you become critically ill
The most important assets you have is yourself. Without you non could have been done in your life. Protecting yourself is another way to get a one lump sum amount in case you get critically ill and help avoid or reduce the need to tap into your assets.
Most people do not know that some critical illness products have a premium refund if there is no claim. In other words, you get covered, if you don’t make a claim, you or your survivors will get the premium you paid back (premium refund can be up to 100%, depending on the insurer and on the product). If you get ill, you get the covered benefits. Incorporating this strategy into your financial plan is a Win/Win situation.
Old age care – the ability to get treated at your home or nursing facility without breaking the bank
Aging with good health is great, however some will find themselves in need of medical support at home or a nursing facility.
Like critical illness coverage some old age care products have a premium refund if there is no claim. Again, a Win/Win situation.
Future goals attainment
Retirement planning, Education Funds, Major purchases (house, boat, car, vacation, starting a business etc.) are major future goals. It is include them in your financial plan.
Wealth building – smart ways to grow your money
Explore more then just what your bank offers you to invest in. There are many ways to invest and looking outside the box is an important way to learn about different types of investments. As banks are limited with the financial product they offer and does not offer all the available financial products in the market. You want to know what alternatives available for you and choose the one that best fit your situation.
Wealth preservation – securing investment against market downtrend
Investments entail some form of risk with them, let it be big or small, you can use financial instruments to secure your principal while growing your wealth. For example, segregated funds, which are not provided by all financial institution, are one way to secure your investment even when the market goes down. They have a time horizon associate with the guarantee. I am sure you can appreciate it when the market goes down knowing that your investment is secure on the maturity date.
Wealth transfer – Estate and tax planning, transferring wealth at minimum cost
Avoiding wealth transfer planning will cost a lot of money to your survivors. Let it be Taxes, fees, and a long probate process. It might take 6 to 18 months before your estate affairs will settle. Putting the right plan to handle your affairs will reduce wealth erosion and will speed the time your estate will be transferred to your beneficiaries and some of it bypassing the estate.
If you would like to discuss your financial strength or your financial plan further or clear some confusion, I encourage you to get in touch with me. Also, If you do not have an advisor or want a second opinion reach out to me for advice.
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