If I had to come up with three basic financial planning points that everyone should be taking action on, they would be as follows: emergency cash reserve, basic insurance, and some kind of pension. Without getting into too much detail, here are basic definitions:
- Emergency cash reserve: this is money in the bank, not invested, and easily accessible. If you lost your job tomorrow, how long would you be able to survive before finding a new one? Typical advice is to have 3-6 months of expenses covered before you start thinking about investing. If you have a very secure job you might be comfortable with less. If you are self employed, or have a fluctuating income, you may need a bit more cash to feel comfortable.
- Basic insurance: if you get sick is it going to cost you? If you work for a company in Japan, for example, you are likely to be covered by the Japan national health insurance. However what if you are long term sick? How long will your company continue paying you? Income protection insurance is designed to pay you a portion of your current income if you are sick and unable to work for the long term. It will often cover you up to age 65 for a relatively small monthly cost.
- Pension: I deliberately referred to “some kind of pension” above. We are not going to get into details now of the options available. (we will later for sure) The question now is: are you currently putting aside even a small amount of money every month for when you are older and no longer inclined / able to work?
You may be surprised to hear that all three of these come under the umbrella of protection. A cash reserve protects you from having to dip into investments or borrow money in a crisis. Insurance protects you from events that can derail your ability to generate income. And a pension protects you from being poor in old age. How are you doing on these three basics so far?