YSK: The Wealth We Need

"We all deserve the best." - ANON.

YSK stands for the Filipino words “Yamang Sapat sa Kailangan” or “wealth according to our needs” in English. Our advocacy calls not for amassing wealth for its sake, but for aiming for a little more than what we need. The “little more” is a strategy for stretch to cover unforeseen events or unprogrammed needs.

The Amount Desired and When Needed

After having identified our top priority or priorities (all of them become priorities when they are due!), it’s now time to establish the absolute amount we need for that priority and when we need the fund. As the amount is relative, in the same way our financial capacities vary individually, we shall try to establish the minimum level required to cover the need or needs.

For our purpose, the amount we will establish shall be expressed in Philippine pesos with equivalent conversion in US dollars based on a rounded exchange level of 1:50. (Exchange rate as of December 2006 is 1:49.03)


We will assume that an emergency fund (at least three months of income to cover against sudden illness, accident, or loss of job) is a given, considering that it is the first level of savings. We will attempt to establish our YSK to cover three universal financial needs which we identify here as the foremost, most driving, most motivating foundational needs of a productive human being.

1. Money for you,
2. Money for your children’s education,
3. Money for your family, whatever happens.

Which of these is your top priority right now?


Money For You

Let’s talk about you and your money. You are probably presently earning, and therefore, you have money. The “money for you” we refer to here is the money you will need to keep you intact when you stop working, or earning, for whatever reason. For most of the situations, this is retirement money. How much would you need when you retire?

We used an assumption earlier based on an arbitrary choice of P20,000 monthly for one person. Let’s validate that amount with details of possible minimum monthly expenses: food at P10,000; transportation at P3,000; utilities at P2,000; medicines and supplements at P4,000; clothing at P1,000. All bare essentials. No frills, no extras. Just enough to survive, based on costs at the present time.

If we input inflation, this P20,000 may well become P40,000 after 18 years at an average 4% inflation rate.

Let’s forget inflation for a while, since we all individually represent different ages. At P20,000 a month, how much would we need in lump sum to allow us that continuous stream of monthly income? At 10% interest rate, we need a principal of P2,400,000!

Question: Do you have this amount already?

If you have, you are one among the three (3) persons out of 1000, as per Central Bank statistics, who are already in an enviable “second enough” situation. But remember that, at 4% inflation, what you have is only one-half of what you will need.

If you don’t have this amount yet, how much have you got for this purpose? The closest preparation we can find for this future financial need would be a company retirement benefit for employed individuals, or a pension pre-need plan or endowment insurance plan purchased by professionals and businessmen. The difference between P2.4M and what you have is the object of your quest, and depending on your present earning capacity, you may set up your retirement program right away, or set it up gradually, little by little, according to your resources, until you are able to grow your fund into the size big enough to give you your desired income stream.


Money For The Children’s Education

Education is a universal need. We don’t have to belabor the importance of education to life, to individuals, to families, to nations. In fact, education may even occupy a more pre-eminent position in the needs hierarchy than retirement. But because education is relevant only to persons with children, which is a lesser universe, we have put retirement as the first item of choice for future preparation.

There is no disputing that education pre-determines the future, to a great extent. Between a person who has a degree and one without, certainly in more than just majority of the situations, the one with the degree is more successful.

In the Philippines, education is a top priority. Next to need for subsistence, education will battle for priority with clothing and shelter and win! With a great majority of the population at the CDE economic level, parents will sacrifice other needs just to give their children the best education they can find.

Under normal conditions, it will take, more or less, eighteen (18) regular study years to finish a five-year college course. But since there are at least three economic levels of education - namely public, private and exclusive – the amount needed to complete a full study will vary according to the choices made. Besides, since preparation requires time, the pre-college schooling (pre-school, gradeschool, highschool) are usually overtaken by the present time that it will be almost futile if not extremely difficult to prepare for them. Hence, our preparation may be limited to college study, for practical reasons.

Roughly, the amounts needed for the three levels, based on 2006 costs, are:

Public – P25t/year; Private Nonexclusive – P70t/year; Exclusive – P150t/year

How well are you doing in this regard?


Money For The Family, Whatever Happens

Our premise in wealth accumulation is that we want to make the most and the best of our lives while we are alive. Hence, our earlier preparations for our present comfort, then for our children’s education, then for our own retirement, all run along this spirit. And that is to say, the most and the best of our lives do not mean a life lived alone but one lived with our loved ones, our family. Our family is as much a part of our enjoyment as life itself. And certainly, our concern for their welfare goes beyond our lifetime.

We care for them and we care enough about what will happen to them should anything happen to us. Certainly, we want them to continue the kind of life they live even after we are gone. Which literally means we need to provide a contingency fund that will take over our income-generating capacity when we go.

And the only way we can conveniently provide for this eventuality, which is a certainty as to occurrence but not as to time, is to have a life insurance cover enough to keep them as they are or as we want them to be.

How Much Are You Worth To Your Family?

The rule of thumb that most insurance professionals use is human life value: your total valuation based on your income-generating capacity during your productive period. (This value flows from the reasoning that your family is entitled to the income you generate in your lifetime.) For most people, this is present annual income multiplied by the productive time to retirement. If you are 30 years old, with two children aged 4 and 6, and are earning P600,000 a year, your human life value is P21M.

This means that if you have this cover right now and you passed away yesterday, your family would have been assured of continuous income as if you have not left at all!

But because of the cost of putting up that cover, it is not unusual to use another fingertip formula based on ten times your annual income, flowing from the logic that that amount will allow your family to survive for the next ten years and be able to establish an alternative income source before the insurance amount dissipates. On that basis, the amount needed is 600,000 x 10 or P6M.

The 3 Moneys for YSK

Based on our model age, let’s summarize the 3 money needs to establish our YSK:

Money for you ---------P 2.4 M, cash accumulation upon retirement
Money for your children’s education ----------- P 1.0 M, cash and cover, beginning at age 16 of each child
Money for your family, whatever happens ----- P6.0 M, insurance coverage

Question: How do we set up an accumulation program that will give us all the above benefits at the least outlay?

Assuming that the seed money is not a problem, we can have several options made available by putting together two or more wealth forms. For example, we can have one educational plan for each of the kids, one pension plan from a pre-need company for our retirement and one insurance plan for the contingency of death. Or we can have just one plan covering all three needs.

But if you have to squeeze from a tight budget, we can either adjust our program amounts according to our affordability, or start with our topmost priority, then work up towards completion as our finances improve later.

Affordability

The key to a successful start is really our affordability. How much are we willing to set aside, in lumpsum or regularly, to get our accumulation program started?

Our affordability has a range, let’s admit it. It ranges from the “must” to the “want”. Where we decide to be in that range is a matter resolved by our economic situation and the importance and urgency of the object of our decision.

Where are you now?

(Author's Note: Inquiries and comments regarding this post and other posts may be sent to orlygjavier@yahoo.com.)