OURS is an intriguing universe. Fathoming it, to some extent, requires manipulating very small numbers and very big ones. Consider the vastly different scales that quantum physicists, cosmologists, nanotechnologists and civil engineers work on.
As you may remember from school, the best way to write minuscule and gargantuan numbers without filling reams of paper with trailing or leading zeroes is to use powers of 10.
(Note: 100 is ten to the power of two, 0.01 or one per cent is ten to the power of minus two, and 1,000,000 or a million is ten to the sixth power, while a billion is ten to the ninth power. You get the idea...)
When we look at numbers like 20, 514 and 21,500, which I’ve picked randomly, we understand the important concept of “orders of magnitude” by noticing that 20 is similar to 10, 514 is in the same ballpark as 100, and 21,500 has the same number of digits as 10,000.
Each additional digit is an order of magnitude. So 514 is one order of magnitude larger than 20, while 20 is three orders of magnitude smaller than 21,500.
From the perspective of personal finance the usual range of monetary amounts we deal with for our monthly incomes may be large in absolute amounts but small in orders of magnitude:
Of all working adults reading this column, I would guess 99.9 per cent earn between RM1,000 and RM100,000 a month.
That’s a huge range in terms of absolute earnings, but it is only two orders of magnitude (note: six digits (100,000) “minus” four digits (1,000) equal two orders of magnitude).
Now, the reason I am outlining basic mathematics here is to help you use orders of magnitude to think through your general and specific cash reserve requirements.
Let’s consider your general cash reserve or EBF (Emergency Buffer Fund) and your desired level of medical care...
Emergency Buffer Fund (EBF)
All of us should try to live below our means by spending less than we earn.
I encourage my clients to start with any savings rate they can handle, say one per cent or two per cent or five per cent of their active income, and gradually, perhaps over one or two decades, raise that to a maximum of 50 per cent of their future enlarged monthly active income.
A hypothetical group of people with a 20 per cent savings rate has an 80 per cent (100 per cent minus 20 per cent) expenditure rate.
So scrutinising the extremes within that group tells us that someone who earns RM1,000 a month would spend RM800, and another who earns RM100,000 a month would spend RM80,000.
If everyone in this group decides that a five-month EBF is appropriate, then savings would be set aside for this general cushion or reserve account.
The range of the size of those general buffers would thus be 5 x monthly expenses or (5 x RM800) to (5 x RM80,000) or RM4,000 to RM400,000.
Now count the digits! We have four digits in RM4,000 and six digits in RM400,000. As six minus four = two, we have a two-order of magnitude general EBF range. That’s narrow; what comes next is not.
Affordable medical care
In my opinion, having the appropriate forms of critical illness, hospital and surgical insurance cover is essential. As such, do work with a competent client-centric insurance agent for your needs.
But some people do not have insurance cover because they are too sick, too old or never took the time to buy the right insurance while they were well and young.
Whatever the reason, consider the much larger order of magnitude range needed for a personal specific medical buffer (SMB).
If you wish to frequent 1Malaysia clinics, know that each visit for Malaysian citizens is RM1. As such, setting aside RM10 for your personal SMB is sufficient.
But if you wish to afford one or two visits to a private clinic, your personal SMB should be RM100.
If things are more serious, then for basic short-term hospital treatment in a government hospital, RM1,000 is plenty.
Moving up the cost ladder, if you want to fund a personal SMB for private hospital care, RM10,000 to RM100,000 might be sufficient.
However, to fly overseas at a moment’s notice for medium- to long-term international medical attention, RM1 million may be enough, while I believe RM10 million would be more than enough.
I’m not plucking these numbers out of thin air. Years ago, I assessed the vast resources and concerns of my wealthiest client and then advised him to set aside RM5 million of his great wealth specifically for medical needs.
If that amount of money can’t solve any potential future medical problems, more money wouldn’t make a difference.
That range of personal SMBs is RM10 to RM10,000,000, which by now you can tell stretches across six (eight digits ‘minus’ two digits) orders of magnitude.
So assess how much you now have in cash (or reliable medical insurance or ideally both) for your current personal SMB.
After that, decide how much you will grow it over the next year or 10!
Most of us WILL face a medical emergency sometime down the road. If we don’t prepare money (to sufficient orders of magnitude) to meet that need, we risk impoverishing those who love us most. They deserve better.
© 2017 Rajen Devadason
Read his free articles at www.FreeCoolArticles.com
Connect on rajen@RajenDevadason.com, www.linkedin.com/in/rajendevadason, and Twitter @RajenDevadason