Part of being financially smart is distinguishing between necessary and unnecessary expenses.

We all know that food and shelter are basic necessities. Clothing too, but only to a reasonable extent.

And depending on our lifestyle, there may also be other essential costs that we need to pay for.

But along with these, did you know that there are three necessary expenses that most of us ignore or at the very least, overlook?

They are the following:

An Emergency Fund
The reason why we spend on shelter is to have a safe and secure place to stay. For this same reason is what makes an emergency fund necessary.

“Buying” ourselves an emergency fund provides us with a cash safety net and immediate financial security. It eliminates worry and anxiety when a dire need for money comes to us.

Know more: How To Build an Emergency Fund

Insurance:
Much like an emergency fund, an insurance plan also provides us with safety and security. But more than that, it also allows us to leverage our money.

Emergency funds are limited to what we can save. But an insurance can provide benefits beyond the amount of money we can keep every month.

For breadwinners, a term or life insurance will ensure that your family will not go into financial difficulties when something unfortunate happens to you.

Meanwhile, a health insurance will ensure that your emergency fund doesn’t get much affected when minor medical emergencies come.

If you’re an employee, I advise that you learn your company medical benefits. For freelancers and entrepreneurs, be sure that you have adequate health care coverage from an HMO.

Buying and paying for an insurance product may seem like a burden at first. But believe me when I say that they are real money savers.

Besides, some life insurance products now also double as an investment instrument which gives sufficient returns in the long-term.

Retirement Plan:
The younger you are, the cheaper it is to avail a retirement plan. More importantly, the higher your returns will be when you finally retire.

A retirement plan can be designed and accordingly adjusted to fit your financial capabilities. Products such as the Personal Equity and Retirement Account are even voluntary, which means you “spend” only what you can afford.

And lastly, expecting that your kids will financially support you when you grow old is NOT a retirement plan.

An emergency fund, life and health insurance, and a retirement plan – three necessary expenses which you should consider the next time you make a budget.

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Photo credit: lism and bitzcelt