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Monday, April 20, 2015

What Does Enjoy Truly Mean?

Efren Ll. Cruz, RFP

(Article taken from: http://www.savingstips.com.ph/what-does-enjoy-truly-mean/)
It’s amazing to see how people would spend so much time and money on entertainment.  This is probably why entertainers are paid oh so well. Just count the many millionaires there are among actors, singers, comedians, magicians, basketball players, software game developers, and people who empower others through social media.

Life is there to enjoy.  But there is a price. Going to the movies costs a small fortune from the transportation to get to the movie house up to the tickets and popcorn.  Dining out weekly can burn a hole in your pocket. Buying a car, building a house, sending children to school will all cost more than an arm and a leg.

Parents are to a certain extent entertainers. They make sure that their family enjoys the most out of life.  But they have to plan well because entertaining does have cost.  Parents have to make sure that given their goals, they are able to generate enough revenues from their portfolio of assets and pay off the cost of not only operating such assets but also the cost of acquiring the same assets.  This is called total portfolio management (TPM).

Here are just a few tips on TPM:

  • The more earning assets there are, the easier it would be to produce the necessary revenues to fund the household’s operations and growth.
  • Perhaps the largest part of assets is human capital or the present value of all the future earnings of the breadwinners of the household.  Valuing this human capital can be done through the help of financial planners.
  • The better use for debt is to fund the acquisition and operation of earning assets. While debt can be used for financing temporary cash shortages especially for emergencies, such emergencies must be real, few and far between.
  • The lower the cost of debt, the more efficient household operations will be.
  • Debt has to be paid according to a schedule and at a certain interest rate. An alternative is to use the household’s own capital.
  • The household’s capital, while not having any scheduled repayment does have a cost, that of the required return on equity to afford growth of the household’s future discretionary and non-discretionary expenses. And this is where the enjoyment comes in.

If you study the etymology of the word enjoy, you will find that its origin is from two old French words: enjoir, which means to enjoy and enjoier, which means to give joy to. In turn, both old French words find their roots from the Latin gaudere, which means to rejoice.  Rejoicing is when you relish the enjoyment of others. Now isn’t that what parents are for?

In the movie “Bucket List”, Morgan Freeman uttered these lines, “You know, the ancient Egyptians had a beautiful belief about death. When their souls got to the entrance to heaven, the guards asked two questions. Their answers determined whether they were able to enter or not. The first question was, ‘Have you found joy in your life?’ The second question was, ‘Has your life brought joy to others?”

So, has it?

Friday, April 17, 2015

Instead of Renting, Just Buy…or Should I

The House in the hands against the blue sky

(Article taken from: http://www.savingstips.com.ph/instead-of-renting-just-buyor-should-i/)
There is a theory in behavioral economics that states that a lot of what we believe in emanated from a thought that was first introduced to us.  This thought became our belief even though it was not our preference.

There is another theory in behavioral economics that says we put more value on the things we own even though another person would probably own the same thing.

Now allow me to explain and apply the above theories.

In the Philippines, the number 13 is believed to be an unlucky number.  Did you know that 13 is a lucky number in Thailand and India?  So why do Filipinos believe that 13 is an unlucky number; because everybody else in the country was saying so, including our parents.  Did we prefer the number 13 to be unlucky? Not really.

So look at the buildings in Makati.  There is hardly a building there with the 13th floor. Look at the rows of seats in an airplane.  There is no row number 13.  While the 14th floor and 14th seat row number are actually the 13th floor and 13th row, respectively, we consider them still the 14th because we refuse to be unlucky.  We grew up thinking that 13 is an unlucky number.  In fact, we grew up thinking and believing that there is such a thing as luck. The same is true with the beliefs on “pasma”, “bangungot”, and putting on “bigkis” on a newborn child.

On the other hand, would you rather be renting a car instead of owning it? Renting just adds expenses without leading to ownership. Plus, owning a car gives the confidence that we have greater purchasing power.

Aha! So that’s why our parents taught us that it is better to just use the rent money as amortization to buy a house. But many times, the amortization will be much larger than the rent expense, not counting the required equity that we need to put up.  We will end up shelling out more cash just to own a house.

I am not saying that people should not work at buying their own house.  The point that I am trying to make is that lenders and property developers may unwittingly be encouraging us to buy our house too early.  And because of budget constraints, we will probably end up selling that prematurely bought first house to buy that second house that we would want to live in for the rest of our life.

That is why there is a saying among financial planners that we should buy our second house first. There is wisdom in shelling out fewer cash in the form of rent so that we can save enough to buy that dream house later on. There is no need to rush.

And please remember that we do not say come house to our loved ones, we say come home. No matter how small our house may be, it can still be our home if we live in it harmoniously and with all the love that only a family can give.

Thursday, April 16, 2015

Debt’s All Folks


(Article taken from: http://www.savingstips.com.ph/debts-all-folks/)
I grew up watching Porky Pig, the animated cartoon character in the Warner Bros. Looney Tunes and Merrie Melodies series.  At the end of each cartoon episode, they would show Porky Pig bursting out of a bass drum head saying, “”Th-Th-Th-Th-Th-… That’s all, folks.”

In personal finance, households that are highly leveraged espouse the saying, “Debt’s All Folks.” Most of their assets are funded by debt.  As a consequence, they end up taking high risk with their finances because they do not only have a high cash flow requirement for repaying debt principal, they also have a high overhead in interest expenses. This kind of financial management is very vulnerable especially if interest rates are poised to rise.

An article entitled, “Rising household debt poses risks to growth of SE Asian economies” appeared recently in the Philippine Daily Inquirer.  The article quoted Moody’s Investor Service as predicting that there will eventually be a rise in global interest rates due to the US Federal Reserve’s tapering of its quantitative easing program. Moody’s cited the Philippines to be the most vulnerable among Southeast Asian economies.

While the level of household debt in the Philippines was among the lowest in the region, the contribution of consumption to the economy was the highest.  In practical terms, the repayment of consumer loans (e.g. housing, vehicle, credit card and personal loans) could be a burden.  This is the reason why the Bangko Sentral ng Pilipinas has begun to tighten on banks’ lending particularly to real estate, in addition to raising banks’ reserve requirements and interest rates.

While “desires for the good life” can cause households to acquire assets mostly through debt, rational thinking will probably lead them to funding only 50% of their assets through debt. In the latter situation, households will have a higher level of solvency, or capacity to repay debt.

Income that is left after paying the necessary living expenses should also be many times larger than the interest on debt. If income is just enough to pay for interest expenses, the household falls into a situation where it is working mainly for its creditors.

What can a heavily indebted household do to correct its financial situation?  The household can try to increase income, reduce living costs or do a combination of both.

Increasing income can come in the form of getting another job on the side or setting up a new business.  But increasing income is also not without risks not only to wealth but also to health. The safest to do is to reduce living costs.
Reducing living costs can involve:
  • limiting the desire to spend so that no new debt is incurred to fund additional asset acquisition (and the best way is to AVOID the occasions and places to spend);
  • refinancing expensive debt with lower costing ones (e.g. through balance transfer for credit card loans, lower interest bearing and longer term collateralized loans); and
  • using any windfall income like bonuses or monetary gifts to pay down debt faster.
The good life does not have to be expensive nor borrowed. To quote from the Interview with God, a rich man is not one who has the most but is one who needs the least.

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