I am writing this blog while waiting for the next batch of training participants at a company that provides generous support for its employees.
Apart from free housing in the employees’ village, employees do not pay a single centavo for electricity or water. Employees shell out only Php600 a year for each child’s elementary education as supervised by one of the top schools in Metro Manila. They also get free transportation to and from the company’s plant site. Even their recreation is provided for via tennis and badminton courts, an Olympic-sized swimming pool and a club house at the employee village.
So why was I still hired to provide personal finance training for the employees of this company? Apparently, the host of benefits lulled the employees to a false sense of financial stability. With not much by way of financial challenges, many of the employees resorted to loading up on consumer durables like household appliances. And many times, the purchases of consumer items were done through the aid of debt, up to the point of borrowing as much as 10% per month on add-on-rate from private lenders, commonly known as “utang sa tao.” Some went overboard and even pawned their payroll ATMs with lenders.
The financial situation of this company’s employees is not uncommon. Overconfidence combined with convenience in spending (as private lenders readily lend just with the pawning of ATMs and with no other evidence of repayment capability) have led people to wallow in debt. My solution is to D.R.E.A.M.
“D” stands for direction. There must be a conscious effort to get out of debt. One way to encourage this direction is to see how much savings can be had over several years if payments to (expensive) debts were not being made.
“R” stands for refinancing. Since debt from private lenders is expensive, securing refinancing from more formal sources like banks and credit card companies would be ideal. A 10% add-on-rate is equivalent to 88% in effective interest p.a. A credit card debt can go as low as 0.59% add-on-rate or effectively 13% p.a. The lower interest rate also affords a much lower cash outflow.
“E” stands for expel. Once the debt has been fully refinanced, a person should expel his credit card by cutting it up. If he does not, this new source of (cheaper) debt can also lead to a false sense of wealth.
“A” stands for automate. Automatic debit arrangements should be set up not only to pay the refinanced debt. And to make this auto debit arrangement more acceptable, a person must condition himself to think that he is not saving a portion of his income. Instead, he should think positively by framing the auto debt as making him live on the complimentary percentage of his income. Behavioural scientists have shown that putting a positive spin makes the person see the auto debit as a foregone gain rather than an outright loss (when he saves a portion of his income).
“M” stands for magnify. If a person can afford it, he should have an amount equal to his previous debt amortization debited monthly. Any debit amounts in excess of the new and lower debt amortization should be credited to an investment account. And once the refinanced debt has been fully paid, all of the periodic debits should be invested.
If a person wants to be emancipated from debt, all he has to do is to D.R.E.A.M.
The color of money at least for Americans is green. But in the American culture, green is also the color of envy. Envy is what could afflict a person who has less money and who is bombarded with visual stimuli on how much better his life could be if he had more green bucks.
This feeling of envy is universal, regardless of the culture and actual color of money. Even financial planners who are supposed to be of stable and sound financial condition are also tempted to feel envious of others. In fact, financial planners are probably in the worse off position because they give advice to both those who are wanting and those who are loaded.
One thing is sure, if you want to fight envy you will need to call on strength from outside of you. Conversely, you will have to always be open to accepting such help and encouragement. Allow me to demonstrate.
At one time, I was feeling a bit wanting. This was when I was in a plane about to embark on an eight- (and almost consecutive) day training run in three different cities in the country that would require me to wake up at 1 am on two consecutive days just to take the first flight out. And on one other day, I would have to fly into the airport in Manila, reload my luggage with fresh clothes from my car that was parked nearby and wait at the terminal for my next flight out.
And if travelling was not taxing enough, at training runs, a trainer has to keep his energy and focus at 100% to keep his participants engaged. Doing this for just one day is already a strength-zapping exercise; what more eight days.
So as I was seated in the plane waiting for the other passengers to board, I decided to put off listening to music through my headphones. This gave me the opportunity to overhear a group of passengers, who walked past me, wishing that their social work to educate children would already push through. Jokingly, there were even saying that with all the good work they were doing, they would probably even go past heaven. This was when I felt a divine tap on the shoulder reminding me on the real purpose of my work: to teach that money is not to be hoarded but to be spread to help others.
At my company’s Ask a Friend, Ask Efren Facebook page, we posted a question that went: “How do I fight jealousy when my neighbor keeps flaunting his newly bought items. Sound blares from his new home theater system. His TV is so huge it lights up the night sky. His new car is always parked in front of his house and not inside the garage at the time when all of us, his neighbors are just about leaving our respective homes for work. Grrrrrrr!”
I am quoting our reply as follows:
“Your neighbor has a problem with his need to flaunt his wealth. But that is his problem and not yours. Your concern is that you look too far beyond what is important and that is the people immediately around you, your family. Focus on their needs first. You will see that it will be more fulfilling that way than just keeping up with the dela Cruzes. And always think that material things hardly stay gold. More importantly, internalize what John Maxwell wrote: many years after your death, people will not remember how much you owned. Instead they will remember you for who you are and how you made others matter.”
With investment scams grabbing the headlines, I believe it is time once more to remind the public of what to look out for.
Firstly, please note that there are differences between multi-level marketing, Ponzi and pyramiding.
Multi-level marketing is a legitimate marketing scheme aimed at generating more sales for a company. Pyramiding focuses on earning money through the recruitment of more agents and not on the sale of a product or service. Many times, people who perform pyramiding acts used multi-level marketing as a tool.
Ponzi is the act of enticing someone to invest in a scheme with a high guaranteed pay out over a short period of time. Unbeknownst to the investor, his returns are being paid out of the funds of a succeeding investor. Money is not really made to earn but is just passed on from one person to the next. At times, Ponzi scam artists also use multi-level marketing to promote their nefarious act.
I once was asked by a relative to attend a training seminar for a consumer product. The company was purporting to have invented great products, in particular coffee and toothpaste out of mushrooms.
The trainer began by saying that their toothpaste was so awesome because not only did it whiten teeth and freshen breath, it was also good for healing wounds faster. Just rub a small amount on the open wound and voila! Then the trainer went on to say that on top of those fantastic features, the toothpaste is also an excellent feminine wash. But the trainer was quick to add that they make no therapeutic claims and that the product was only registered as a food supplement. Now this is the first sign of a scam, when the claims on product benefits are too good to be true.
Next the trainer went on to say that the price of their toothpaste was Php800 for a 150 ml tube. This is the second sign of a scam, when the item being sold is too expensive compared to existing substitutes. A leading toothpaste brand can be sold on a buy one, take one promo for just a little over Php100. The difference in price is to afford the scam artist enough money to pay loads of commissions to its unsuspecting agents.
Finally the trainer pointed to the car outside the room and said that the vehicle was acquired by another trainer who focused on recruiting more agents as his “downline”. This is the third sign that hammers the final nail on the coffin, the focus on recruitment.
Lately, scam artists have combined Ponzi with pyramiding by inviting people to invest huge sums to set up their own little selling units with a guaranteed return of sometimes as high as 40% in just a week. To see how unreal such promises are, just compare the returns promised to the weighted average interest rate on time deposits displayed on www.pdic.gov.ph.
Please note that the law states that if there is a public offering of investment securities, the proponent should secure a secondary license from the Securities and Exchange Commission (SEC). The registration of an entity with the SEC as a corporation or partnership is just the primary license. And also note, as the SEC points out, that the agents of scammers are just as liable as the scammers themselves.
To be safe, visit the SEC’s website www.sec.gov.ph for public advisories or consult your friendly financial planner.
Just the other day, I ran into an officemate from way back. He knew that I was into finance. So the first question he asked is if the stock market is still attractive given the looming elections for President.
I had my views but wanted to first check the history books to see if the stock exchange index behaved in a particular way. To qualify this research I have data on the Philippine composite index only from 1958. This means that I can only correlate the index to as early as the 1961 elections.
It would appear that there is no discernible pattern with the behaviour of the PSEi vis-à-vis the elections for President. While the 1960s showed the index in negative territory in the year prior to the elections for President, the index was mostly upbeat in the year prior to the elections after the Marcos era.
There was only one election for President after the Marcos era when the index was in negative territory and this was in the 1998 elections. But even then, it was the Asian Financial Crisis and not the elections that led to the index falling into negative territory in the year prior to the said election.
So do the elections for President truly have an impact on the Philippine Stock Exchange Composite Index (PSEi)? In my honest opinion, I believe they do but, especially now, in a muted way.
It is not uncommon for investors to take a wait and see attitude when a new government administration will take over. Investors naturally want to assure themselves that the new administration will be friendly to the economy in general and business in particular. If it will be, this bodes well for corporate earnings and stock prices.
The great thing though since 1986 is that each new government administration, in its own way, worked towards the liberalization and strengthening of the economy. The country has progressed from so much institutionalization of reforms that signs are beginning to appear of the economy decoupling from politics. Just look at how the PSEi has continued to be stable despite the mud-slinging with and continuous criticisms of the current administration.
On top of this decoupling, foreigners have begun to take the Philippines as a serious investment destination. Not only has there been an increase in hot money flows into the country, we have also seen our net foreign direct investment at the highest in history.
And while hot money does not stay, local money has been harnessed by the financial services industry to offset the adverse impact of hot money outflows.
The average investor might agree with me but will probably be swirling in emotions that prevent him from taking advantage of opportunities in investing, especially in the wake of elections. That is why the better alternative is to rely on professional fund managers whose nerves of steel have been forged by as many bull runs as crises.
These fund managers reside in each pooled fund (e.g. variable life, mutual fund, and unit investment trust fund).
In the Philippines, we pronounce the word “estate” with the accent on the first syllable. The correct pronunciation is one where the accent is on the second syllable. And when said in a quick fashion, estate will sound like state when pronounced correctly.
That is exactly what happens when you don’t plan for your estate way ahead of time. The state will just apply the one-size fits all laws of intestacy (dying without leaving a valid will), which may not be to your liking and, which may not avail of the optimum tax savings benefits.
The great majority of income-earning individuals should consider planning their estate. For one, net estates valued at over Php200,000 are already subject to estate tax. Second, the Bureau of Internal Revenue is tightening on the application of estate taxes.
But what is net estate to begin with? Net estate simply refers to the amount of assets you will leave behind, after being called from this life less the allowable deductions. Some of these allowable deductions are as follows:
The answer is that the state is a passive partner in helping you to create your wealth. To some, the answer may still not be enough. But that is the law.
But more than just paying taxes, the equitable disposition of assets to heirs is the bigger issue when it comes to passing on wealth. How many stories have we read on the newspaper or heard from our neighbor about relatives fighting over their inheritance? Such news would be enough to make the deceased turn in their grave.
Still, I cannot overemphasize how intricate estate planning is. While reading a book or even this blog will make you informed, it will not give you the expertise of an estate planner who has dealt with countless settlement cases. My advice, consult the expert.
“Oh my” is an expression used by people when they are surprised either in a positive or negative way. The expression has morphed into “OMG”, which could mean oh my gosh, oh my goodness, oh my god, or even oh my “gulay”. The abbreviation is commonly used for SMS, instant messaging and other related forms of communication.
Some people refuse to use “oh my god” either because they don’t believe in one or because they feel that using the name of God in this manner is in violation of the second of the Ten Commandments (i.e. You shall not take the name of the Lord your God in vain.)
Umay, on the other hand, is akin to being tired of a certain food. In the broader sense, umay can mean feeling nauseous from having too much of anything, even of a good thing.
If we refer to “oh my” as the expression used when getting a pleasant surprise, the spectrum of emotions from “oh my” to “umay” actually reflects a well-known law in economics called the law of diminishing marginal utility.
Simply put, people will enjoy less and less of a product or service that they purchase repeatedly. The first experience with the product or service will elicit an “oh my” response. But repeated enjoyment will make people experience “umay”. Demand for that product or service will therefore drop and people will move on to other products or services with higher perceived utility.
Restaurants take advantage of this law in economics when they offer “eat all you can” buffet’s. Restaurants offering such buffet’s hardly go out of business from just overeating of customers (because customers already begin to experience “umay” just on the second trip to the buffet table).
People’s wants are insatiable. Once they grow tired of one want, people move on to the next. People need to know when enough is enough so that they can be satisfied with what they already have and avoid the “umay” experience. To many this may be hard to do. In reality, it is. But as they say, no pain no gain. So here are three steps to help out.
First, people need to do simple mortifications for around a month to develop that habit of killing the small desires of the flesh. These should be as simple as taking coffee without sugar, waking up 30 minutes earlier or reducing cigarettes consumed by one stick a day. Aristotle once said that people are what they do repeatedly and that excellence is not one act but a habit. Small financial mortifications multiplied by daily repetition will equal financial discipline that will eventually lead to contentment.
Second, people should set goals in life and get busy trying to achieve them. The temptation to experience other “oh my’s” sets in when the mind is idle.
Third but by no means the least, ask for grace from above.
Now wouldn’t you want to have nothing but pleasant surprises in life?
The wallet is a funny thing. Whatever money we put in it is bound to be pulled out easily in a very quick fashion. And many times, we don’t even know where, when or for what purpose we brought out the money.
If you don’t believe me, try putting Php5,000 in your wallet in Php1,000 denominations. Don’t put any other amount of money there. Now see if that money will last for even a week and if you can remember where you spent it.
Here’s another thing: do we feel guilty with spending money in our wallet in a quick way with hardly a clue as to how it was spent? Not really because money in our wallets quickly become loose change or “barya” that we don’t put too much value on. This behavior is a convoluted way of applying the materiality concept in accounting.
So the combination of having easy access to money that we see as not amounting to much makes us spend that seemingly less valuable money fast and without much guilt. Withdrawing money from wallets is like a stainless steal.
Now try depositing the same Php5,000 in Php1,000 denominations in a passbook account, one that does not have any ATM attached to it. You will notice that what is reflected in your passbook account is the total balance, not five Php1,000 balances. Even the deposited amount, provided you deposited all of the Php1,000 at the same time, will reflect only one amount, Php5,000.
Check that account’s balance after a week. There is a very good chance that you would have more money in that account after a week than the balance you would have in your wallet for the same length of time. Why? Because it is harder to spend one large amount of money than many smaller amounts, even if the sum total equate to the value of that one large amount. Plus, with the need to fill out withdrawal forms each time you withdraw money from your passbook account, you will tend to remember better where you spent your savings.
So to have better control over your money, keep them first in a passbook account, the one without an ATM attached to it. And by the way, don’t put debit and credit cards in your wallet as much as possible because they only give you easy access to your money.
At the same time, we perceive money from debit and credit cards as plastic money and, therefore not as real and valuable as notes and coins. Thus, we tend to spend plastic money faster and without guilt.
Moreover, debit and credit cards are not exactly considered legal tender. Legal tender, like notes and coins, immediately extinguish a financial obligation from say buying items from a grocery store or cell phone shop. With debit and credit cards, it is only after the merchant gets the actual cash credited to his account that your financial obligation to him is extinguished.
Again, don’t keep too much money in your wallet. Remember that all wallets have “holes”.
Let’s clear definitions first. When I say investing in securities, I mean investing in financial instruments either directly (e.g. time deposit, commercial papers, government securities, stocks, corporate bonds) or indirectly (e.g. investment management accounts of Trust Departments and pooled funds).
And with investing in general, you have to be invested in going concerns. By going concern, I mean investments that have a great chance of standing the test of time and ideally outliving you as the investor.
I have always said that the best investment in the world is to invest in yourself. A better-equipped you will be able to offer more value-added to society at large. Ultimately, it is on this value-added that you will earn income. This is the most lucrative form of investment.
However, under the unbreakable rule of investing, high return also means high risk. Earning from just your value-added to the world will not afford you a diversified income stream. Moreover, you will never know when a dreaded disease or death, which cut short the income from your value-added, will come knocking on your door. You simply cannot outlive yourself.
That is why after protecting your downside through life insurance, you should invest in earning assets that have the potential to outlive you; the going concern investment.
Investing in your own business is great. However, if that business is structured in such a way that it’s very existence also depends on your existence as the business owner, then that business is not a true going concern.
For a business to be a true going concern, it must have an adequately decentralized operating and policy-making structure. After all, nobody is indispensable. Such a structure will continually give birth to product/service innovation, high employee engagement, effective marketing, and efficient finances or in other words, a going concern.
Building a business that is a true going concern takes a lot of time and effort. And if you do not have the size of funds, expertise and time to do so and/or you rely largely on your value-added to the world for income, the alternative way of investing in a going concern is through investing in financial securities.
Before financial securities are even offered to the investing public, regulators help screen if the issuers of such securities are going concerns (i.e. they must have the capacity and longevity to pay off their debt securities). These issuers must also have the potential to give equity securities owners the decent returns that the latter deserve. Since nothing stays the same, security analysts do their share in updating the financial performance and condition of issuers of securities to see if they are still going concerns.
And if you cannot do direct investing in going concerns, there are experts out there who can do it for you for a modest fee: enter Trust Departments of banks and pooled funds.
But whether investing is done directly or indirectly, the overall idea is to invest in a business or securities that can augment your earning capacity and even replace it especially during retirement. Such investments will need to be going concerns.
Many financial products providers will make would-be investors go through a client suitability assessment (CSA) to see if such investors are truly compatible with the investment that they are thinking of getting into. A CSA attempts to measure a person’s propensity to take on the risks in investing.
But what is really risk and can it be measured?
The plain and simple definition of risk is the potential for losing part or all of your invested principal and expected income. Still, can risk be quantified? To answer this, let’s make an analogy.
A car is stable when travelling down the road because of its shock absorbers. And while sudden stops or abrupt turns may change the height of the car vis-à-vis the road, the latter would not be too far off from the cruising level.
But if you take out even just the rear shock absorbers and make a sudden stop, that car would bounce up and down uncontrollably, making the height of the car vis-a-vis the road in such occasions much higher than usual. Most would surely not want to be riding in a car without rear shock absorbers because apart from the uncontrollable bounce, that car may just turn turtle and end up costing lives.
We can say that an investment’s historical average annual compounded return (as discussed in a previous blog) is the same as the average cruising height of car without rear shock absorbers vs. the road. The difference between an investment’s individual historical returns and its average annual compounded returns is then equivalent to the height of each bounce of our car vs. road during sudden stops. This difference (or height of the bounce) is what is used to measure risk.
At the risk of a nosebleed, the standard deviation of historical returns on an investment vs. its average annual compounded return is that investment’s risk. Similarly, the amount of bounce of our shock absorber-less car vs. its usual height vis-a-vis the road is that car’s level of risk.
Now here is the iron tablet to help recuperate from that nosebleed. You do not have to compute risk yourself. Many free investment data service providers (e.g. Bloomberg, Reuters) as well as product providers themselves supply the computations for historical risk (standard deviation) and returns (annual compounded average) of particular investments. Some would even compute the risk of an investment (like a stock) vs. an index (like the Philippine composite index).
Suffice it to say that the higher the level of return, the higher the level of risk. And the higher the level of risk, the greater is the chance of you losing part or all of your invested principal and expected income.
So are investments that can potentially pay higher returns to be shunned altogether? Not necessarily. Remember our car example? The only way to minimize the bounce is through shock absorbers. In investing, the practice of diversification is equivalent to installing shock absorbers in your investment portfolio.
Money for bags: PARENTS, money for shoes: PARENTS, money for dates: PARENTS.
Parents, parents, parents. As teenagers, our number one source of funding is from our parents. We don’t earn our own money yet so we ask the ones who do to give us some. We are either given weekly allowance or we just ask our parents for some cash whenever we go and hang out with friends. We run out, we’ll ask for more. We are so used to treating them like our own personal ATM’s that we don’t see the consequences it will have on us in the future. There will come a time when we will all start being adults, start working and start earning our own money. Once that happens, the weekly funding stops, we run out of money and we go bankrupt, all because we thought that money grow on trees.
I believe that spoiled children are a parent’s worst nightmare. I mean who would want children who constantly want whatever they see and throw tantrums if they don’t get it? My parents certainly didn’t and because of that, they made sure to take early precautions. As early as I can remember my parents would tell us to:
I have been conducting personal finance education training since 2004 and so far it has been a bumpy ride. Employers tend to question spending on teaching their employees personal finance skills that are not directly related to their work. Plus, many employers feel that giving a salary or wage already fulfills their role of sending their employees on the road to financial freedom.
Well if this were so, why is it that of the thousands of people that my company has trained on personal finance, 72% found themselves with money problems in one form or another prior to the training? What is more telling is that 22% considered themselves to be in great financial stress.
Studies have shown that employees tend to be less focus at work when they face added stress from financial burdens. The mind wanders from work in what is called absenteeism.
Salaries and wages may help in becoming financially free. But money is a double-edged sword that can lead to financial disaster if not properly handled. And this is why personal finance training is needed. Without such training, an employee faces challenges from:
Employee financial stress will manifest itself in more ways than one, such as in the following:
Teaching money management skills and not giving away more money is the answer. Personal finance lessons can:
Personal finance trainers abound from stand alone, independent companies to financial planners embedded with product providers. They are just one Google search away.
So think twice about thumbing down a personal finance training proposal. These trainings may just mean time well spent for employees and money well saved for the company.
Question: I’m 30 years old, single, with three siblings, two of them have jobs and one in college. My parents are retired and have a small apartment business. Is it really necessary to get life insurance now? – MaryAnn via email
Answer: By the construction of your question it looks like buying life insurance is really on your “to do” list. It’s just that you are trying to postpone it if possible because it might not be a necessity for you now.
One of the reasons for buying life insurance is to protect the income you will lose if you pass away unexpectedly. And why protect income? So that you can leave something behind to your loved ones to tide them over during the period that they are trying to financially bounce back.
But as you said, you don’t have your own family yet. So, what is the point of buying life insurance now?
Well, the other reason why enough life insurance should be bought as early as possible is because the premiums are more affordable the younger you are. Why? This is because as people age, the risk of their passing away increases and this additional risk will cost more.
“And who will be my beneficiaries?” you might ask. Why not make your family members you revocable beneficiaries. By making your beneficiaries revocable, you can switch them with your future husband and children. Just note that payouts under a life insurance policy with revocable beneficiaries are still subject to estate tax. Only payouts under a life insurance policy with irrevocable beneficiaries are exempt from estate tax.
An additional question on your mind could be how much of life insurance coverage should you be buying. There are many ways of computing this from simple rules of thumb to detailed forecasting of the lifestyle that your beneficiaries will need to fund when you are gone.
One rule of thumb is to determine how long in years your loved ones will need to financially bounce back from losing you. Once you know that number, simply multiply it to your annual income to arrive at the life insurance coverage you will buy. Don’t buy life insurance coverage for your family for the rest of their life. That strategy does not only spoil beneficiaries and promote laziness, it is also very expensive.
A sample detailed computation would be to estimate the expenses your family will likely incur upon your passing away. These would include likely hospital expenses towards your untimely death, burial expenses, estate taxes, and debt liquidation to name a few.
You will need to add to these foregoing expenses the amounts your family will need to survive for a number of years. These will cover children’s education, spouse’s retraining to join the workforce, daily living expenses and others.
Finally, subtract from the sum above your assets that your family can readily liquidate at the time you are called from this world, income streams you will leave them and any existing life insurance coverage to arrive at your capital gap. This capital gap is the additional life insurance coverage you will need to secure.
Please note that the foregoing computation is not complete. You will need to sit down with your insurance planner to really find out the complete picture on how much life insurance coverage you will need to get.
So don’t wait any longer. Buy life insurance now. Remember that insurance is your gift to your loved ones and, therefore, an asset.
When I was much, much younger, we would gather around in a circle and play a game that went like this:
Player 1: Who stole the cookie from the cookie jar? I think number 2 stole the cookie from the cookie jar.
Player 2: Who me?
Player 1: Yes you.
Player 2: Not me.
Player 1: Then who?
Player 2: I think number 3 stole the cookie from the cookie jar.
Player 3: Who me?
Player 2: Yes you.
Player 3: Not me.
Player 2: Then who?
Then the cycle would repeat until we all got tired and bored of playing it.
In real life, we all have financial cookie jars or places we put our cash, whether they be our wallets or purses, piggy banks, savings deposit accounts or even investment accounts. And just like with cookie jars, we tend to dip into our private stash.
Personal finance teaches that if we truly want to save and build our wealth, we must save in different accounts, at least for the major purposes. Samples of these major purposes would be getting a post graduate degree, getting married, sending children to school, buying a car,buying a house, enjoying a grand family vacation abroad, and funding retirement. There are several reasons why having separate savings and investments accounts is ideal.
One is that having an account for a particular purpose serves as a deterrent to our propensity to dip into our financial cookie jars. If we knew what the savings or investment account was for, we would think twice about putting a dent on a child’s college education funding, delaying the purchase of our dream car or home, or even reducing the quality of our retirement lifestyle. Having just one account makes it difficult to see which goal is being compromised. And as a result, we are likely to end up fooling ourselves into believing that none of our financial goals is being shortchanged. As an added protection, we could even set up “and” accounts where two or more signatures are always needed for withdrawals. This feature would serve as a check and balance.
Another reason for having different financial cookie jars is that goals will differ in terms of the time we have to achieve them. The more time we have, the lower and more affordable would be the required level of our periodic additions to our savings and investment account, all other things being equal. By knowing our savings and investment horizon as well as what we can afford to add, we could determine what we need to earn for a particular goal.
On a rough rule of thumb, the farther the goal, the more we could invest our savings in higher risk, long-term outlets like bonds, stocks and pooled funds, tempered only by our risk preference. The closer our goal, the more we should invest in short-term instruments like time deposits, special deposit accounts (SDAs), Treasury bills, and short-term commercial papers.
So saving in different accounts will avoid having to ask who dipped his fingers in our private stash and pointing an accusing finger. And as they say, whenever we point, three of our five fingers point back at us.
Imagine that you are driving your car in heavy traffic on one of the busiest roads in Metro Manila. You are in the middle lane. You suddenly see the lane to your left start to move while your lane and the one to your right are still motionless. You also see space that would allow you to easily veer to the left lane.
So you make that move to the left lane and slowly inch away from the car that was previously in front you in the middle lane. All of a sudden, the left lane stops. Unexpectedly, a car stalls a few vehicles ahead of you. At the same time, the other lanes start to move forward so much so that the car previously ahead of you in the middle lane goes past you. Arrgh!
The question is, “Who do you blame?” The answer is nobody; not even you!
Nobody is omniscient. When we make decisions, we will always not have all of the necessary inputs. Each decision we make will be best the decision based on information available to us at the time. If things do not go as planned, it will just be another lesson learned that will hopefully make us better in making similar decisions in the future.
The same goes with managing money. Take the case of deciding on whether to invest in a piece of property for resale or not. Intuitively, holding on to propertyshould be a no brainer because even if we are not able to resell the property, we will still end up holding a tangible asset.
But holding on to a non-earning asset is like holding on to dead money. Money could have been put to better use had it been invested even in a simple time deposit. We must not forget the original goal for buying the property, which was to make a profit from reselling it.
Clearly, we need to make well-informed decisions. But for fear of making a mistake, we may opt to ask the experts. Experts can guide us into making the best decision by identifying the factors that need to be considered. In buying property for example, experts would say that we need to consider among others the following:
This is not to say that we should not consult experts in making decisions. Experts provide a great service. However, we should own the decisions we make in adopting money management strategies to achieve our specific financial goals. If things pan out, then achieving our goals is the reward. If they don’t, we should not play the blame game. Instead, we should get up, dust ourselves off, learn from our mistakes and move on.
How do you feel about the number 5? Unless “5” is your favorite number then the number should be meaningless to you if it is not compared to something else. Allow me to explain.
I am somewhat of a gadget geek, whether it’s for heavy machinery or facial care. Recently, I bought a weighing scale that measures not only weight but also body mass index, body fat, visceral fat, resting metabolism, skeletal muscle and body age using the bioelectrical impedance method (told you I was a geek).
Body mass index, which is “weight (lbs.) ÷ height (inches) ÷ height (inches) × 703” is supposedly a reliable indicator of body fatness for people. This weighing scale also measures both essential and stored fat. Visceral fat (as opposed to subcutaneous fat or fat found underneath the skin) is the fat found in the abdomen and in areas surrounding the vital organs.
Resting metabolism measures the minimum level of caloric intake needed to sustain a particular body’s everyday functions. The weighing scale also measures percentage skeletal muscle, which grows around the skeleton and comes in pairs – one to move the bone one way and the other to move it back. More muscle means more calories needed.
Finally, the weighing scale determines the equivalent biological age of the body.
The weighing scale merely comes out with numbers. In and of themselves, the numbers mean nothing. However, when compared to averages per age bracket and gender, the weighing scale gives a pretty good picture of the current health of its user. For example, a biological age of 55 for your body would elicit no reaction unless you compare it to your actual age. You would be alarmed, however if your actual age is only 45. The same goes with the other tests.
But this is just the starting point. You can then go on a diet and/or do exercises and track performance over a certain period to bring back your results to within the normal averages.
The same is true with personal finance. Income and savings may be high or low. But it is the size of those income and savings taken in the context of your lifestyle that determines whether you are financially healthy or not.
I have come across a janitor who was able to send his children to college, own a house, buy a car and manage a small business with his wife, all starting with his meager income as a janitor.
I have had another client explain to me why Ilocanos are very frugal. Because they harvest and earn money only twice a year, they trained themselves to save up for the lean times. In fact, this Ilocano client told me that he feels more financially confident during the times in between harvests.
On the other hand, I have come across many highly paid employees of large companies in Metro Manila who are hardly making ends meet. Their supposedly high, steady and more frequent earnings has made them complacent and to a certain extent, over-confident. Consequently, many of them live an income level or two higher than their own, a disastrous financial situation to be in.
The number denoting your income, though important, is just a starting point. It is in the amount of expenses you incur and how you grow what is left that will determine how financially free you will be.
It has probably been said too many times already but the old adage of “it’s not what you got but how you use it” definitely applies to personal finance.
I am often asked if investing in a particular business would be a wise decision. My invariable answer is “it depends.”
Investing requires a great deal of study not just of the potential investment but also of the investor. Here are the five steps that I have come up with in deciding whether to invest directlyor not.
1. Determine your investment return objective and risk preference.
Investing without having a goal in mind is like going on a journey without a destination. A doctor friend of mine once asked me when is earning enough, enough? Well, if you don’t have a goal, you will never know when enough is enough.
The cost of this goal sometime in the future compared to what you have now and what you can additionally invest will help determine what you need to earn on your money. And what you need to earn will also dictate the level of risk you must be willing to take.
2. Ask yourself if you are all SET.
SET is all capitalized because “S” stands for size of funds, “E” for expertise in investing and “T” for time available to manage investments directly. As to size of funds, people typically fall into the trap of looking at just the start-up cost without due consideration for the permanent or operating capital needed to run the business.
Expertise is a pre-requisite for investing. Invest in what you don’t know and see your money slowly drain away.
Time is not so obvious to the novice investor. Investing is like flying a plane. When taking off, full attention is needed from the pilot, and so with a business. That is why employees typically make poor direct investors.
Now if you lack even just one of the S, E or T, you are better off investing indirectly, either through hiring a business manager to initially run your business or investing in managed funds (e.g. variable unit-linked insurance, mutual funds and unit investment trust funds).
3. Scout around for the investment that best suits your answers to #1 and #2.
Scouting around includes a careful study of investment options to see if their risk/return potentials meet the criteria established in steps 1 and 2 of these guidelines. While asking for tips is a definite advantage, it would even be better if you were to do the studies and run the numbers yourself. If you feel you lack the acumen for doing the studies then you can always have a feasibility study made or just invest indirectly through managed funds that have onboard fund managers who do nothing but analyze investments to form optimal portfolios.
4. Manage investment risk through diversification.
Without exception, investments bear risk. The only way to manage the risk is to practice diversification. Farmers are very good at this. While waiting to harvest their major crop, they practice inter-cropping and perhaps even raise livestock to smooth out income throughout the year.
Diversification can come in many forms like launching more than one product or service, investing across industries, buying different currencies and even investing in different geographical areas.
5. Monitor investment performance.
Especially at the start, it would be hazardous to run a business or investment on auto-pilot. Be sure to monitor investment performance periodically and frequently at the start. Once you get the hang of it, you could probably loosen the reins and monitor less frequently but still periodically.
I am a mother of two boys – now grown up and pursuing their place under the sun. When my kids were younger, I felt I had too many balls to juggle – pursuing a career, maintaining harmonious family relations, educating my children and inspiring them to be the best they can be, developing my physical and spiritual wellness. All these took its toll but none was as worrisome as saving up for the future with the wages my spouse and I can muster.
I was fortunate to have worked for a company who had a strong advocacy for financial education. I learned the equation “Income-savings = expenses” in my early 30s and kept true to this principle. As I receive annual salary adjustments, I made sure I saved most of it. The money I saved, I use to invest in insurance to protect the breadwinners and education policies for my two children.
I first invested in an education plan that provided elementary, high school and college funds. Since my savings was small, I can only afford one that provided a proportionally small education benefit. My children were 6 years apart so by the time I was done paying for the first policy, I was buying another for my newborn son. When my youngest was 3, I purchased 2ndeducation plan for his brother. This time, I bought only an education plan. Three years after, I purchased a 2nd education plan for the youngest. This went on for many years such that by the time my eldest son was going to college, he was armed with three college education policies.
When my eldest announced he wished to pursue culinary school, I did not think twice. Afterall, I was first to say “be the best you can be”. Despite the prohibitive tuition fees of culinary schools, I did not discourage him from pursuing the course. I knew I had planned well for this and that I only needed to supplement the tuition fees with other expenses not covered by the plan (such as the expensive knives and other kitchen tools used by culinary students).
Now that my second son is in college, I find myself paying only 1/3 of his annual college tuition fees. The rest we get from his education policies.
How did we do it? Here are a few tips I wish to share:
So, does it pay to plan ahead for your child’s education funding? A resounding YES because in so doing, we can attend to our retirement planning even as we are spending to send them to college.
I just saw the most recent list of the forty richest Filipinos. It is an impressive list that includes the youngest billionaire in the person of Edgar Sia (of the Mang Inasal fame) to Henry Sy (of the huge SM Group). A good number of them are rags to riches story.
The list is aspirational for the reader. But the common reaction would be to say that being a billionaire is probably reserved for just a privileged few and that striving to be a millionaire alone is already a huge challenge.
But here’s the surprise! Many people, especially those who are gainfully employed are already multi-millionaires. And here’s the other surprise. It is typically the lenders who know that people are multi-millionaires.
Up to this point in this blog you would have probably gone from excitement to bewilderment. Allow me to untangle the mess of emotions I have created.
Consider a person at age 21 who earns the minimum monthly employment income for 13 months a year. Add to that a 5% annual pay increase and a sprinkling of a higher increase due to promotions. Top it off with the standard retirement pay provided by law and you get an earnings potential for the career of that person ranging from Php22 million to Php44 million (depending on the region in the country where he is employed)! And all of this (earnings) potential emanates from a person’s greatest assets, his body and mind. Collectively, I call them his human capital.
Human capital is often abused. People are aware of their future earnings potential. In fact, it is because of this earnings potential that they begin to mortgage their future by enjoying too much now. And this is also why I say that it is typically the lenders who recognize that people are multi-millionaires. After all, why will creditors lend hundreds of thousands and even millions of Pesos to people who do not possess those amounts yet? Lenders ask for evidence of earnings potential in the form of certificates of employment and compensation.
Eventually, people who overly mortgage their future earnings end up overheating their human capital just to pay for past excesses.
Just like any valuable equipment in a factory, human capital also has to have down time for maintenance. The human body and mind must be allowed time to relax, which is why work-life balance is very important.
Human capital also depreciates. The sum total of future earnings will obviously get smaller the closer people are to retirement. It is therefore essential to save and invest a good portion of earnings to allow financial wealth to grow over time and eventually replace human capital.
One last thing, human capital is not exactly linear over the career of a person. If life is all about consumption to a person, human capital will be plotted as a downward sloping curve. On the other hand, human capital can grow exponentially if savings from it are reinvested in the body and mind. This is why healthy living and continuous learning are the best investments that anyone can make.
So, what have you been doing to your human capital lately?
I know my age will show when I write about this but I am sure many will still recall the disco song “I Will Survive” as sung by Gloria Gaynor.
Right after the People Power revolution of 1986, the comedy show Bubble Gang made light of that shining moment in the country’s history by depicting rich socialites joining the rallies. As the skit went, one socialite was asked how she felt when she joined the rallies. The socialite emotionally replied by paraphrasing that famous first line of Gloria Gaynor’s song, “At first I was afraid; then I was petrified.”
Emotions can wreak havoc in our finances, whether it is in cash, debt, risk or wealth management. For example, in cases of death of the family’s breadwinner, those left behind may say that the loss will be so tremendous that they will feel the loss in the same level of intensity forever. And those left behind may say that nothing in this world will ever be able to console them.
A 1998 study led by psychologist Daniel Gilbert entitled “Immune Neglect: A Source of Durability Bias in Affective Forecasting” says that affective forecasting is the way people predict their future moods. Durability bias is the tendency for people to assume that their feelings, especially negative ones, will last a very long time (longer than the period they usually do). The immune neglect, a major cause of the durability bias, is the tendency to ignore a person’s ability to adapt to unpleasant events in his life.
The brain is hardwired to go through affective forecasting and immune neglect to result in durability bias. But time heals. People do get over traumatic events in their life. The only requirement is that there must be openness to heal. A sign of this openness to heal is the act of people embracing a sense of positivity. I mean, come on, how can someone who just lost the love of his life recover when all he does is listen to sad songs?
Recovery will be faster if those left behind are financially prepared. And no they don’t have to be like the families on Doomsday Preppers, the National Geographic show where “otherwise ordinary Americans…go to whatever lengths they can to make sure they are prepared for any of life’s uncertainties.”
Traditional life insurance is a cheaper and more practical way of preparing the family for the untimely demise of the breadwinner. Just be sure to get the life insurance package and coverage that is appropriate for those you might prematurely leave behind.
Does the word “budget” still make you cringe? For many, the word conjures up images of a ball and chain strapped to their ankle, a heavy weight putting a drag on their finances and fun. But people who use a budget usually find it freeing. It provides peace of mind, guiding their use of money in a way that enables them to live generously, save and invest adequately for future needs, and enjoy financial margin.
This article is the second of a three-part series. Last month, we looked at the first step involved in using a budget: planning. Now let’s take a closer look at the second key step: tracking.
Knowin’ where it’s goin’
Once you have a plan for how much you intend to give, save, invest, and spend on everything from food to clothing, you need a system for seeing what’s really going on with your cash flow. We’ll introduce you to different tracking tools in this article. The best one? The one you will actually use!
First is a paper and pencil system. Along with the Cash Flow Plan form on the SMI web site, you’ll find a Cash Flow Tracker form. Take the goals from your Plan and write them across the top of the Tracker. Every time you spend money, whether you use cash, write a check, use a debit or credit card, or pay a bill online, write it down in the appropriate column.
The reason there aren’t 30 or 31 rows is that you won’t spend money in every category every day of the month (at least, we hope not!).
Keep your Cash Flow Plan and Tracker forms in a place where you’ll see them, such as your kitchen counter or a bedroom dresser. That way you’ll be reminded to record the day’s spending. After you do, cross off the date at the bottom of the form as a reminder that you captured the day’s spending.
Use one form for each month, totaling up the spending for each category, and using last month’s totals to keep track of year-to-date totals.
The most visual, hands-on system
Another way to track your cash flow is to use the envelope system. With this system, some of your bills will be paid out of your checking account, such as your rent or mortgage, utility bills, insurance premiums, and others. For other more discretionary categories, such as food, clothing, and entertainment, withdraw (in cash) each category’s monthly budgeted amount. Put the designated cash for each category in a separate, clearly-labeled envelope.
For example, if you get paid once a month, take the month’s budgeted amount for groceries and put that cash into an envelope marked “Groceries.” When you go to the store, bring that envelope with you, pay for your groceries with that cash, and put the change back in the envelope. If you get paid twice a month, on payday take half of the monthly budgeted amount and put it in the envelope.
The envelope system is a hands-on, visual tracking tool. You can easily see how much you have left for a particular category at any point in time, which can help you stay on track.
If you’re new to budgeting, we recommend starting with either the paper and pencil system or the envelope system. Use one of these approaches for at least six months before considering moving on to an electronic budget tool.
Adding some automation
There are two types of electronic budget tools available today—software and online tools. They have some benefits in common, but also key differences. Quicken is the leading budget software program, and Mint.com is arguably the leading online budget tool, but others exist as well.
One of the strongest benefits of electronic budget tools is they do a lot of the tracking for you. When linked to your bank and credit-card accounts, these tools can automatically capture transactions you make by check, credit card, debit card, and online bill-pay, as well as online transfers and deposits. The only transactions you have to enter manually are cash transactions.
Electronic tools can even categorize your transactions. If you do your grocery shopping at Bob’s Finer Foods, for example, these budgeting tools can be set up to automatically categorize such transactions as “Groceries.”
With such tools, you can easily see how you’re doing in any category at any time. It’s great to be able to pull up the status of your online budget on your smart phone while in the parking lot of a store before going in to shop.
Worried about security? The leading electronic budget tools use what’s called bank-level security, which is the same type of security your bank uses when you check your account online. Of course, if you’re not comfortable with that, go with the paper and pencil or envelope system instead.
Quicken can generate a variety of detailed reports, so if you’re especially analytical, you might want to go that route. Mint is more streamlined.
In the Bell household, we used to use Quicken, but switched to Mint years ago. What steered us away from budget software was the fact that it tethers you to one computer, plus you have to pay for it. With Mint, you can access your budget anywhere you can get on the Internet, plus Mint is free.
Article Originally Written by Matt Bell
Matt Bell is Sound Mind Investing's Associate Editor. He is the author of four personal finance books published by NavPress, speaks at churches and universities throughout the country, and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.
Sound Mind Investing is a faith-based financial services company dedicated to helping individuals invest successfully. SMI provides time-tested, objective strategies for mutual fund investing, including specific fund recommendations, along with biblically informed, practical teaching on a wide range of other personal finance subjects. Visit sound mind investing at www.soundmindinvesting.com
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