Living for Today

Denying yourself of life’s little pleasures can lead to success in personal finance. Living frugally requires a lot of sacrifice which explains why many don’t engage in such. The temptation of splurging money is so hard to resist that the concept of saving for tomorrow is easily forgotten. Those who continue to choose to live for today justify their lifestyle by saying that “Life is to short, you’ll never know when you’ll go so might as well enjoy now than regret”. But what IF (and that is a big if) you’re bound to live longer than others?

The table from Reuters below shows that as of 2004 the average life expectancy of a Filipino is 70.7 years old. That is 68.6 for male and 72.8 for female. It also shows that the life expectancy extends by 2% every four years (translation: People will live longer!). So if you are 20 years old today, then by the age of your retirement (which is forty years from now), you are expected to live for another 27.9 years (with the life expectancy reaching 87.9 years by that time). That is assuming of course you’ll only be on the average (but there is also a chance that you may even outlive that).

This is why we need to plan for our finances now. An aging man with no wealth to stash is a pitiful sight don’t you think? Imagine having to live the full of the 27.9 years after retirement with meager or no resources at all!

Ric Edelman in his book “The truth about money” wrote it perfectly:

“You will be on this earth for 40, 60 or 80 more years. You can choose to live month-to-month as you have been living, or you can choose to live better. Give up you materialism for a few years, reduce your needs for now, and one day, you’ll be able to exceed your current lifestyle. All it takes is a little effort each day, and a lot of days.

There isn’t any magic to this, no get-rich scheme. And while you may be afraid of how much time it will take to succeed, that’s nothing compared to how much time is really left in your life. So what if it takes you 10 years to get out of debt? You’ll still live have 30 or 50 or 70 years to enjoy after that.”

Your lifestyle will always be a choice, are you living for today or do you want to enjoy the luxuries for tomorrow? It’s your call.

Failing to Save ... Saving to Fail ...

Most of us are taught by our parents to save. When I was seven years old, my mom helped me initiate my first banking transaction. The bank where I opened the account has a lion mascot named Leo T. Pid (cool name!). What I got for my first deposit was a passbook (with my name on it), a t-shirt and a coin bank. It was a fun experience and I was motivated to save and slowly observe my cash deposit increase.

I guess one way or the other we all have the chance to save. The question is where do you put your money? Is it on a savings account? Is it on a time deposit? I know someone who puts her money in the cabinet! Most of the time, we park our cash on an instrument which we deem as safe and readily available for us.

Now, let me say that if we park all our cash on savings deposits alone then we are doomed. Why? It is a fact that inflation always beat interest rates. In lay mans term this means that the money on your savings account will have lesser value in time. You put your money on cash deposits, then the bank will keep it safe for you (assuming that it won’t close!). However, they really won’t help you earn a lot from it either. I’m not saying that you should not put your money in bank deposits. Rather, you should place a balance on where you park your money. The rule of thumb is you can put 3 to 6 months of living allowance on a cash deposit while the rest must be placed on the investment of your choice.

We need to make a paradigm shift on our concept on saving. Most of us misconstrue saving and wealth building. The law on inflation and interest rate dictates that saving alone is detrimental for your wealth building process and will eventually eat up your resources in the long run. Because of this, you must never be content on the interest income generated by cash deposits.

If you already have a significant amount of cash sitting on your lap then you must find ways to maximize your returns. You can start by checking out the different investment instruments such as Bonds, Stocks, Treasury Bills, Mutual Funds, UITF, FXTN and even Real Estate. You may even want to put it in a business if you have a calling for entrepreneurship.

Perhaps the biggest obstacle is knowing where to start. Banks nowadays has a special desk for investment accounts. You may inquire with their in-house investment manager and check on the different products that they offer. There are also other financial institutions such as insurance firms and investment houses which have their own product line-up. You may also do your research in the web since products are posted on their sites.

Investing on these products has an inherent risk attached to it. Your portfolio will likely depend on your own personal risk tolerance. As the rule says, the higher the risk - the higher the return. At the end of the day, it’s you who will decide where you’ll put your precious cash.

Preparing to buy a house the smart way

I practically lived my life in my parent’s house. I wasn’t inclined on getting my own house since I was living in my own comfort zone. My family shares the house only with my dad who most of the time is in the province and stays with us once in a while. A year and a half ago, I surprised myself by deciding to buy a property. Our new house is currently being built there and in a few months we will be moving in.

I believe that financial preparation for property acquisition is essential in ensuring a healthy cash flow. Before anyone engage into a property purchase, it is important that the financial position must be determined. If cash is available for an outright purchase, then this wouldn’t be a problem.

Now, why do people engage in mortgage even if they are awash with cash? Simply because cash is king. Paying in cash spares you from monthly headaches. However, getting the property outright makes you house rich but also cash poor. Liquidity is very important since no one knows when an emergency will occur or an investment opportunity will pass. Every peso paid for the mortgage is also a peso less for your wealth accumulation. You may have been freed from the interest but you lost the opportunity to invest that same amount that will yield you a higher return.

If you are getting a house thru mortgage, you need to know if you can meet the obligations that it carries. It’s unfortunate that there are people who jump in blind or simply ignore the rules of personal finance. They only realize the difficulties when their payment begins and their cash flow gets affected.

The first financial hurdle for a mortgage would be the down payment. You should have a “significant” cash deposit before you start considering on getting a new house. When the down payment is addressed, the monthly amortization (for the balance) must be thoroughly considered. The monthly amortization is overlooked at times. However it is more diligent to pay attention to this since this gets the bigger cut on the cash pie. How do you determine your capability for paying the monthly amortization? Your personal net worth must be established and the 30% debt rule must be applied. You can start by listing your regular income and outstanding debt. If you are married, you can include your spouse’s income as well (assuming that he/she will help you for the purchase). Your debt listing must cover all your financial obligations including credit card purchases, loans and scheduled payments like insurance premiums etc.. A personal finance rule states that your total debt must not exceed 30% of your total income. This rule intends to protect you from going cash strapped as your monthly amortization kicks in.

Let’s make an example. Stephanie is a typical yuppie. She is 25 years old, single and is currently earning P100,000 per month. She has been prudent in her savings and has no outstanding debt. She saw a property in Tagaytay and is inclined to purchase it. The property’s worth is P5 million and the developer allows her to deposit 20% of the total contract price and pay the rest in installment with an interest of 10% per annum amounting to 37,000 monthly for 10 years. She examined her bank account and found that she can cover the down payment. She has no outstanding debt and thinks that she can cover the mortgage. So is she capable of paying? The answer is no. If the 30% rule is applied, then the maximum monthly amortization that she should get is only P30,000. If she really wants the property then she should negotiate with the developer for a longer payment term or a lower interest rate. Aside from the down payment and monthly amortization, she must also consider the other cost of owning the property such as taxes, repairs, furnishing and homeowner’s dues. The 30% rule gives her the leg room to address this other incidental expenses.

Needless to say, you should always shop for the best deal for your mortgage. For a development project, you should check if it can be funded thru a government housing loan (thru PAG-IBIG) since this carries a lower interest rate. In case PAG-IBIG housing loan is not applicable, you may want to check around the different banks and compare their loan packages. There are also property developers who offer in-house financing. The 0% interest deal is now common during the pre-selling stage. Some even provide mortgage flexibility by allowing balloon payment. You should ask your sales agent the different payment schemes and choose which one suit you best.

Lastly, location is of primary importance. Check if the property’s location is pristine and does not fall to any nature hazards such as fault lines. It will also be diligent on your part to check if the property is titled properly. If you are getting the property from a developer, make sure that the property developer can be trusted. Remember, you are putting a significant amount on the hands of your developer so make sure you choose only from those that have good track record.

Do you need an MBA?

One day, our professor in Business Communications asked the class why we went to graduate school.

One answered that he wanted to move up the corporate career ladder and he’ll use his MBA as his springboard. My classmate who is an entrepreneur answered that he wanted to develop his skills and eventually apply it to the business that his parents started. Others said that they just want to pursue another field of interest.

There’s one answer that hasn’t left me up to now. He said: “I think this is the best motivation for one to appreciate the graduate school. To search for true friends..“

Hahaha.. Everyone found that really funny when he blurted that out. We realized that MBA is not only a source for networking for business but for personal acquaintances as well.

As for me, I consider my MBA as accidental. I was having personal problems during that time and I’ve thought of indulging in school work to keep myself busy. At the very least, that would be my productive form of deviation. Indeed it was, and after three years of grinding school work, I was fortunate to graduate with the degree.

So was it worth it?

The graduate school gave me the opportunity to learn the things that are beyond my field. My career was in Information Technology. Prior to my MBA, I must admit that I’m clueless whenever business subjects were discussed. The course honed my skills in the areas of Finance, Marketing, Operations, Economics and Management. On a personal note, I developed the good habit of reading and understanding the business section of our daily newspapers. It also made me realize that these subjects are not only applicable to business but to personal finance as well. More importantly, MBA gave me the chance to meet the people who eventually inspired me to thread the field of entrepreneurship.

As for my classmate, I hope that he has found his “true” friends in graduate school. And I guess he did, because I know for a fact that he stayed there longer more than anyone else.

Preparing for your child's education

Do you have kids? or planning to have one in the future? If yes, have you considered the cost of their education? I mean, I think everyone has thought of it but have you actually tried quantifying its cost? I found myself asking that question one day and this led me to formulate a table for the education expense. I used a mid-level school tuition fee as basis for the cost with a yearly increment of 10%. It is fairly a simple assumption and this gave me an idea on the amount that I need to prepare for my kids.

Here is the table that I made.

Looking at the numbers of the tuition alone already made me cringe and I intentionally didn’t include the miscellaneous fees. I also browsed thru the 2006 report of the expenditures on children by families and found out that 10% of the total expenditure for raising a child goes to education. Maybe it is fair to say that we really need to plan for it.

I think most of us prepare for this expense thru savings. Some funding come from OFW’s abroad which explains why the country has an influx of dollars just before the enrollment season.

Another way for preparing is thru pre-need educational plans. However, I wonder how many Filipino’s still trust pre-need plans? The loss of confidence was stemmed by the pre-need industry collapse which led many to abandon the idea of obtaining one.

I'm glad that Congress (thru House Bill No. 4343) is doing its part in preventing further bust of the pre-need industry. Hopefully, this will provide the control and safety net not only to the pre-need companies but more importantly the plan holder.

I have several educational plans for my kids and I’m fortunate that I chose a pre-need company that had the stability to withstand the crisis. I believe that every buyer bears the responsibility to check if the pre-need company has the ability to provide what is stated in the contract. Remember, you are parting your cash with nothing tangible to hold on to except for their promise of delivering the benefits in the future.

Here’s another tip, whenever the sales agent presents you with an illustration of the plan, do not take the figures on face value. Most of the time, the presentation material highlights figures that are already summed up which makes it look astonishing. Take time to compute for the total cost and compare it with the benefit. The yield will give you the total interest for the plan. You may want to further divide it to obtain the annual rate and see if it falls with your target return. If it meets your criteria, then you probably met a match.

I computed the returns for the educational plans and realized that I will earn an interest of 4.5% per annum for the entire coverage. When I got the plan, I wasn’t particular with the returns for that matter. I just want to ensure that I have at least something for my kids the moment they are bound for school. If I were to make that decision today, I’ll probably ditch getting those educational plans. Those plans will provide me with a return but I still think that I can beat the interest that it offers. I will instead put my money on other investment instruments which can yield me more.

Regardless of the way, the preparation for education expense must be part of everyone’s financial discipline. Not obtaining a pre-need plan spares you the hassle from the amortization. However, it does not give you an excuse to enjoy that money today. It becomes more relevant that you should save more in an effort to reach that goal by getting a higher return rate on a shorter period of time. Just remember that at the end of the day, it’s your children who will benefit from all of this.

Can you afford it?

August, being perennially a wet month, is a lean season for retailers. This is why big malls schedule their mid-year sale at this period hoping to draw consumers to spend. The red-tag retailing has evolved making the 3 Day Sale a regular event on their calendar dates. These “SALE” events are tied up with credit making it convenient for consumers to purchase pricey items by means of installment.

One of my personal favorite “SALE” is the appliance and gadget madness. I can’t resist the urge of checking out the latest toys in the market. I also noticed that pricing of these products is critical since most of these items are identical in specification. Price seems to be a major differentiator.

During the sale period, the hook line and sinker for spending spree occurs. Money Tree suggests that before you splurge and burn your money, find time to think and rethink your position. Often many are led into an illusion that the item they buy is cheaper than what it actually is. How? Expensive items are often disguised and repackaged as “affordable”. Marketing geniuses mask the amount by subtly dividing it into monthly or even daily cost. A P100,000 television is expensive and will surely shun a buyer. But present the same cost on a per day basis (roughly around 277 pesos per day) and you’ll have many Juan’s lining up to purchase that tv set.

Be careful. This “affordable” purchase scheme will often be used to lure you to give in to your “wants” list. There’s always an instant justification to the action saying that the purchase is a steal with only a few hundred pesos per day to throw away. Reaching out for the credit card seems to be effortless and convenient. There is no feeling of guilt when you swipe that credit card and you go home happy with your new set of goodies.

Again, this type of spending causes a false sense of purchasing power. It makes you believe that you can actually buy more than what you can afford. Rule No. 6 in CNN’s Money 101 says:

“Spending beyond your limits is dangerous. But if you do, you’ve got plenty of company. Government figures show that many households with total income of $50,000 or less are spending more than they bring in. This doesn’t make you an automatic candidate for bankruptcy — but it’s definitely a sign you need to make some serious spending cuts.”

More often, happiness derived from this type of purchase is short-lived and it abruptly ends once the credit card bill arrives. It makes you realize that the “affordable” purchase you made is much more significant when it sits on top of your regular needs purchase. As you continue to touch base with reality, you find out that there is actually no additional income to support for the added expense of your new toy. It is a start of a financial horror story and you find yourself sinking on debt.

This is not a pretty site and one must be avoided at all times. I’m not against the purchase of the goods that we crave for. The key phrase is “planning the purchase”. I will not hesitate spending a fortune buying things that I like provided that this was planned beforehand.

So, remember, whenever you are verge of impulse buying … think … the price tag always more than meets the eye.

Where did my money go?

Do you wonder where your pay check went? I have a strong perception before that money just passes thru the palm of my hands. Back then, I already have control of my finances. Yet I find myself clueless on where my money goes. That is until I forced myself to list everything that I spent for.

We often call that action as budgeting. For some reason, this word has an allergic effect to many. Let us see how Wikipedia define the term budget:

“Budget generally refers to a list of all planned expenses and revenues”

Since my spending habits is not dictated by any plans and are spontaneous in nature, then it is not budgeting but purely recording. Yet, it has served its purpose. I found the process useful and the list on my old reliable notebook just got longer

As simple as it is, the process is nevertheless time consuming. There is a conscious effort on my part to rewind what transpired the whole day. I made some memory checkpoints during the times that I reached for my wallet. The list practically has everything on it, from the banana que that I bought in the carinderia to the appliance I bought at the mall.

Years passed by and slowly the record eventually just got better. I categorized each of the line item to determine what type of expenses I am heavy on. I also inserted an income tab to lists all the money going in. This two combined, gave me my net worth which I use as gauge for my personal financial health.

I was so happy with this financial tool, that I even shared the template to my friends. That is when I found out that expense tracking is not for all. Some actually tried it, but sooner or later gave up. As Salve from Money Smarts says:

“ As you well know, I don’t like budgets. Just thinking about them makes me wince. I have tried, but really, I cannot pretend that I already have the hang of it. Just can’t.

I simply figure out how much I should save and invest, then spend the rest. That’s it. I enjoy the moolah. Let the money chips fall where they may. I can smile while forking over money at the restaurant because I know the purse strings keeping the savings fund are tightly shut “.

I learned that budgeting and expense recording has its own personality. Each person has his way of taking care of his money. It all goes down to the basic fact that (no matter how you do it) financial discipline to save is the ultimate goal.

Oh yes, discipline is always a tough task but once you have it then you’re made.