Consider the following scenarios:
Jose, 28, died when his bus swerved headlong into a cliff,
killing all of its passengers. Aside from the grief, his young widow and their
three-year old son had to cope with the loss of their breadwinner.
Lola Juana, 70, retired two decades ago. Not a peso is left
of her modest retirement pay, her small monthly pension just enough to pay for food
and medicines. She has no leeway for any emergencies.
Jose and Lola Juana are fictional characters but their
stories reflect the struggles of too many Filipinos. Unprepared and uninformed,
they are steps away from stumbling into a financial quagmire, if not already
drowning in one.
Findings from Euromonitor’s
2013 Consumer Lifestyles in the Philippines report are a cause for alarm.
- There may be a growing interest in insurance, but most Filipinos remain traditional when handling money
- Most Filipinos still have a low degree of financial literacy. Many lack knowledge of basic financial concepts and how to properly prepare for their future needs
- Often, Filipinos do not think of the long term; have low interest and lack considerable knowledge of saving and investing their money for income protection and retirement
- 80% of Filipinos, mostly low-income households, are still “unbanked”; they tend to keep their money at home rather than in banks
- Many Filipinos do not worry about tomorrow, and many spend their money as soon as they earn it
The growing economy has put more disposable cash into the
pockets of many Filipinos, but only on a “here today, gone tomorrow” basis. If
these financial habits will not improve, we’ll see more Lola Juanas in the
future.
Unlikely you say? Many NSO surveys reveal that out of the Philippines’
millions of senior citizen, only a tiny fraction are financially-independent
(that is, not relying on their family or the government or private institutions
for help). Some materials I’ve read even pinpoint it to only 1%.
So for the love of
yourself, your family, and your country, please, it’s time to raise that
Financial IQ.
Consider then this article as your intro to the x-curve concept and how to build a solid financial foundation.
Decoding the X-Curve
Early 20s or 30s.
Unless you are a trust fund baby or a teenage start-up millionaire, you’re like
us, hustling it out in the workplace every day to meet your basic needs. Food,
clothing, shelter, education – all of these depend on that regular monthly
paycheck.
Point A, the starting line: Big responsibilities, none to
minimal savings, active income. You are working hard for money.
60s (or earlier) and
beyond. You’re still human and you have basic needs. But instead of paychecks,
you’re living off the interests of your investments. If you’re working, that’s
because you love what you do, not because you need to earn to eat.
Point Z, the goal: No
responsibilities, big savings, passive income. Money is working hard for you.
The idea behind x-curve (as shown below) is that a person’s
responsibilities generally decrease while his/her wealth generally increases
over time.
Before we discuss how to get from Point A to Point Z, remember
our two earlier scenarios about Jose and Lola Juana? X-curve covers them too.
What if you die too
soon? What will happen to those who are dependent on your income? If you
are the breadwinner, you’ll want to provide for the people you’ve left behind
A life insurance can serve as your family’s
income replacement. But first, make sure you are adequately covered.
To compute how much insurance you need, multiply your annual
expenses by 10. So if you spend P200, 000 a year, you’ll need P2 million worth
of insurance. This is the amount that the company will give to your family
after you die.
Why x 10? Because your family can invest that entire amount
in a fund that yields a minimum of 10 percent a year. In our example, 10% of P2
million is equal to P200, 000, the same amount your family was spending before
your death.
Of course, it’s up to your family how they’ll want to use
this cash, which is why it’s equally important to financially educate them too.
And, do inform your family members that you have bought a plan.
There are numerous insurance option out there – whole life insurance
(you pay until you die), term insurance (renewable for a set period of time),
insurance bundled with mutual funds, etc. In fact, your company may have
enrolled you in their group plan, as part of your benefits.
You’ll also hear different opinions. Some say stand-alone
term insurance is best for most people since it can be cheaper than whole life
and more cost-effective than bundled. One
advice I like is, ultimately, our goal is to be self-insured, when our money
has grown to a point that we no longer need insurance.
Admittedly, it can be quite confusing, especially if you have
many friends sidelining as agents (wink). Or you get cornered to join an
orientation in a mall somewhere (wink again, been there too). Be polite but
hold your ground – explore and do your research first before committing.
What if you live too
long? Will you have enough savings to maintain your needs after your
retirement?
Old age brings with it its own set of woes. Aside from the
high cost of medicine, you’ll also have to deal with inflation rate – you’ll buy
less in the future with the money you have now.
The solution? Build your own retirement fund today by
creating your investments.
Don’t rely on your retirement pay or your pension. Or even your
12 loving, generous kids, even if they are perfectly willing to sponsor your
senior citizen moments. Besides, would you not prefer to be the one treating
your grandchildren, instead of being at their mercy?
(Very important note in case I be misinterpreted: Of course
I love my parents and I’d do anything to make their twilight years comfortable.
As for myself, kids or no kids, I’d love to be financially-independent in my
old years.)
But, as I’ve elaborated in Lesson 3 of another post, banks
are convenient places to store our short-term and emergency funds, but a BIG NO
to park our long-term savings.
Because of inflation, your money loses around 3% or higher
of its purchasing power every year. The 1% annual interest that regular bank
accounts offer can’t even cover that.
So for your retirement fund, invest it instead where the
banks invest your money, where they earn five to 20% interest while you get
crumbs.
It’s an entire topic on its own, but these investment
vehicles include equity funds, bond funds, balanced funds, stocks, among others.
Again, compare and do your research before committing.
Solid Financial
Foundation
How many of you have heard this advice? “While you’re still
young, you should already invest in
your own car, own condo…<insert list of material things that yuppies should
have>.
Although well-meant, it reminds me of this quote from the
book The Richest Man of Babylon “Advice
is one thing that is freely given away, but watch that you only take what is
worth having.”
To get from point A to Z in the x-curve above, it’s not enough to accumulate material
things and call it investing.
Like building a house, a strong and sound financial
foundation must be built from the ground up.
Step 1: Increase Your Cashflow
Money saved is equal to money earned.
Create a budget and see where you can cut costs. If you drink a P20 soda every
day, for example, then try cutting off, and you’ll be P600 richer at the end of
the month (and healthier too).
I can hear the groans (“Girl, I have nothing more to give up! I’m
drained to the last peso.”) Track your spending for a month, and you might
be surprised by your “hidden” expenses. They might be small, but they do add
up.
If you want to be poor, follow
this formula: Income – Expenses = Savings.
If you want to prosper, then
stick too: Income – 10% Tithe – 20% Savings and Investment = Expenses.
Remember, pay yourself first. Unless you develop good money habits,
all your salary increases, bonuses, and sideline income will just be sucked by
your ballooning expenses.
Step 2: Healthcare and Life Insurance
As detailed in the x-curve
section, you need insurance if you have responsibilities or assets to protect,
especially if you have a young family. Your life insurance should depend on
your specific needs and what age you are in.
In addition, aside from the basic
PhilHealth (which every Filipino, especially the poor, must have), a good
healthcare plan is very important. In sickness or in accident, it’s a buffer
from the potential heart attack your hospital bill would bring.
For yuppies employed in a
company, check what health plan you are enrolled in and take advantage of it,
and not just during your physical annual exam.
For the self-employed, please
consider getting a health care plan. I was sad when I heard that friends of a
famous Filipino writer had to solicit funds to help her pay for the hospital
bills, esp. since she did not have a health card. Financial literacy is a must
for all professions.
Step 3: Manage your Debts
There are good debts and bad
debts, like there are good and bad cholesterol.
Robert Kiyosaki defines good
debts as those that put money in your pockets. Like when you get a loan to buy
an apartment and had it rented out. (So there is investing in material things
after all)
Bad debts are those that don’t
yield anything in return. Like when you swipe your credit card to buy the
latest home theater system, even if you can’t afford it.
Bad debts keep people wide awake
at night and force them to invent multiple excuses to avoid their lenders, ala Confessions of a Shopaholic.
I’m not an expert in debt
management, but here are some tips I’ve read and heard on how you can control,
and ultimately, eliminate bad debts:
- In the book The Richest Man in Babylon, 1/10 of your earnings should go to your savings, 7/10 to your expenses, with 2/10 divided among those whom you owe money.
- At the same time, on one seminar, it’s recommended that you pay off all debts first before you commit to saving, since the debt interest will grow greater than your savings.
- Negotiate with your creditors if you can reduce the interest rates. Pay the high-interest rates first, or transfer them to those with lower interest.
- Pay more than the minimum in terms of your credit card debts.
- If possible, consolidate your debts into only one person/institution, so it’s easier to discuss the payment terms.
- You can also use the snowball method, where you pay off the smallest debts first so you’ll be inspired by your progress.
My two cents: If you want to buy
something, why not save up for it rather than borrow/get a loan to buy it?
Delayed gratification is applicable in money matters too.
Step 4: Create your Emergency Fund
Life insurance – check. Health insurance
– check. How about other emergencies and unexpected changes? Disasters can
strike, home and property can be badly damaged, or you may suddenly lose your
job.
To cope with unforeseen
circumstances, build an emergency fund equal to 3 to 6 months of your monthly expenses.
This will also prevent you from dipping your finger prematurely into your
investments or retirement fund.
Step 5: Investments and Asset Accumulation
“Truly rich people have multiple
sources of income, with focus on creating passive income.”
Your salary falls under active
income. The profits from your banana cue stand is active income too.
Active income is also called
linear income – your direct labor is one is to one with the money you earn.
Passive income on the other hand,
keeps coming even if you’re sleeping. This include interest from investments,
rental incomes, royalty from books or albums, earnings from selling franchises
of your store, etc.
Passive income is exponential
income. You plant the seed, watch it grow, and you now have a fruit-bearing
tree.
Remember the x-curve concept? The
goal is for you to live on interest (passive income) when you are already old.
That is why your retirement fund should not just sit on a bank, but should be
in a more suitable investment vehicle where it can earn higher interest rates
exponentially.
Of course, you don’t have to wait
for your retirement to enjoy the fruits of your long-term savings. There are
other ways to create passive income for the medium-term (we don’t advocate get
rich quick schemes here), and you might want to explore the wonders of real
estate and entrepreneurship.
Whether you become an
employee-investor, employee-investor-entrepreneur, full-time entrepreneur, it
would still be wise to build that retirement fund.
Business failures can happen
and it will be wise to have your money riding on separate vehicles. Having multiple
incomes streams is always a good idea.
Step 6: Preserve your Estate
Once you have built your empire
(congratulations!), it’s time to have some form of succession planning.
Once you die rich, will your assets
and bank properties fall into the right hands? Is your last will and testament
in order? Will your family have enough money to pay the taxes required (you’ll
be amazed how large they can be) to legally acquire their inheritance?
A good lawyer can help you sort
your affairs in order.
But first, Step 0...
If thinking of these options makes
your head swirl, take a deep breath, and just do it step by step. If you are a
yuppie like me, begin by increasing your financial IQ and building good
spending and saving habits. I started with stock investments because it’s the
most feasible option for me. After three years, I’m now exploring other
avenues, based on my core gifts.
P.S.: If you’re a stranger who
just stumbled on this blog, feel free to say hello! and to keep in touch. I’ve
always believed in the importance of a support group/network, and would love to
grow my own tribe.
My other financial literacy-related articles:
5 Things I Learned About Money in my 20s
Saving and Budgeting for Yuppies
Labels: Financial Literacy
