Financial Stages -- Nag Level-Up ka na ba?

Personal Finance Basics - Financial Stages

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1 out of 10 OFWs financially broke: study

By Macel Ingles, ABS-CBN Europe News Bureau and U.S. News Agency / Asian
(www.usnewslasvegas.com, Nov. 12, 2011)

 ...
 The study made by the Social Enterprise Development Partnerships Inc. (SEDPI) also showed that most or around 80% of Filipinos working abroad overspend on investments on houses and home improvements.

Also, 8 out of 10 do not have savings and are unable to prepare for their retirement or return to the country and are caught in a cycle of debt and poverty
...
According to Vincent Rapisura, CEO of SEDPI, it is a sad phenomenon that OFWs do not enjoy financial stability despite years of working abroad.
...

Read more: 1 out of 10 OFWs financially broke: study
(Source: http://www.usnewslasvegas.com)

Work "smart". Not just work "hard". Be Financially Literate. -- (To avoid scams too).

As part of the advocacy of this blog, let me share the article below from our Senator Ed Angara about the sad state of "financial illiteracy" affecting most Filipinos.

I hope we take this as a challenge and motivation to educate ourselves on this very important skill-set so that we will later reap the benefits of this "investment" in financial education by knowing how to make our money work harder for us and not us working harder for money.

In other words, financial literacy will allow us Filipinos to earn better by working "smarter" instead of simply working "harder".

Isn't that a good thing if we have more free time for our families instead of working overtime for money?

I hope more Filipinos will be enlightened on the need for Financial Literacy for them to be better able to manage and grow their earning power (actively and passively) more efficiently. At the same time this will also contribute to more investments in our local industries. This, in turn, will lead to improvements in our economy, more jobs for the Filipinos, and a future First World financial status for the Philippines.

Go Philippines!

Angara calls for 'financial literacy' for Filipinos 

While Filipinos are obsessed with political news and are keen followers of most political developments, they are sadly stuck in a depressing state of "financial illiteracy" which has dragged down economic growth, Senator Edgardo J. Angara has lamented.

Angara, chairman of the senate committee on banks, said that the "financial illiteracy" that afflicts most Filipinos has dampened investments, failed to develop new financial instruments and constricted the growth of the stock exchange. 

"We are so financially illiterate that we can not even get people to invest in the capital market. And it often takes a long, long while before new financial instruments are offered to would-be-investors," Angara said during a recent financial forum that introduced the REIT, a special real estate investment vehicle. 

The banking system holds a staggering amount of US$80 billion, money which should not have sitting in banks had there been a wide menu of investment and opportunities instruments available", according to Angara. 

"We cannot even unlock the investment power of money locked in the banks and this is a sad thing," said Angara. 

Even the financial pyramiding scams are proof that people have money to invest and are on the lookout on where to place their money. 

"The financial pyramids have been built by people who want to generate income from their money. There is really money lying around waiting to be tapped and the architects of the pyramiding scam tapped into this kind of money," he added. 

Angara said the stock exchange is constrained by the limited number of companies listed in it and there is very little financial sophistication to push people into investing into the stock market. 

The efforts to expand the market and lure in the investors are hamstrung by the lack of interest in financial journalism and business news, said Angara. 

"Unlike in other countries where people read the developments in the stock market and other financial markets with real interest, there is no similar enthusiasm here for financial and business news and this has not helped increase the financial sophistication of Filipinos who want to invest", added Angara. 

The pre-need firms, he said, are generally regarded as steady anchors of the capital market in developed economies but this is not the case in the Philippines. 

"There is an urgent need to put in place sweeping reforms in the pre-need industry to transform the industry into a powerful component of the capital market", said Angara. 

Angara said that people with money also invest in land but since these buyers have no solid grounding in the real estate market, "liquidity often turns out into illiquidity."

Source: Angara calls for 'Financial Literacy' for Filipinos (http://www.edangara.com) 

Having problems paying your Credit Card debts?

Maybe this quote below explains some of the reasons why...

Will Rogers Quote on Money, Debt, and a pretentious lifestyle:

“Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.”
― Will Rogers

Step 6. Get Protection or Income Replacement Strategies (a.k.a. Insurance):

Like an emergency fund, insurance protection is intended to be like a financial shock absorber to protect you and your family's financial stability during those times when undesired emergencies or bumps in the road of life are encountered. Insurance protection (also known as Income Replacement Strategies) are designed to provide an alternative source of income for you (or your family) when the income generating capacity of the breadwinner of the family is impaired or stopped. (Wherein the breadwinner is any member of the family or a business vehicle which provides the income for the household needs).

Basically, insurance protection serves the following strategic purposes:

I.    Provide you and your family financial stability during emergencies;
II.   Prevent you (or your family) from resorting to high interests loans/debts during emergencies;
III.  Prevent you from cashing out your long term investment accounts before the intended goals of the investments are achieved.

So avail of Income Replacement Strategies (thru Insurance) to protect the income generating machine/s of the family.

Mr. Save EARLY vs Mr. Save LATER

Maximizing the Power of Compound Interest

Mr. Save EARLY:

-> Invests P20,000/year for 8 years @12% annual interest.

-> Started investing earlier @ age 21 yrs old.

-> Total Contributions = P160,000.

Mr. Save LATER:

-> Invests P20,000/year for 22 years @12% annual interest.

-> Started investing at a later age (29 yrs old).

-> Total Contributions = P440,000.

Whose savings will gain and perform better (and at a much lower cost)?

--> Checkout the results below when both men will reach the age of 50. 

	Mr. Save EARLY @		Mr. Save LATER @
	Annual Interest Rate =	12.00%	Annual Interest Rate =	12.00%
Age	Payment / Contributions	Accumulated Amount (End of Year)	Payment / Contributions	Accumulated Amount (End of Year)
21	20,000	22,400	0	0
22	20,000	47,488	0	0
23	20,000	75,587	0	0
24	20,000	107,057	0	0
25	20,000	142,304	0	0
26	20,000	181,780	0	0
27	20,000	225,994	0	0
28	20,000	275,513	0	0
29	0	308,575	20,000	22,400
30	0	345,604	20,000	47,488
31	0	387,076	20,000	75,587
32	0	433,525	20,000	107,057
33	0	485,548	20,000	142,304
34	0	543,814	20,000	181,780
35	0	609,072	20,000	225,994
36	0	682,160	20,000	275,513
37	0	764,020	20,000	330,975
38	0	855,702	20,000	393,092
39	0	958,386	20,000	462,663
40	0	1,073,393	20,000	540,582
41	0	1,202,200	20,000	627,852
42	0	1,346,464	20,000	725,594
43	0	1,508,039	20,000	835,066
44	0	1,689,004	20,000	957,673
45	0	1,891,684	20,000	1,094,994
46	0	2,118,687	20,000	1,248,794
47	0	2,372,929	20,000	1,421,049
48	0	2,657,680	20,000	1,613,975
49	0	2,976,602	20,000	1,830,052
50	0	3,333,794	20,000	2,072,058
	160,000		440,000
	--> Total Payments		--> Total Payments

Results:

-> Mr. Save EARLY reaped a lot more gains from his investment than Mr. Save LATER (P3,333,794  vs  P2,072,058). A huge difference of P1,261,736. 

-> Mr. Save EARLY was able to achieve this at a very much lower cost than Mr. Save LATER. (P160,000  vs  P440,000).


Important Lessons from the above illustration: 
1.  To maximize the power of compound interest in Savings/Investments, START Saving/Investing EARLY.
2.  Work Smarter, Not Harder. Let the power of compound interest Work For YOU thru Investments, and Not Against YOU thru Loans/Credit Card Debts.

The Explosive Power of Compound Interest

(A much neglected life changing concept and wealth building tool.)

No one ought to be allowed to graduate from college or high school without understanding this concept.
- Dave Ramsey, Personal Finance Expert, Best Selling Author and Speaker.

The concept of percent and interest is taught in basic Filipino high school mathematics. But it is unfortunate that the application of this concept in everyday money management activities is not well emphasized in the high school lessons such that the "power of compound interest" sounds like an alien phrase to most graduates of high schools and even colleges in the Philippines.

And yet this simple concept about the power of compound interest can potentially improve the financial and everyday life of the hardworking Filipino income earner.

One important warning though about compound interest is that it can work for you or against you.
--> It can work for you to increase your income (thru INVESTMENTs) or it can work against you to add to your expenses (thru LOANs and CREDIT CARD DEBTs).

Which do you prefer? Which of the two options will allow you to attain Financial Independence and escape the Rat Race?
--> (Clue: Let Others Pay You interest thru your INVESTMENTs instead of You Paying Interests thru your LOANs/DEBTs).

Enjoy watching this video by Dave Ramsey on the Power of Compound Interest:

Wealth Management and the Economy

Several studies and surveys conducted has already established the direct connection between the wealth management skills of a country's population to the economic strength and wealth of the country:

The better the money management and wealth building skills of the people as a whole, the better is the status and strength of the country's economy.

Sad to see yet another study confirm the poor training in wealth building our Filipino kids are getting especially since we call them the future builders of our nation.

Maybe this news article will motivate us to teach our future nation builders to not just spend, spend, spend, but also to save, invest, and build.

Filipino kids lack money management skills -- study
BY DIANE CLAIRE J. JIAO, Reporter

HONG KONG -- Almost all Filipino children have regular access to cash, but they still do not understand key money concepts, such as earning, saving and spending, and the impact these have on their lives, a study showed.
...

Read more:
Filipino kids lack money management skills - study

Why our (Asian) neighbors are richer than us

Philippine Daily Inquirer, June 7, 2011
By Randell Tiongson, RFP

Excerpts:

I just read an article stating that Singapore has the highest concentration of millionaires in the world with 16 percent of its households having at least $1 million in assets, as determined by a study released by the Boston Consulting Group.
...
We don’t need to limit our sights to Singapore; we can also look at Thailand, Hong Kong, Malaysia and Indonesia and use them as a benchmark.
...
The answer to the question of why our neighbors are drastically richer than us partly lies with issues on economics.
...
One report we can look at is the national savings rate of said countries. Singapore leads the pack with an average savings rate of 50 percent.
This means that on the average, Singaporeans spend half of their income and save and invest the other half; which is probably a huge reason why there are so many millionaires there.
...
Facts will show that the savings rate in Hong Kong, Indonesia, Malaysia and Thailand hovers between 30 and 40 percent, really encouraging statistics.
...
NEDA reports place the savings rate in the Philippines at between 12 and 16 percent. Following the 70-30 rule on spending and savings, there’s not much promise for our nation. It is unfortunate that many Filipinos have embraced a First World consumerism lifestyle but have a Third World income. We simply do not save enough.

Read more:
Philippine Daily Inquirer, Why our neighbors are richer than us

Step 5. Create an Emergency Fund:


Save and build up a cash reserve equal to around 3X~6X of your total monthly household expenses. The purpose of this cash reserve is to cover for unforeseen emergency needs that may come your way. This emergency fund is like a safety-net or a spare tire to protect you and your household from any fall or flat tire in your financial journey thru life. Just like the spare tire, this fund has to be liquid and easily accessible so that you can easily respond to the emergency financial need. Another important purpose of an emergency fund in personal finance management is to prevent you from resorting to debts/loans during a financial emergency. So this will prevent you from acquiring new monthly expenses thru the required interest payments on the debt (See Step 3: Eliminate Bad Debt).

Some examples of financial emergencies:
-> Unforeseen household/car repairs
-> Job interruption
-> Medical emergency

Having an emergency fund is a requirement to be able to develop a well-rounded financial plan.
Create an Emergency Fund.

What is an Emergency Fund? (From Investopedia.com)

Step 4. Eliminate Bad Debts:

Bad debt is money that is borrowed to buy items (usually wants and not needs) which loses value over time and which will not provide a commensurate 

financial return to pay for the interest on the debt.

Good debt is money that is borrowed to buy items which increases in value and/or which provides financial return to pay for the interests on the debt.

Examples of Good Debt VS Bad Debt:

Good Debt :
Money is borrowed at 10% annual interest to pay off a previous debt for which you are paying 20% annual interest.
Bad Debt :
Money is borrowed at 20% annual interest to pay off a previous debt which is charging you 10% annual interest.

Good Debt :
Money is borrowed at 30% annual interest to buy an apartment that will give you a rental income that is equal to 50% annual interest.
Good Debt :
Money is borrowed at 20% annual interest to pay for education/seminars that will increase your human capital value in the corporate world.

Bad Debt : Money is borrowed to buy the "latest" gadgets just to be ahead of the crowd.

From the examples provided above, the essential difference between a Good Debt and a Bad Debt is whether the money borrowed is used to accomplish the following:

I.   Generate additional income for You.
II.  Reduce your expenses.
III. Increase your value as a professional or human capital.

If the borrowed money does not accomplish any of the 3 items above, then most likely the debt incurred is bad debt.

So pay off bad debts and stay off bad debts.

Ten Most Common Money Mistakes:

Mistake #1.     Living beyond your means 
Mistake #2.     Not saving enough
Mistake #3.     Being materialistic
Mistake #4.     Giving in to Greed
Mistake #5.     Not knowing what you want
Mistake #6.     Failing to pay off debts
Mistake #7.     Being killed by advertisements
Mistake #8.     Not having a plan
Mistake #9.     Not having financial education
Mistake #10.   Procrastinating

Source: 

10-most-common-money-mistakes

Step 3. Reduce Expenses and Increase Cash Flow:


-> Increase cash flow by reducing expenses on unnecessary wants.
Know your Wants from your Needs. (Understand that having income generating Savings/Investments should be considered among your "Needs" because these instruments will support you during the time when you will have no more active income.)

-> Pay Yourself First / Budget to Save.

Create a budget which will require you to allocate a portion (Ex. 10%~20%) of your monthly income to Savings/Investments before spending your income on your monthly necessities.

Expenses = Income - Savings (Correct), 
Savings = Income - Expenses (Incorrect).

-> Stick to the Budget.

-> Payoff Bad Debt (and Stay Off Bad Debt).
Pay off bad debt which requires you to pay interests to the lender. Eliminate these unnecessary expenses by paying off the debt as soon as possible.
Stay off bad debt by avoiding borrowing money to buy unnecessary items/wants which will burden you with additional expenses to maintain or support the items/wants.

-> Do not live beyond your means.  

-> Buy Assets instead of Liabilities.
Increase cash flow by "spending" on items that will add to your income. (Buy income generating assets instead of income depleting liabilities.)
Having passive income generating assets will allow you to have an alternative source of income that is not dependent on your effort and will later provide for your needs when you cannot work anymore.

-> Start NOW!

Filipinos have low Financial IQ - 2008 Study

"Based on the Fin-Q results, only one out of 10 Filipino respondents is consciously saving up for this retirement. The rest have some savings but don't know if it will be enough. Others have no idea at all how much they need or have not started planning," said Agustin Davalos, Citibank Philippines' retail bank director.
"If they lost their jobs tomorrow, or suddenly fall ill and cannot work, their savings would last only for nine weeks (about two months) before they run out of money," Davalos said.

 Article: Filipinos have low financial IQ, says bank - Philippine Daily Inquirer

Step 2. Establish Goals:

Establish S.M.A.R.T Goals for your Dreams and Ambitions.
Refer to this link for the discussion on Goal Setting.

"A dream is just a dream. A goal is a dream with a plan and a deadline." - Harvey Mackay
"The trouble with not having a goal is that you can spend your life running up and down the field and never score." - Bill Copeland

Step 1. Invest in Financial Education: (Cont.)

Ingredients for a Successful Personal Finance Management

To be successful in managing your finances, your Cashflow (Income and Expenses) should be managed with Discipline so you can build up Savings that will utilize Time and Compound Interest so that these Savings will generate additional income for you without your Active Effort.
Therefore, it is important to have a good understanding of financial planning basics and the right information about the different financial products available so you can let your money work for you.

Step 1. Invest in Financial Education:

"Spend" time and effort to research and study on the following important financial planning basics:
 
   > Goal Setting and Budgeting
   > Difference between Active Income and Passive Income
   > Difference between Good Debt and Bad Debt
   > Time, Compound Interest and Inflation
   > Going from Saving to Investing
   > Risk / Reward Trade-off
   > Different Financial Instruments available in the market - (Insurance, Mutual Funds, Stocks, Bonds, etc.)

This "investment" in knowledge will help you make sound financial decisions in the future and will help you avoid making costly mistakes in money management decisions. This is the first and most important "investment" you need to make before you venture out into actually investing (and risking) big sums of your hard earned cash in the business or financial world.

Important Advice: Do not invest in anything which you do not understand.

Important Steps in Personal Finance Management

Step 1. Invest in Financial Education
Step 2. Establish Goals
Step 3. Develop Discipline to Reduce Expenses and Increase Cash Flow
Step 4. Eliminate Bad Debts
Step 5. Create Emergency Fund
Step 6. Get Protection or Income Replacement Strategies (Insurance)
Step 7. Invest to beat inflation (Long term asset accumulation)

Goals: What next?

G -> Goals. Set Goals:

R -> Reality Check:

O -> Options:

W -> What Next?

Now that you have evaluated and filtered out your options carefully so that only the one or two best options remain to guide you in your drive towards your goal; your Time, Efforts and Resources can now be more easily managed and optimized so that their focus is only on your best options considered to make your goal a reality.

So what's next? What actions do you need to take to drive you closer towards your goal?

Where next? Where do you need to go to move you nearer to where you want to be?

Who next? Who's help do you need to support your effort in going after your goal?

What's next?

Goals: Options, options, options...

G -> Goals. Set Goals:
R -> Reality Check:
O -> Options:
W -> ...

List your options.
Evaluate your options.
Which among your options will give you the best, realistic chance of attaining your goals within the time frame that you specified?
Do you need to adjust the time frame for your goals to match the available options?

Goals: Going Forward or Backward?

G -> Goals. Set Goals:
R -> Reality Check:
O -> ...
W -> ...

Reality Check. Determine where you are now in relation to where you want to go.  If you do not know what your current situation is or where you are at during the start of your journey or project, "going towards your goal" would be a blind, directionless, and wasteful use of your time, effort and resources.

This may be because of either of the following 3 cases you may fall into:

Case 1. Your current situation may already be where you want to be. Expending time, effort and resources going after something you already have would simply be wasteful. 
Case 2. Your current situation is already better than where you want to go. You may be going from a "good" situation to "bad" situation. In your attempt to move "forward", you may actually be driving yourself "backward".
Case 3. If you do not know your current situation relative to your goal, you will never know if you will be falling under Case 1 or Case 2 above.

So know where you are now to be able to know if you are trying to go forward or backward. Know your current "reality".

Goals should be SMART!

S -> Specific
M -> Measurable
A -> Attainable
R -> Relevant (Risky and Rewarding)
T -> Time-Bound

Specific: 

Goals should be specific and unambiguous. Describe and quantify your goals as clearly as possible.
A clear, quantifiable and unambiguous goal will be necessary when determining the success or failure of the project/task.
  
Measurable:

Goals should be measurable. The measurability of your goal is derived from and dependent on how clear and specific the goal is.
Goals which are not specific and measurable has no basis to provide guidance and direction to the efforts and activities involved in the project/task.
Any goals which are not measurable (and specific) cannot provide the baseline to determine whether the project is successful or not. 

Attainable, Relevant, & Time-Bound:

Goals should be attainable, relevant and time-bound. Goals which are not attainable and relevant (risky and rewarding) has no fundamental basis to demand
from you your engagement in the project. The project/task would simply be a waste of your Time, Effort and Resources if the goals are not attainable and relevant to begin with.
Goals should be time-bound (time-specific or time-limited). Set a time frame or end point for the goal. Without a time frame, your commitment to the goal would be half-hearted and sloppy. Without a time limit, there is no urgency to start taking action now. The time frame will also prompt you to manage and look into the availability of the required tools and resources to be able to achieve your goal.

Again, make SMART Goals!

Very IMPORTANT Goal Setting Requirement:

When you already have in mind your SMART Goals, write them down and make them visible to you each day. Having the goals written down and visible to you each day will be a powerful reminder to keep your daily efforts and tasks directed towards achieving your longer-term goals.

Goal Setting Quotes:

Below are some very helpful motivational quotes which summarizes the guidelines discussed on goal settings above: 

"If you don't have the time to write down your goals and action plans, where will you find the time to achieve your goals?" - C. Pulsifer

Our plans miscarry because they have no aim. When a man does not know what harbor he is making for, no wind is the right wind. - Seneca

A dream is just a dream. A goal is a dream with a plan and a deadline. - Harvey Mackay

The trouble with not having a goal is that you can spend your life running up and down the field and never score. - Bill Copeland

Progress has little to do with speed, but much to do with direction. - Author Unknown

In life, as in football, you won’t go far unless you know where the goalposts are. - Arnold H. Glasgow

Goal Setting

G --> Goals. Set Goals:
R --> ...
O --> ...
W --> ...

Why is Goal Setting important?

In any purposeful human undertaking, before anything else, the most important first step is the setting of Goals or Objectives for the human endeavor.
As a matter of logic and practicality, the setting of Goals actually goes beyond being important. Goal setting is a fundamental, necessary First Step
to any human endeavor. The reason for this can be best demonstrated by the question below:

How can any human undertaking or activity be important if there is no reason or objective for the activity to exist in the first place?

Below are some helpful statements which creatively emphasize this point.

> You can't hit a Target you cannot see and you cannot see a Target you do not have.
> Goals establishes the picture of what success will look like.
> Goals provides the focus where the individual tasks should all be directed.

Basically, for any purposeful human activity, we should begin with the end in mind.

Growth and Money Management...

First Steps in Money (or Income) Management

The most basic, important first steps in personal money management can be summed up by the anacronym <GROW>. Sounds like a very fitting description on how to achieve GROWth in your financial life don't you think?

Well let's look at what the letters stand for:

G --> Goals. Set Goals: Identify your (financial) goals in life.
R --> Reality or Reality Check: What is your current (financial) situation? What is your current (financial) reality?
O --> Options: What are your Options that will lead you to your Financial Goal?
W --> What next? Where next? Who next? :  Among the Options considered and evaluated in the "O" step, what is your next course of action?

Hope this brief entry will motivate you to seek further information and education to equip you in your journey to Financial Independence. I will be sharing more details in my next posts. Thank you.