Personal Financial Management Basics

LEARNING OBJECTIVES

• Identify common money mistakes usually made and ways to correct them

• Identify and avoid the obstacles to financial freedom

• Learn and apply the KsK’s* 10 Commandments for Financial Freedom

* Ksk- Kalayaan sa Kakapusan

SCOPE

• INTRODUCTION• WHY THE NEED TO UNDERSTAND

PERSONAL FINANCE• OBSTACLES TO FINANCIAL FREEDOM• STEPS TO MAKING YOUR FINANCIAL

PLAN• 10 COMMANDMENTS TO FINANCIAL

FREEDOM• THREE (3) Ds TO LIVE BY

INTRODUCTION

“To be financially literate, all you have to know and understand is what you want for yourself and how you will match your financial resources to meet your future wants. Wealth is nothing more than having the money to fund your particular needs at any given time.”

The key is:• Anticipate your future needs

Alamin ang iyong pangangailangan sa hinaharap

• Plan to have resources to meet them

Paghandaan at alamin ang mga wastong paraan upang makamit ang perang sasagot sa iyong pangangailangan

• Understand how you can adjust your needs against the reality of your available resources

Ibagay o baguhin ang iyong pangangailangan para sumang-ayon sa iyong kakayahan.

“Knowing how much you need to be wealthy is the First Step to financial freedom”

• Wealth does not necessarily mean having millions and millions of pesos. Being wealthy simply means having the financial resources to support your chosen lifestyle.

• Anyone can plan to have and achieve his or her chosen lifestyle.

WHY DO YOU NEED TO UNDERSTAND PERSONAL FINANCE

“Learn everything about your money. Plan and monitor how it works for you.”

• Avoid common financial mistakes, usually making you lose your hard earned money

- in managing a business/negosyo

- knowing the difference b/w good and bad investment decisions

• Understand the importance and how to make a financial plan

Always remember:

• Lahat ay nagkakamali sa paghawak ng pera ngunit kailangan tayong matuto sa ating mga pagkakamali

• Laging intindihin ang proseso ng inaalok na negosyo na makapagbibigay ng kita sa puhunan mo. Huwag basta-bastang magpapadala sa mga payo ng mga kaibigan or kamag-anak lalo na kung sila ay walang pagsasanay sa larangan ng “investment”

• Ang bawat isa sa atin ay kailangang may pansariling planong pinansyal

• Kung kinakailangan, humanap ng propesyonal at dalubhasang taga payo

OBSTACLES TO FINANCIAL FREEDOM

“Recognize and accept obstacles – then take action against them.”

Procrastination (pagpapabukas)

• MAŇANA HABIT

• Delaying savings decisions may also mean passing up opportunities

• Missed opportunities cost you money and ultimately cause you to lose real wealth

Inflation

• The economic condition of sustained price increases

• Money is an asset that continuously loses value (prices go up, value of money goes down)

• Therefore, it is not enough to save. When you put your savings will determine whether your earnings rate will beat inflation.

• As a rule, you should target an earnings rate, that is 7% (ave inflation rate) higher than inflation

Unreasonable demands of family and friends

• Educate your family and friends as your are educating yourself about financial matters

• Arrange to send money for education directly to the school or buy a pre-need educ plan from a reputable pre-need company

• Buy a pension plan from a reputable pre-need company to ensure that you have some retirement money

• Prepare your financial plan and STICK TO IT.

Yourself

• Negative values can hinder us from achieving financial independence

• Fear of failure, laziness, negativism, bad spending habit, lack of emotional and financial intelligence

• All it takes is DETERMINATION, DECISIVENESS, DISCIPLINE, and DESIRE to overcome these

Fear of failure

• Most people are afraid to make mistakes that they end up not doing anything

• What is impt is what your learn from that painful experience

• Failure is an event. It is not a person.

Laziness

• Habit of too much dependence on others

• Taking for granted that when we face a crisis, someone will appear to help us out

Poor spending habits

• Impulse buying

• Spending because of trends

• If you write down your monthly expenses, you will find that most of them ARE REALLY OPTIONAL

• Your SPENDING HABIT is the final determinant of your financial success

Lack of financial literacy

• People make spending decisions based on an erroneous understand of money and assets

• Financial literacy is all about common sense

- through self-study and attending basic personal finance seminars

- does not require formal college degrees

STEPS TO MAKING YOUR FINANCIAL PLAN

• STEP 1

KNOW WHERE YOU ARE

“Knowing where you are tells you how far you are going and how to get there.”

Figure out where you are financially

• Prepare your Statement of Assets and Liabilities (SAL)

• Prepare your monthly Personal Statement of Income and Expense (PIES)

• You will only know your financial standing when you complete your own SAL and PIES

• Review your SAL yearly and PIES monthly. This will allow you to keep your focus on the growth of your Net Worth every year.

STEP 2: Determine your Financial Life Phase

• START-UP PHASE

• BUILD-UP PHASE

• ASSET ALLOCATION PHASE

• RETIREMENT PHASE

STEP 3: Set your financial goal

“Put your goals into writing as you put seeds into soil.”

Rules in making your financial plan

• FIRST: Put it in writing. ISULAT!

- ito ang nagpapatunay na ang nakasulat na mga tunguhin ay mas naisasagawa kaysa sa mga planong nananatili sa isip.

• SECOND: State it in positive terms

-ex. I will save 5,000Php every payday so I can buy a house in 15 years.

Rules (cont’n)

• THIRD: Set a specific timetable for each goal.

- goals w/o target dates of achievement remain as pure wants

• FOURTH: Monitor progress

- it assures achievement, particularly when progress is being seen and felt. It injects confidence and increase the capacity of the person to ensure the eventual achievement of the goal.

KsK COMMANDMENTS TO FINANCIAL FREEDOM

• “Organize your financial plans for easy reference and quick review.”

• TIPS- organize and maintain your financial files in order- have separate files for your cash disbursements, assets, pre-need/pension/ academic/insurance plans and other important documents with clear relevance to your personal financial statements

COMMANDMENT #1 – Pay yourself first

• Savings is an expense that buys your future

Ibukod mo ang iyong iipunin na pang puhunan sa darating na panahon.

• Spend your money wisely

Isulat ang lahat ng iyong gastusin at baka matuklasan mo kung ano ang pinagkakagastahan mo na walang silbi

COMMANDMENT #2 –Define your financial target at each life stage

• Accept your life stage and set your financial goal on where you are

• Save at least 20% of gross regular monthly income• 10% or half of your initial savings should go to Cash

Reserve/Emergency Fund.• The other 10% should be used to pay for Term

insurance, Medical Insurance, Savings, pension or investment plan

• In case of emergencies, understand the situation. Do not be hasty in offering all your savings

COMMANDMENT #3 – Stop spending on things that decline in value

• Do not buy things that lose value.

• Do not buy on impulse

• Increase your assets. Assets give you money. Decrease your liabilities. Liabilities take money away from you.

• If you regularly update your SAL, you will know if your spending is increasing your Net Worth or not.

COMMANDMENTS #4 – Protect your greatest income generating asset - YOURSELF

• When there is a possibility of unbearable financial loss, you must cover yourself with insurance

• It is important to keep yourself physically healthy

• Spiritual health is important to be able to endure trials and hardship

• Always strive to improve yourself through continuing education

COMMANDMENT #5 – Grow with the economy and beat inflation

• Make sure that your investments earn more than the inflation rate

• Save early and make it easier for you to accumulate your desired Net Worth earlier than at age 65

• T-Bills and $ deposits in reputable banks are the most risk free investments

COMMANDMENT #6 – Trust the power of compound interest

• Be smart in saving. Using compound interest can make you earn four times more for the same amount of savings over the same period of time.

Alamin kung anong “investment instruments” (gaya ng T-bills, mutual funds, etc) ang nagbibigay ng pinakamaayos na kita sa bawat pagkakataon na ikaw ay handang mag-”invest”

• Do not touch your invested money until you are ready to retire

COMMANDMENT #7 – Assess risks and options: the higher the return, the higher the risk

• INHERENT RISKS IN INVESTING- Risk of nonpayment (credibility of the borrower)- Risk of liquidity (how quickly can you convert the

investment into cash)- Risk of inflation (investment must grow beyond the

inflation rate)- Risk of new taxes (ex. EVAT)- Regulatory risk (new laws)- Business risk (how stable is the business your are

investing in)- Fraud risk (integrity of the business process)- Foreign exchange risk (maapektuhan ba ang investment

w/ the devaluation or valuation of peso ex. Export business)

COMMANDMENT #7 – Assess risks and options: the higher the return, the higher the risk

• WHAT IS A LOAN- the only correct basis for granting of loans is the ability of the borrower to prove that he will use the proceeds in an activity that will produce sufficient income to repay the loan- the lender gives out loans when:*the borrower has more than enough sustainable income to pay for the loan plus interest*Talagang gusto ng nagpapautang para mapasakanya ang kolateral sa halaga ng kanyang pautang

COMMANDMENT #7 – Assess risks and options: the higher the return, the higher the risk

• WHAT IS AN INVESTMENT- Investing in a company makes you a partner in the business- walang kasiguraduhan na ipinapangako ang ang isang kumpanya kapag ikaw ay inalok na sumali sa kanilang negosyo bilang isang investor- in investing, make sure you understand:* how the income is being produced* who else is investing* how you can or how will you get your investment when you want your money back

COMMANDMENT #7 – Assess risks and options: the higher the return, the higher the risk

• LEARN TO IDENTIFY SCAMS

- suriin at intindihin ang mga puntos na maaring maging mga senyas na ang inaalok sa iyong transaksyon ay isang tinatawag na “scam” o panloloko lamang

COMMANDMENT #8 – Make your money work for you: the power of leverage

• LEVERAGE, in finance, is borrowing.

- Debt is an instrument for growth but it has to be well planned and studied. It makes your money and money that does not belong to you work for you.

• Guidelines on how to avoid debt problems:- as much as possible, pay in cash. Borrow only if your cash will earn higher than the cost of your borrowing.- be conservative. Do not assume that your current active income will continue to increase- make sure you know how much of your present income is being used to service your debts.- never borrow for wants. Borrow only for needs and only if you have to.

COMMANDMENT #8 – Make your money work for you: the power of leverage

COMMANDMENT #9 – Invest and Diversify

• Spread the risks. Remember there is no sure business

• Investing is not simply looking for opportunities and high returns. Investing must always match a specific purpose

COMMANDMENT #9 – Invest and Diversify

INVESTMENT OPPORTUNITIES RECOMMENDED ESP. FOR THOSE IN START-UP PHASE

• Government securities and other short-term investments

• Investment and business

• Franchising

COMMANDMENT #10 –Make use of the power of one: strength in numbers

• Saving together provides better benefits• Learn and share with like-minded individuals• Isiping sumali sa mga kooperatiba or sa mga

ibang uri ng samahan (ex. Savings & loan assn”). Ito ay malamang na makakatulong sa iyo sa pagpapalawak ng iyong kakayahan at sa pagbigay ng marami pang oportunidad sa pagpapalago ng iyong puhunan.

COMMANDMENT #10 –Make use of the power of one: strength in numbers

• Most would-be entrepreneurs failed because:- they lacked the business management skills- they may have enough in the beginning but miscalculated the working capital requirements and were thus unable to raise the correct financing when they needed it.- they seriously mismanaged the operations of the business- they did not see the value of competent staff or consulting advisors in the areas of marketing, production, technology, legal aspects, personnel and most imptly, leadership.

COMMANDMENT #10 –Make use of the power of one: strength in numbers

• Pooling your resources can provide you:- more high yield investment and business opportunities- greater probability for “no capital loss” for each members contribution- greater ability to provide each member w/ the mechanism to convert his equity to cash in case of any urgent need- greater chances to earn higher and more consistent income- better access to the best professional management- assured financing for venture devt and implementation- greater assurance for sustained success

The THREE (3) Ds

The KEYS to your success in reaching financial independence

• DETERMINATION – the will and the persistence to do what you want to do

• DISCIPLINE – practice of regularly following certain methods and procedures to ensure success in your objective

• DECISIVENESS – willingness and the virtue to make decisions quickly, firmly and clearly

DISCIPLINE

“Sa ikauulad ng bayan, disiplina ang kailangan.”• Learning to say NO is part of discipline• If you are in business, it is wise that you keep

certain aspects of it confidential to protect your own business. You must use common sense in this respect.

• If you are regularly sending money to your family and relatives, you must prepare a realistic budget for their needs.

IMPORTANCE OF SHARING

• Sharing always bring back more blessings• We must always share part of our wealth,

whether it be in terms of money, talent or “genius”

“We make a living by what we get; we make a life by what we give.”

- Duane Hulse

Reference: “Pera Mo Palaguin Mo: Wealth Within your Reach” by Francisco B Colayco