money minute

7/29/2019 Money Minute

1/49

10 Principles for Managing Your Money

Managing your money can be quite daunting. But financial planning really boils downto a few key ideas, some of which are so familiar they sound so cliche. Yet knowingis not the same as doing. Most personal finance experts and financial planners agreeon these principles. They just differ on their strategies and financial vehicles. Hereare "10 Principles for Managing your Money":

Principle #1. You won't get anywhere if you don't know where you're going. Amajor mistake people make when it comes to their finances is they don't set theirgoals. Don't invest just for the sake of investing. Or buy insurance just to get thepesky insurance agent off your back. Link everything to what you want in life.

Principle #2. It's not how much you earn, it's how much you get to keep. It'scommon for us to say: "If only I earn more money" or "If only I was born rich". Butwealth is not the same as income. You can earn a lot but spend more than you earn.Or you can earn a modest income but save and invest aggressively.

Principle #3. A little goes a long, long way. Oh, you hardly spend for anything, doyou? So where did your money go? Small expenses here and there pile up. But italso works the other way around. Even if you just invest a small amount of money,but if you do it regularly and early enough, you can make millions in due time.

Principle #4. Live within your means, then increase your means. Spending wisely tokeep your expenses low is a good thing, but at a certain point, it can only do so

much. You also have to find ways to increase your income if you want to improveyour bottom line.

Principle #5. It may not happen, but it can. You don't blink when you have to payfor car insurance. Yet, you put off buying insurance for your life and health. Doesn'tcompute.

Principle #6. You first, then others. Who do you work for? It seems many of uswork for others, and I don't mean our family. We pay the government, banks, creditcard companies, utility companies, and others first before we set aside anything forsavings and investments for our own future. It's time to start paying yourself first.

Principle #7. There are two things certain in life -- death and taxes. We put offpreparing for death because it seems so distant and, right now, unlikely. And we justaccept paying taxes because, in most cases, we have no choice. Denial andacceptance. But we should, and can, do something about both.

Principle #8. Match the right instrument with the right requirement. Before youinvest, buy insurance, pay for a preneed plan, or get into any financial product,make it clear to yourself what exactly you want out of it. Then choose the rightproduct based on what your need is.


2/49

Principle #9. Make a life, not a living. Managing and earning your money just toaccumulate more money for the sake of it is a tragic way to live your life. Financialfreedom is about enjoying the good things in life, such as enjoying your family,learning new things, and pursuing your life mission.

Principle #10. The more you give, the more you get. Many wealthy and successfulpeople believe not just in giving back, but in getting back what they give, and thensome.

In the succeeding weeks, I'll discuss each principle at length and show you step bystep how to do your own financial plan.

Principle #1: You Won't Get Anywhere If YouDon't Know Where You're Going

Ever get lost while driving? Remember how it feels like going round and round incircles? What about the time you were on vacation abroad and you spent the wholemorning not knowing where to go or what to do? Frustrating, right?

It's a lot like that when we don't have plans. And all plans start with goals. If youtried (operative word is "tried") to go on a diet without setting specific weight orwaistline goals, most likely you would have lost ten pounds in a week and gainedeverything back (and then some) the next. Trust me, I should know.

It's the same with our personal finances. Oftentimes, it feels like we're not gettinganywhere. That's because we don't know where we're going in the first place.

My mistake in the past was not setting goals for my financial life. So I started

making investments in stocks and mutual funds without any specific goal than tosave and invest. Then came sudden events that require a lump of cash that I didn'thave (the market was down that time). If I had set clear goals and planned well, Iwould have avoided those stressful moments when I had to scrounge for funds.

So the first step in financial planning is determining where we want to go. In otherwords: goal setting.

Set goals. Goals give us direction. They're also an excellent way of getting usmotivated and disciplined. So the next time you pass off that Frapuccino to save upfor something, you won't feel too bad.

Write them down. There's power in writing down your goals. It's one thing to daydream about what you want, it's another to cast it, well, on paper (or in Excel if youlike).

Tell people. There's even greater power in telling loved ones about your goals. Ittakes stronger commitment when others know about what you want to achieve. Andit somehow makes you more accountable for your words.

Now, how do you go about this exactly? Take a piece of paper and follow this


3/49

exercise. Better yet, open Excel or Word.

Ready? Here you go: I want you to day dream. Go ahead. Close your eyes and thinkabout your dream life. Imagine your ideal life in the future. What do you see? Bevery specific. What kind of house do you have? What kind of cars? How many kids doyou have? What is your spouse doing? What are you wearing? What do you see

inside the house? Dream all you want. It's free.

Sorry to interrupt your reverie. It's time to list down your goals. How do you start?Well, most of us have goals that fall under five categories. Ask yourself:

1. What do I want to be? This is about how you see yourself as a person: a father,spouse, son, citizen, etc. It's about your values and how you would want to live yourlife based on them. What kind of person do you want to be?

2. What do I want to do? This is about your career or vocation. What kind of jobdo you want? Or what kind of business or work do you want to pursue?

3. What do I want to have? This refers to the material things you want to acquire

-- house, cars, gadgets, clothes, La-Z Boy chair.

4. Where do I want to go? This is all about your dream destinations. Where doyou want to travel?

5. What do you want to give? This is about giving back -- to your church, acharity, people around you, and uhm, me (pushing my luck).

Right now, just jot them down and have fun doing so. If you have a significant other,do this exercise with him or her. It's always nice to dream. Next week, we'll continuethis exercise on goal setting. But it will be more detailed and organized.

Make SMART Goals

Last time, I wrote about the need to set goals as the starting point in devising yourfinancial plan. So did you do your homework?

Was it hard to do? I hope not. In any case, in this issue, I want to share with youhow to set the right goals, or to be precise, set goals the right way.

Remember I listed down the five common goals people set? Well, did you realize thatmost, if not all, require money? Obviously, you need money to acquire stuff, travel,and give away.

Even goals for your career or work may require money. If you're going into business,certainly that requires capital or even just regular expenses (in case your businessdoesn't really require capital to start). Even if you're working for somebody else,sometimes it also requires money to improve your knowledge and skills.

Sure, you don't need money to become your ideal self. But sometimes, you mayhave to spend for books and seminars on self-improvement.


4/49

So there. Almost all your goals require money. Therefore, it is imperative that youlink your financial strategies to your goals. Again: Match your money strategywith your life goals.

Now, go back to your list of goals. Anything wrong with them? Are those all yourgoals in life? If it's hard to think of everything you need and want in life, try this

approach:

Option 1: Sketch a timelineDraw a long line on a piece of paper. The beginning of the line represents your agenow. The ending is an arbitrary age in the future, say 65. Cross the line with short,vertical lines, with intervals of 1, 2, 3, 5 years, it's up to you.

Here's your life in a timeline. Jot down age intervals. Every 5 years for me is goodenough. Now, think about the major milestones you expect and want in your life.Consider each of the five types of goals here. Maybe 5 years from now, you wantyour own house. Next year, you're planning to have a baby. Two years from now,you want to go to Europe. By age 40, you want to put up a business. After 12 years,your son will enter college. You want to retire by age 55. By age 60, you plan to put

up your own foundation. And so on.

Now, you have a big picture of your life goals, right? Not only that, the timeline givesyou an idea which goals to prioritize.

If you don't want to draw a timeline, try this other approach:

Option 2: Make a classified listHere, on a piece of paper (or on Excel or Word) just make three headings: short-term, medium-term, and long-term. Short is less than a year. Medium is one tothree years. Long term is anything beyond three. Then, under each heading, listdown your goals. Whichever approach you take, you'll get a more complete list and a

better sense of priority.

Note that the further in time you go, the harder it is to list goals. That's okay. Thelist is not meant to be exhaustive and final. The fun thing about it is you can alwayschange, remove, and add goals as you go along.

Finally, I want you to go back to each goal you wrote and refine each. How? MakeSMART goals. You've probably heard about this before. To refresh your memory,SMART goals mean:

Specific. A goal like "to travel abroad" or "to retire comfortably" is not useful. Wheredo you want to travel? How much would you need? When do you want to retire?What do you mean by comfortable? Be very specific, detailed, and well defined.

Measurable. As I mentioned, most of your goals have a monetary value. You willknow you can achieve your life goals if you attach money goals (which can bemeasured) to them. That way, you can track how near or far you are in achievingthem. So instead of writing "to travel to Europe", find out how much it would cost togo on a European tour" and write "to travel to Europe on a 15-day package thatcosts $2,000". Ask "how much?" or "how many?"

Attainable. Some say "A" stands for "Agreed Upon" or "Acceptable". If you're


5/49

sharing your goals with your partner, then it's important that you both agree tothem. But it also stands for "Attainable", meaning you know your goals can be done.

Realistic. Your goals may be attainable but if you've set plans that require morethan you are able to do, then they're not realistic. For instance, becoming amillionaire is attainable, but if you're working from scratch, becoming one next week

is not realistic.

Time-specific. Set a specific date for each of your goals. Don't use words like "inthe future", "some day", "when I'm old", "after I retire", "soon" and the like. Set ayear, a month, or even a day. Don't write "buy a Honda Accord next year". Write"buy a brand new P1.2 million Honda Accord 2.0 VTi-LT on September 2005".

So, there you go. When you're done with this exercise, I hope it has helped you havea clearer picture of what you want in life. It is just the first step in taking control ofyour finances, but it will be the glue that will keep everything together.

Next week, I'll talk about Principle #2: "It's not how much you earn, it's how muchyou get to keep."

Principle #2: It's Not How Much You Earn, It'sHow Much You Get to Keep

If you went through the exercise of setting goals the last two issues, you would haveby now set SMART goals which you've categorized by what you want to be, what youwant to do, what you want to have, where you want to go, and what you want togive. And you would have prioritized your goals by drawing a timeline or listing themby short-, medium-, and long-term.

Now that you know where you want to go, you need to have a clear understanding ofwhere you are.

Bear with me. The next few exercises will take a bit of work. And I have to warn you:it's all about the hard, bitter truth.

Whether you earn 20 thousand, 50 thousand, or 100 thousand pesos a month, youwill realize it is never enough (or perhaps, you already know this all along). If you'reearning 20 thousand, you might think "If only I'm earning 50 thousand.". If you'reearning 50 thousand, you might think "If only I'm earning 100 thousand." (If youhave more than you need now and in the future, then good for you!)

In the end, it's not really how much you earn that matters, it's how much you get tokeep. That's Principle #2.

Remember the book "The Millionaire Next Door"? It's not the people who earnmillions but also spend millions that are really rich. It's those who may be earningonly thousands but accumulate money that eventually turn into millions. In otherwords, it's not income that matters, it's net worth.


6/49

Of course, the other idea espoused by another best-selling book "Rich Dad, PoorDad" is that it's cash flow that really matters.

Well, whatever view you believe in, the next step after goal setting is to do yourpersonal financial statements.

Did I hear a collective gasp? Or a collective groan?

Yes, unfortunately, this is something you have to do. Because the only way to findout what your net worth and your cash flow are right now is to compute them.

It's crucial that you go through the exercises that will follow. I've gone through thembefore so I know how much I am worth financially and I know how much is going inand going out.

This will be the foundation of your financial plan and it will also be the primary tool tomeasure your progress.

Are you ready? Not yet? Good! Accept your fate this week and we'll do the dirty work

next issue.

How Much Are You Worth?

When people refer to, say, Microsoft as a "$30 billion company", what exactly dothey mean? Some would say it's in terms of total revenues, others total assets ormarket value.

But when they refer to Bill Gates as being "worth $100 billion", you know what it

means -- net worth, i.e. assets minus liabilities.

When it comes to the definition of wealth for individuals, most agree it's net worth.Not their annual income. Nor their total assets. There's another definition I learnedfrom a recent seminar that's even more to the point. But I'll share that next issue(yes, I am tricky!).

You now know where you want to go. This time, you need to know where you are.And the starting point is knowing how much you are worth (financially, thatis...remember, your self-worth has nothing to do with your net worth).

For that, you need to come up with your personal balance sheet. I'm sure you knowwhat it is. Some call it a statement of assets and liabilities. Elected government

officials (mis) declare it.

So that's what you have to do right now: declare your assets (what you own) andliabilities (what you owe), and the difference is your net worth (what's left over).

Use a spreadsheet for this. Or just use pen and paper (a notebook that you can keepconfidential). But since I'm really nice, I made a worksheet just for you (see Toolboxat the top left).


7/49

Assets

List all your "liquid" and "appreciating" assets. That means cash (or cash equivalent),investments, real estate, and business equity. Beside each, enter the amount.

For cash (cash on hand, savings deposits, checking accounts) and cash equivalentssuch as CDs (nope, not your Celine Dion Greatest Hits CD...I mean certificates of

deposit) and other money market accounts (like time deposits and T-bills), checkwith your bank. If you have foreign currency deposits, get the equivalent peso value.If you own a whole life insurance policy or an endowment plan, find out what theaccumulated cash value is.

For investments and real estate, find out the current market value. Log on theInternet or make the necessary calls for stock prices and net asset values (NAV).Your paper's business and classifieds section can also help (for prices of stocks, NAVof mutual funds, and average selling price of similar houses in your area or other realestate property you own).

You may want to include preneed plans you have, like an educational plan. They'renot appreciating assets, rather they are prepaid expenses, which in business

accounting counts as an asset until used. They are, after all, funds you saved forfuture use. If you own a business, include what your business is worth (or computeyour equivalent share in the business).

Now, notice I didn't include most personal property like cars, furniture, electronics,clothing, and your Celion Dion CD collection. Why? These are "depreciating" assets,i.e. they go down in value. Sure, you can still sell them, but they represent anexpense for you, not assets that go up in value (unless your Celion Dion CDs becomerare collectibles 50 years from now).

A few personal finance experts would even exclude from your net worth calculationsome appreciating items like jewelry and art work, and even your house. Mainly

because they don't provide liquidity for you to live off them. So if you want to beconservative with your calculations, exclude them. But I recommend at leastincluding the value of your house.

Liabilities

Next, list all your debt. This includes both secured (loans with collateral) andunsecured debt.

Secured debt includes the mortgage on your house (and other real estateinvestments), your home equity loan, and auto loans.

Unsecured debt includes your credit card balances, personal loans, salary loans, andSSS and PAGIBIG loans.

Net worth

Finally, deduct your total liabilities from your total assets and you have your networth. Tada!

Do you feel rich? Maybe you just found out you're a millionaire, even if it's just onpaper (especially if you listed your house as an asset). Congratulations! Or perhapsyou discovered you're not worth much financially, even if you're a high incomeearner. Well, we'll get to that next week.


8/49

At least now, you know where you are in your financial life. Compare where you are(personal balance sheet) with where you want to go (financial goals).

Do you want to own a house in 10 years? An educational fund for your toddler?Money to travel to Europe by yearend? Retire at 50? A Range Rover next year? A

home theater system this year?

Check your assets. Can your assets finance these goals? No? Not enoughappreciating assets? Maybe your assets are not liquid enough. Maybe now realizeyou spent too much on depreciating assets. Or your debt is too high that it eats uppart of your investments.

Most likely, you'll see a gap between what you have right now and what you want tohave. Maybe a huge gap. Depressed? Go on, wallow in self-pity. When you recover(and I hope it should be right about now), remember you want to gain control overyour financial life. And this is what's financial planning is all about.

Next issue, we'll do your personal income statement, or to be precise, your personal

cash flow statement. This will be another eye-opener. Reality bites? You betcha.

Dude, Where's My Cash?

How often does this happen? You withdrew cash from the ATM this morning. Thisafternoon, it's gone. Or you received your bonus (lucky you) yesterday. By theweekend, it's gone.

Time flies, and so does money. And you'd think, there's never enough to go around.

Last issue, you (hopefully) calculated your net worth. Now, you will come up withyour cash flow statement. In short, how much cash comes in and how much cashgoes out.

Before you draw up your strategy in achieving your financial goals, you need to knowexactly where you stand in terms of cash flow. Net worth is important, but for some,cash flow is king.

Remember I wrote that net worth is the measure of financial wealth? Well, for some,it's not net worth, but cash flow. How rich are you really? You can look at it this way:If you stop working right now, how long will you able to sustain your lifestyle?

If your assets can support you for twenty years, then that's how rich you are. If youcan live off your assets for five years, that's how rich you are. If it will take onlythree months before you run out of cash, then that's how rich you are. If you livepaycheck to paycheck...you get my drift.

Some people are living on interest, or what people call "LOI". People who haveinherited tons of money or have worked their way to wealth. But I'm getting aheadof myself. Before we all get depressed, we need to do a reality check and knowexactly how we're doing in the cash flow department. Because this will determine


9/49

what actions to take.

Again, I'm uploading a Personal Cash Flow Statement worksheet for your use. Youcan call it a personal income statement or spending record, whatever. The wholeidea is, you need to know how much income goes in and how much expenses go out.

INCOMEOn the Income side, list down all your sources of regular income. If you're employed,that includes your salary, allowance, commission, etc. That's "earned income".

If you're self-employed or own a business, put in the income you generate from thebusiness that you use for personal expenses. That's "business income".

If you have investments or paper assets that generate dividends, interest, and thelike, plug it in. That's "portfolio income".

If you have rental property or have equity in a limited partnership or business butnot actively engaged in it, put it in. That's "passive income."

You can either plug in gross amounts then subtract taxes and other deductions to getthe net amounts or you can just input net figures for simplicity.

If your income does not come regularly, such as commissions, you can add up whatyou earned last year and divide it by twelve months to get the average. It's temptingto include bonuses, but since you don't receive them on a monthly basis, take theconservative path and exclude them.

EXPENSES

Now, on the expenses side. Okay, this will be bloody. You need to know how muchyou spend every month. These are your regular monthly expenses, which includeshousehold expenses like utilities, rent, or your mortgage. Then you have groceries,

food, entertainment, and the like.

The best way to find out how much you spend and what you spend on is to trackyour expenses for a week, at least for this exercise. Then, adjust the amounts bytracking them for a month, and another month, and another, until you get a goodidea of your average expenses per month.

Of course, you need to categorize these expenses. It's up to you what categories touse, but I suggest you keep the list short. Break down each category into moredetailed accounts, such as Dining Out and Movies under Entertainment. Just makesure they're related.

That's not all. You just listed your "regular" expenses. Yes, you spend a lot more

than you think. It's really the "irregular" expenses that can prove burdensome.These are expenses that you pay quarterly, every six months, or once a year, suchas insurance, clothing (unless, of course, you make it a point to buy clothes everymonth), and annual fees. And those that you did not plan for, like emergency carrepairs or dental work (ouch!).

You need to estimate how much you spend every year on these irregular expenses.And be realistic. Don't exclude clothing expenses just because the last piece ofclothing you bought were those leather red pants three years ago.


10/49

For each of these irregular expenses, estimate how much you spend every year.Then divide by 12 months. That's how much you effectively spend every month.

NET INCOME

Now, subtract your total expenses from your total income and you get your net

income. That is what's available for savings and investments. Well and good. Mostlikely though, you'll get a negative amount. That means, my friend, if you're abusiness entity, you're in the red.

Don't fret. At least now, you know where your cash is. It's in the pockets of yourcredit card company, your bank, your utility company, your cell phone company,your landlord, your friendly neighborhood mall, your local Starbucks, etc.

Next week, I'll show you how to make a spending plan that will free up cash tofinance your goals.

The Money Diet

Have you been on a diet? I have. A million times. And it never works. Well, it worksfor a while, then I go back to my old weight and then some.

Diets are a lot like budgets. It's hard to follow a budget. Why? Budgets, like diets, atleast the way we do them, often restrict us. And usually, whatever's prohibitive, wedo. We like eating fatty food and junk food in the same way we like eating out andwatching movies. Or buying clothes. Or drinking a capuccino everyday. So once wedeprive ourselves, we end up frustrated and then give up.

That's why I'd rather call a budget a "spending plan". You can say "a rose by anyother name...", but you have to start thinking of a spending plan as a "plan forspending". Duh, right?

Think of it this way. We think of a budget as a restriction on what we cannot spend.But that never works. People find it hard to process negative things. But oncerestated in a positive way, then it can work. So if you start thinking of what you canspend on, not what you can't spend on, then there's a greater chance of succeeding.

It's the same with diets. Diets that focus on what you can eat and what you can doto lose weight tend to work better than those that tell you what you cannot eat.

For instance, we began an allowance system. My wife and I allocated a certain

amount each week for our lunches and other daily expenses. That's all we have inour wallets. Instead of withdrawing anytime from the ATM machine, we live with ourallowance. And our focus becomes: With this much, I can eat this and that...

The other thing is that a spending plan must be realistic. Too often, budgets are soout of touch with reality that they're doomed to fail. No budget for clothes? Of coursenot. No budget for coffee? Impossible.

Of course, you need to cut back, but don't cut back entirely unless absolutely


11/49

necessary. One trick is to cut a little across all expenses. A little of this, a little ofthat. Work on a plan you can live with. And don't wallow in self-loathing if you goover it. Just make certain adjustments, say skip the movie this week and rent aDVD, until everything balances out.

Replace bad habits with good habits, just like when dieting. It's a bit hard at first,

until you get used to it. Instead of buying a book, maybe you can spend some timebrowsing at the bookstore. Instead of buying a new magazine, buy cheaper backissues. Or check the magazine's website. You can be as creative as you want --there's much to enjoy in life without overspending. Once you get into the groove ofthings, you can go on auto-pilot without groaning or whining.

Always go back to your financial goals, if you need a boost in motivation. Andremember, your spending plan is not cast in stone. Once your income increases, youcan make adjustments. When you pay off your debt, then you can allocate more tosavings.

Putting It All Together

Now what?

Okay, we've gone through the basics of financial planning:

- setting financial goals- calculating your net worth- determining your cash flow- preparing your spending plan

What's next? Well, by this time, you probably have realized you have a long way togo to meet all your financial goals. That's why we went through the exercise ofprioritizing them, because for most of us, the way to achieve them is accomplishthem one goal at a time.

So, start with the most immediate goal. Knowing how much cash goes in and out,find out how how you can fund that goal. Good for you if you have enough. Betteryet if you can finance more than one goal at the same time.

However, if you're running a tight ship at the moment, then you have to look atseveral choices. Ask yourself how will you be able to achieve each of your financialgoals.

Just like a business, there are various ways you should consider:

1. increase your income find a higher-paying job- get yourself promoted- moonlight or freelance- get into networking- buy a franchise- put up a small business


12/49

2. decrease your expenses live within your means- cut unnecessary expenses- be a smarter buyer

3. increase your assets- increase your portfolio income by buying paper assets

- invest in real estate for rental income

4. decrease your liabilities pay off your credit card debt- accelerate your loan payments- refinance your mortgage- extend the term of your loan

As you can see, there are so many things you can do, and many of them at the sametime. Of course, some are easier said than done. My suggestion: start with what'seasier to do, such as cutting unnecessary expenses or paying off your credit cards,thus freeing up cash for financing your goals.

In fact, even before you think about investing, look at what you can cut. In the same

way companies do cost-cutting first before thinking of investing, expanding, oradding their sources of revenues, do your own cost-cutting measures first.

You'll be amazed how much cash is actually available just by taking small steps.Because a little goes a long, long way. And that's our topic for next week -- Principle#3: A little goes a long, long way.

Principle #3: A Little Goes A Long, Long Way

Do you think you can't save another centavo anymore? We often feel we've doneeverything to cut costs. That's why we always think: If only I earn more, I can savemoney.

Of course, we want to earn more. But don't you notice the more you earn, the moreyou spend? But even at our current income, we can find ways to save money.

Remember the previous exercises on coming up with your Personal Cash FlowStatement and Spending Plan? Certainly you've seen where your money goes. Butlook deeper.

If you track your expenses on a daily basis for a week or so, go through eachexpense item. Perhaps you ignore the "little" things. You know, coffee, cigarettes,

dessert, movies, parking. Maybe you've lumped these under a single category suchas "Daily Expenses". After all, you don't want to account for every peso that comesout of your pocket.

But the little things count a lot. A penny saved is a penny earned. And as you willlearn, it will earn a lot, lot more.

David Bach, author of "The Automatic Millionaire", calls it "The Latte Factor".


13/49

If you drink latte from a fancy cafe every work day, calculate how much the"opportunity cost" is if you had invested the money in an investment such as amutual fund.

How much does a cup of latte cost here? Say 70 pesos. That's P350 a week orP1,400 a month. You can invest as little as P1,000 in a bond fund (after the initial

investment of P10,000). So if you put in P1,400 in a bond fund that returns anaverage of just 8% a year, and you do this diligently for 5 years (or a totalinvestment of P84,000), you'll end up with P100,810.25 by the end of the 5th year.On year 10, it's P148,123.33. On year 15, it's P217,641.76. On year 20, it'sP319,787.15.

That's almost P320,000 just for saving P1,400 a month! What if you set aside moreeach month? What if the fund or some other instrument averages 9% or 10%?

If you save P5,000 a month for 5 years, by the 20th year, you'll have more than amillion pesos.

That's the power of compounding. When the gains from your investment (interest

income, dividends, capital gains) revolve such that they too earn further gains, yourmoney compounds. For example, for an investment that returns 10% on average peryear, your P100,000 earns P10,000. That P10,000 then also earns 10%, or P1,000 inthe second year, such that you now have P121,000 (i.e. P110,000 plus 10%.) And soon.

So the earlier you invest, the more you put aside, the further you hold on to theinvestment, and the more regular and often you save, the more powerfulcompounding works.

That puts your caffeine fix into perspective, right? I used to hang out at Starbucks orFigaro or some other cafe and drink brewed coffee, or a capuccino, with friends or by

myself practically every afternoon. Imagine how much I could have earned if I setaside the cash for investments.

I still drink coffee, but I stopped thinking I should get my fix at Starbucks orSeattle's Best. Like today, I had coffee at Mister Donut for a third of what it wouldcost me at Starbucks. And most days, I don't drink at all. Sometimes, it's all in themind. Do I flog myself if I ocassionally find myself ordering a Frapuccino? No, since ithas stopped becoming an expensive and unnecessary habit.

Again, this is not about coffee-bashing. I love coffee. If a daily latte won't makemuch of a dent in my savings, then who really cares? But right now, it does.

And there are a myriad of things you can save on. Go through your list of expenses.

Paying too much for electricity? Cell phone bills? Eating out? Shoes? CDs? Movies?You can go on and on.

All I'm saying is you can cut down a little across all these items without totally givingup on them or depriving yourself on some small luxuries. Gee, I'm not giving upgoing to the spa with my wife. But I don't have to do it every month. I mean,whatever.

Just cut a little across a lot. Because, as you can see, a little goes a long, long way.


14/49

Principle #4: Live Within Your Means, ThenIncrease Your Means

Many personal finance experts emphasize managing debt and controlling costs, alongwith investing your savings, as the primary approach to increasing wealth.

And certainly the old adage "Live within your means" is a very fundamental principlein personal finance. As I pointed out before, it's not how much you earn, it's howmuch you get to keep.

However, I also subscribe to the idea that we ought to find ways all the time toincrease our income, not just watch our expenses.

That is, increase your means.

To me, it includes getting a raise or increasing sales (if you own a business or workon a commission). But it's more than increasing your income from its current source.I believe in finding alternative sources of income.

Robert Allen calls it "multiple sources of income". Whatever you think of the guy, theconcept has its merits. It's the same thing for companies. Those that diversify theirsources of income are better able to sail through rough times during the usualbusiness boom-and-bust cycle.

They diversify by selling various products and services, by selling to different marketsegments, and by acquiring other companies.

You have to start thinking the same way. If you're dependent on a single source ofincome, say, a salary, what would happen if you get fired? Or get a cut? It happensall the time.

If you own a restaurant, and some major crisis forces you to close down yourrestaurant, or stiff competition suddenly lowers your sales significantly, and yourincome comes solely from it, how would you cope?

Do I suggest getting another job on the side? Another business? Well, it depends onyour situation.

If you're a full-time employee, consider getting a franchise that can later run on its

own with minimal supervision. Or get into network marketing, or even, a part-timesales job, that you can do on weekends or evenings.

If you're a freelancer or entrepreneur, consider another business. Or, simply expandyour products or services. If you're doing PR, consider handling events. If you'reselling pastries, maybe start selling coffee. Whatever.

Or if you're generating substantial income, you can diversify by investing in income-producing assets. Put your money in stocks, bonds, mutual funds, rental properties,


15/49

etc.

If possible, diversify without over-extending yourself or going into totallyunchartered territory. That is, diversify without losing your focus.

The point is, just like with investments, you don't want to put all your income eggs in

one basket. Ideally, you receive regular, predictable income, plus commissions, fees,or royalties as well as interest and capital gains. In other words, multiple streams ofincome.

So think about your own diversification strategy.

Principle #5: It May Not Happen, But It Can

When you're young, you don't think about old age or death. When you're healthy,you don't think about getting sick. When you're living a normal, quiet life, you don't

think about getting into an accident. When you have a nice, cushy job, you don'tthink about financial catastrophes.

You'd think "It couldn't happen to me." But the thing is, it can. Of course, theprobabilty of you dying when you're healthy and twenty five is small. The likelihoodof you being hospitalized when you're living a healthy, active lifestyle is low.

But should you wait till you're sick, or disabled, or laid off, or dying? You can say thesame thing about your properties like your house and cars.

For forget about probability first. I want you to play a game called "What if?" It'ssimple. Just ask yourself:

- What if I get fired from my job?- What if my business goes belly up?- What if my house burns down to the ground?- What if get into a car accident?- What if I get disabled?- What if I get cancer?- What if I become diabetic?- What if I die?

Does all these sound morbid? The thing is, we avoid thinking about these thingsbecause a.) they're unlikely to happen, b.) you have too many problems to eventhink about these things, c.) you just don't want to think about it.

But instead of burying your head in the sand, be honest to yourself and ask thesequestions. You don't have to have the "right" answers. Just be honest.

Say, if you lose your job, maybe your spouse's income can sustain your expenses forsix months. Or maybe, you have enough cash stashed away for three months.

If you get disabled, say you have rich parents who can and are willing to support youfor life.


16/49

Or you discover you have a heart problem. Your company has a group health careplan that gives you coverage.

If you die, well, maybe there's not much financial loss since you're single and juststarted working.

On the other hand, say, your car gets carnapped. You only have the basic mandatoryinsurance. What do you do then?

Or you get sued because a customer in your restaurant got food poisoning. What doyou do?

Maybe you travel a lot, but you're not insured at all. And your wife is a stay-at-homemom. What will happen to them if a plane crash happens?

So, as you ask these "what if" questions, you get a clearer picture of the possibleresponses to what could happen.

There are two other questions that you need to answer. And I'll discuss them in thenext issue.

You Don't Need Insurance...

If you're not earning income. Remember that you're insuring against loss. For lifeinsurance, it's loss of income upon death. For disability and accident insurance, it'sloss of income upon being disabled due to an accident. Insurance is supposed toreplace lost income. So if you're not earning income, you don't need to be insured,

because there's nothing to replace.

It doesn't make much sense to insure children because they don't earn income. Noamount of money can replace the loss of a child, or any of your loved ones for thatmatter. But if can afford and willing to pay for insurance for your kids, knowing fullwell it's not really necessary, it's your choice.

If you're retired and have accumulated enough wealth, such that, when you die,there's enough left to support your surviving spouse, then you don't need lifeinsurance. (However, some advise using proceeds from life insurance, which are tax-free, to pay for estate taxes.) What about your children and grandchildren? Well,your kids are earning income, aren't they? Life insurance is meant to protect lovedones who are dependent on your income, not to provide for them for life.

However, if you're a stay-at-home mom (or dad for that matter), even if you're notearning any income, you still have economic value. Because the services you do athome (cooking, cleaning, babysitting, etc.) represent actual expenses if done bysomebody else. So you need to be insured.

If you have no dependents. Even if you have income, but no one's depending onyour income, then life insurance is not necessary. If you're single or living with yourparents, and you're not supporting anyone, you don't have to be insured.


17/49

If you're newly married, and you're both working, perhaps you don't need li feinsurance yet, as the surviving spouse can support him/herself. But if it's going to bea financial strain, then do consider insurance.

Remember, life insurance is designed to replace lost income that supports people

who depend on you. It's not a windfall on your unfortunate death.

However, in the case of accident and disability insurance, even if you don't havedependents, you might still need to be insured in case you're unable to work becauseof an accident or disabiity. In this case, you are supporting yourself. Who's going topay for your expenses if you can't work? Of course, if your family can and is willingto support you, then you don't have to be insured. On the other hand, do you wantto be a burden to your family?

If there's no catastrophic loss. Please keep in mind you are insuring not just anyloss, only catastrophic loss. This applies particularly on non-life insurance.

Your P30,000 digital camera may be valuable to you, but will it be a financial disaster

if you lost it? Well, maybe you'll kick yourself several times, but it's not going to be acatastrophe.

But if your car gets stolen or crashed, that's a catastrophe. If your house or officeburns to the ground, that's a catastrophe. If you get sued for millions, that's acatastrophe. If you get bedridden with a dreaded disease, that's a catastrophe.

That's when you need insurance on your car, house, business, and against personalliability.

So, ask yourself "Do you really need to be insured?".

You Do Need Insurance...

To protect your income. Whether or not you have dependents, you do need to eat,don't you? Or at least have the dignity not to fend off your parents' money (okay,maybe if you're in your early twenties, not earning much, and living with dad andmom, you're excused).

In this case, what you need is disability and accident insurance. If you meet anaccident and get disabled, this kind of insurance will compensate for physical loss (incase of disablement, like your feet or eyes....ouch) and, as an option,

reimbursement for medical expenses.

To protect your assets. That means major property like your house, office, andcars. You'll need fire insurance, homeowner's insurance, and car insurance. Somepolicies cover valuables inside your house. But you don't want to insure items thatwon't constitute a catastrophe if you lose them.

To protect your dependents. If you have people dependent on your income, likeyour spouse, children, and even business partners, you need life insurance.


18/49

To protect your net worth. It's possible you can get sued for practising yourprofession or operating your business. You don't want to end up penniless, that'swhy consider personal liability insurance (or comprehensive general liabilityinsurance).

To comply with requirements. Sometimes you have no choice. Like when you geta housing loan, your bank will require you to get credit life insurance. So in case youdie before you pay off your loan, they still get paid. How nice of them.

So, yes, you do need insurance. The important thing is to know why and when youneed them. That's why you have to ask yourself "Do I need insurance?"

The next question is "How much do I need?" Now, we'll leave that one some otherday. For next issue, we'll tackle Principle #6.

Principle #6: You First, Then Others

I know it goes against our culture. When it comes to family, our children come first.Sometimes, our parents come first. Even our siblings come first.

It's very Asian for us to work endlessly to give our children a good education and abetter life, sparing them from hardships and possibly not making them work anotherday of their lives.

We were also brought up to think that our parents become our responsibility whenthey become old and unable to work. After all, they sacrificed so much to get us towhere we are now.

And in many cases, we also feel responsible for the welfare of our younger siblings,particularly if we have become relatively more successful.

There is, of course, nothing wrong with taking care of our loved ones.

But there are inherent problems with this kind of thinking. If you read "TheMillionaire Next Door", you've learned that millionaires never spoiled their kids bygiving them everything they want.

If we give our kids a life of luxury and comfort by giving them everything to them,we're actually harming them than helping them. There's less motivation to work hardbecause they see you as their human ATM.

There's also nothing wrong with taking care of our parents when they get old. Butremember that the money you spend on their medicine, hospital bills, food, etc.means less money you can spend for your kids and yourself.

Does that sound harsh? After all, they gave everything to you. It's your obligation togive a little something back. If that's your situation, then by all means providefinancial support.

If your parents have enough saved for their retirements, thank them for being


19/49

responsible parents. Then follow their example.

Either way, you have to start with yourself so you don't repeat the cycle. Askyourself: Do you want to be a financial burden to your children when you're old andgrey? If you believe in giving everything to your kids, then perhaps you expect to betreated the same way later on. It's an unwritten social contract.

However, if you want your grown-up kids in the future to be able to use their moneyfor themselves and their own kids, then get serious about planning for retirement.

Unfortunately, for many of us, our kids are our retirement plans. But this shouldn'tbe the case.

If you do agree that funding your own retirement and long-term care is the rightthing to do, then you have to accept the principle of putting yourself first beforeothers.

Sure, there may be things you would not compromise, like quality education for yourkids. But between putting aside regular savings for your retirement versus buying

the latest Honda Civic for your college boy, put yourself first.

It's not being selfish. Because when you get old, you will not put the burden onjunior. That's selfless.

Principle #7: There Are Two Things Certain in

Life

Life is full of uncertainties. Certainly most areas of our financial lives are in the

context of uncertainty debt, investments, insurance, income.

What is certain, as the famous quote goes, is death and taxes.

I know most of us don't think about death, not so much because it's an unpleasantsubject but because it's so distant.

Discuss with your loved ones. Maybe you haven't built a big enough estate toeven think about estate planning. But have you ever thought about how you want tobe buried? Do you want to be cremated? Do you want a short wake? Do you want aclosed casket?

There's nothing morbid about this if you share these things to a loved one. I thinkit's perfectly normal to talk about. Should you buy a memorial plan? Not necessarily.What's important is that someone you love knows what you want when you die.

Consult an estate planner. Now, if you do have a substantial estate, it's notenough to make a will. Talk to a lawyer or a trust banker who can explain to you howwills, trusts, gifts, etc. work. Going through the process gives you a good idea howmuch you have, which beneficiaries should receive what, and how they can minimizethe payment of estate tax. Otherwise, your loved ones will be left with a mess.


20/49

Someone I know experienced this problem recently. Her dad passed away and theywere left with missing documents, unpaid obligations, angry employees andsuppliers, and a huge tax burden. It took months to fix everything. That's not a goodway to die.

It was the estate tax that proved to be a major burden. Obviously, even in death,taxes will continue to haunt us.

Plan to minimize taxes. For the living, taxes are certainly a burden. If you're anemployer, you have to contend with income tax, value-added tax, withholding tax,and other business taxes. But at least, you have more flexibility when it comes toallowable deductions (at least until the government succeeds in shifting to grossincome taxation).

If you're employed, you know almost a quarter of your salary goes to thegovernment. It's like you're working for the government one fourth of the time.

As a consumer, you have to pay real estate tax. Your investments are hit by

withholding tax. You pay higher for goods and services because taxes on businessesare passed to you.

Unfortunately, unlike in the US, there's not much you can do if you're an employee.But tax planning is still an important area of personal finance. You may be helplesswith withholding taxes on your compensation, but you still have choices when itcomes to investments and estate planning that will minimize the taxes you pay.

To sum up: death may be a distant likelihood, but it's something you should thinkabout already. Taxes may be an inevitable occurrence that you have little controlover, but it's still something you can plan for.

Principle #8: Match the Right Instrument Withthe Right Requirement

Okay, this principle doesn't sound so catchy. For sure, the familiar warning "If it's toogood to be true, it probably is." plays better on the ear.

But it doesn't quite capture what's most important when it comes to investments.When it comes to investing your money, the key principle to remember is"matching". This should guide you when making investment decisions.

If you don't match your investments with your requirements, you'll end up makingpoor choices. When I started investing, all I knew was that stocks was the way to go.So I invested in stocks with no particular objective except to save and invest "for thefuture".

But I should have taken into account my immediate needs, like wedding expensesand a mortgage. That way, I should have invested in bonds, government securities,and other fixed income instruments.


21/49

Matching investments with specific needs helps you determine how much you shouldexpect and can take (risk and return), how much to invest (asset allocation), howlong to be invested (time period), and what to avoid (speculation and scams).

Risk and return

Everyone has a different appetite for risk. Some are conservative investors who only

keep their money in safe instruments like bank deposits and government securities.Others are risk takers, putting money into speculative stocks and even get-rich-quickschemes. Most of us are in between.

But our risk attitude as investors and our expectations for returns should really takeinto account our goals. Example, if you were planning for retirement, then investingin equities, which has a higher risk, is an appropriate decision. Putting money inbank deposits is not a good idea because inflation will eat up your measly returns.There's no way you'll accumulate enough wealth for retirement purposes if you're toorisk averse.

In the same way, if you're saving for a downpayment for a car loan by next year,you shouldn't be investing in stocks. Don't expect double-digit returns in a short

period of time if your goal is short term. Even if you have a high appetite for risk,you should be guided by your specific need.

Asset allocation

How much of your money should you put into stocks, bonds, real estate, moneymarket accounts, government securities, and cash?

It all depends on your goals. If your goal is something immediate and you don't wantto risk losing your principal, then allocate money into short term and relative safeinstruments. If it's long term, then allocate more into equities.

Time period

Now, how long should you keep your investments? Again, if you have no particularobjective for your investments, and you're invested in stocks, you may be easilytempted to pull out when the market goes down. But if those investments are for thelong term, then you can ride the ups and downs of the stock market.

If you have short term needs but you invest in long term instruments, you may endup losing money if you're forced to sell your investments.

If you have long term requirements but you just invest in short term instruments,you may risk not earning enough on the smaller returns.

Speculation and scamsLastly, this principle should guide you in avoiding get-rich-quick schemes and

investment scams. If your need is to protect your income, then you certainlyshouldn't play with speculative investments, and worse, potential scams.

If you have play money you don't care to lose (lucky you), then putting it in high riskinvestments is a gamble, as long as you know what you're getting into. Still, I don'tencourage it. Wasting money, even play money, is still a waste.

So, if you have money to invest, go back to the financial goals you set (rememberthe exercise we did before?). What is it you want to achieve first? When you


22/49

determine your need, you can now make the right choice on what type of investmentcan best meet.

Principle #9: Make a Life, Not Just a LivingMoney is not the root of all evil. What the Bible says is "the love of money is the rootof all evil." It's one thing to keep in mind when we deal with the subject of money.

Money is a tool, a means to an end. If it becomes the end in itself, then we shouldask ourselves about what really matters.

Unfortunately, for some people, rich or poor (yes, even the poor), the pursuit ofwealth for its sake has become their philosophy and lifestyle.

And for many people, including you and me, making money has often stood in theway of enjoying our lives. It's quite ironic: we work hard to make money to pay for

things that make us and our family happy. But we end up neglecting the importantthings in life, like quality time with our loved ones or simply enjoying the little things.

Surely, many good things in life are free. And we should invest our time and effort inthem. But there are also some good things in life that we spend for, and ought toinvest in. Let's not just spend for material things that we accumulate or fornecessary living expenses. Let's also spend for things that help us enjoy life more.There are three I recommend.

Recreation

Part of enjoying life is recreation. Is recreation part of our lifestyle? Or is the one-week holiday abroad too much to handle when we're always worrying about the work

we left back home?

It's good to work to pay for a house, groceries, travel, cars, tuition, gadgets, clothes,and all those mundane things. But you should include recreation in the things youspend for. That includes sports and hobbies that you enjoy and enrich your life.

EducationEducation is also part of enriching your life. That means continuing educationclasses, seminars, workshops, books, magazines, and traveling. Do you invest inyour education? Learning continuously is a great way to live our lives.

Avocation

And then there's our avocation. Is there something you like to do off hours? There

are things that we spend time, effort, and even money on, even if don't get anythingconcrete in return, just a sense of fulfilment.

For me, Money Minute and promoting financial literacy is my avocation. I enjoywriting and teaching and learning. That's a reward in itself. There are also otherthings I want to pursue in the future. What's yours?

Whatever it is, it's okay to spend for things that give you satisfaction. And the pointis, it doesn't have to be (and should be) just material things. Recreation, education,


23/49

and avocation that enrich your life are often more long term or more deeplysatisfying.

Principle #10: The More You Give, The MoreYou Get

Some people hold on to their money too hard that they eventually lose it. It's likeclutching sand in your hands. Others freely give and they never seem to run out ofmoney.

My sister-in-law has a generous heart and she's blessed financially. Give a little andget back a hundredfold. Many people attest to the power of giving.

To me, there are three things we can all put into practise to make this principle workin our lives.

Stewardship

If you come to think about it, we're really just stewards of whatever we have. Ofcourse, we think we own what we have because we worked to get them. But evenour abilities are God-given.

If we put that into perspective, we become better stewards of money. To be sure,that's easier said than done.

But if we do think of ourselves as stewards, part of being good stewardship isgrowing our money and sharing it.

TIthing

Part of being stewards is tithing, which is giving ten percent of our income to thechurch.

Tithing is an acknowledgment that everything belongs to God. It's also an act offaith, because it's hard to give ten percent when we can hardly pay the bills.

But many people who diligently practise tithing testify that the promise of tithing isreal.

CharityOf course, the concepts of stewardship and tithing are Biblical concepts that you maynot ascribe to.

Whether or not you share these beliefs, there's a third way of applying this principle:charity.

A lot of rich people like Bill Gates and Oprah Winfrey give back a lot to society. Butyou don't have to be rich. You don't even have to give cash. You can give your timeand effort, which also have financial value, if you think about it.


24/49

Six Feet Under

It may sound morbid, but the topic of death, particularly the expenses related to

burial, is quite fascinating. The costs can really kill you and the rituals cansometimes be ridiculous.

Nowadays, you can have a fancy burial with photo and video coverage, a band,balloons, the works. A party when you're dead.

But even the basics can be quite steep. A casket, for instance, sells for as low asP20,000, made in wood, and can go upwards of P850 thousand for solid brass.

A cemetery lot can go for P45,000 to more than P800,000 while a mausoleum costsabout a million and upwards of eight million.

No wonder cremation is becoming a more popular and more practical alternative.

The cremation cost about P9,000. A wooden urn goes for just P1,500, although brassones cost P25,000 to P65,000. And if you want a bone or ash niche in acolumbarium, it would cost P50,000 to P65,000. You can, of course, just keep it athome.

You do get freebies from package deals. Otherwise, you have to consider otherrelated expenses:Viewing room: P3,000-P5,000 per dayFlowers: P500-P5,000Garden: P1,500-P8,000Hearse: P5,000Police escort: P700-P1,200 per policeman

Burial: P18,000-P25,000Headstone/Marker: P700-P5,000Grave diggers/Niche watchers: P500-P2,000 per personSandwashing: P7,000-P15,000Obituary space: P2,000-P50,000

As you can see, dying can cost you an arm and a leg. You can say the funeralservices industry is making a killing. With these expenses, who wants to die?

I know it's something you and your loved ones would rather avoid but part of afinancial plan is anticipating for the cost of your or their funeral. Here are somethings to remember:

1. Shop around.You won't have the luxury of comparing prices if a loved one suddenly dies, orworse, if you die. Not all funeral homes or cemeteries are the same. Compare pricesif the likelihood of someone in your household dying soon becomes apparent, such asdue to old age or serious illness. At the very least, ask around and be aware whichones are reputable and recommended.

2. Don't be pressured.

Remember, it's not called the funeral industry for nothing. So don't think of funeral


25/49

directors as clergy. It's not that they're vultures but it's still a business for them. Sodon't buy products and services you don't need or want.

3. Avoid emotional overspending.You don't have to buy the most expensive casket or the biggest mausoleum you can(or can't) afford to honor a loved one or cure guilt pangs. Show your love when the

person is alive. A simple, dignified memorial and funeral service is sufficient.

4. Plan ahead.If you can to buy a memorial lot or casket in advance, it would not only come cheap,it will give your loved ones peace of mind.

But even if you don't purchase ahead, at the very least, talk to your family aboutyour wishes (and solicit theirs if they're open about it). Why buy an imported solidbrass casket when your loved one really just wants to be cremated and doesn't wantany viewing?

5. Consider a pre-need plan.Memorial plans today are really just another form of investment. Pre-need

companies sell packages that pay out an agreed-upon amount in a lump sum. Theydo offer value-added services like professional assistance. And memorial parks alsooffer plans that you can pay in advance.

The Credit Card Trap (Part One)

Plastic. For a growing number of Filipino consumers, credit cards have become thepreferred mode of payment, from dining out in a restaurant to paying for the widescreen TV on installment.

It's also becoming a major problem for regular people who find themselves tens ofthousands of pesos in debt. In the first quarter of this year, credit card bills thatwere past due topped P13.8 billion.

We talked to Fol Rana, Jr., Vice President for Sales & Marketing - Retail of EquitableCard, one of the major players in the industry, on how to manage our use of creditcards.

It's just a tool. Rana stressed that credit cards are just an aid in your finances. "Ifyou don't have cash, it allows you to purchase items." Combining the billing periodand the grace period before you're charged interest is the equivalent of 30-45 daysof free money (that is, if you pay the balance in full when it's due).

But it's still a loan that you have to pay. Unfortunately, there's a certain detachmentwhen we charge for purchases, as if there's no tomorrow. It's just not the same aswhen we grudgingly pull out cash from our wallet. Says Rana, "With cash, you seevalue. With a credit card, you see plastic."

Have a good credit record. Keep this in mind when you miss a paymentagain.Your credit card payment history affects your credit record, which is a factor whenyou apply for other loans, like a mortgage or housing loan.


26/49

Although there's no credit bureau in the country, credit card companies have anarrangement to check balances of their customers. They also check the bankingindustry's negative file information system.

So it is a good idea to use a credit card to establish your credit record when you're

just starting out. "A person with a credit card history has a better chance thansomeone with none," Rana points out.

Get rewarded. The other good thing about using credit cards is the payoff like freeairline miles, rebates, discounts, and reward points, which you can use to claimitems or waive your annual fee. If you're a good customer, you can get invited tospecial events and promos. However, these extra features should not be your toppriority when choosing among credit cards, particularly if you're not the type whopays in full.

Study your finances. Find out how much you're earning and spending every monthto give you an idea how much you can afford and how much credit you really need.Rana explains, "If your card can cover your expenses, then don't ask for more

cards." More cards and higher limits mean greater temptation to overspend.

Track your expenses. The problem with credit cards is you'll only find out your billonce a month. Often, you get shocked by how much you charged. There's anotherway. Use the phone or the Internet to track transactions and balances, if your creditcard company offers such facilities (perhaps this should be one of your criteria inchoosing a credit card provider).

Control your expenses. If you track them, you can better control them. Don'texhaust your credit limit. Rana says you can even request the card company todecrease your limit. He also suggests you just carry one or two cards instead of all.

And if you really want to keep your credit card costs low, don't do cash advances,which charge you an interest the moment you get the money. Pay at least theminimum to avoid late payment charges. In fact, pay more than the minimum tolower interest charges. Better yet

Pay in full. Rana explains there are two types of cardholders - revolvers, who paythe minimum amount due, and transactors, who pay in full.

Card companies love revolvers more, because they earn from interest charges. Theyare also less likely to cancel, as they always have a balance to pay. If you're arevolver, don't worry about being seen as a bad customer. Paying just the minimumdoesn't trigger concerns as long as your credit limit is commensurate to yourcapacity to pay. Just don't expect to get an automatic increase in your limit or an

upgrade.

But don't feel guilty if you're a transactor and want to help your friendlyneighborhood credit card company. Card companies still make money off youthrough annual membership fees. But even if you manage to have this waived, theystill earn from their member merchants.

Pay on time. Even if you can afford to pay the minimum, pay it on time. Latepayments trigger red flags if they happen regularly. There's no excuse for not


27/49

paying. Rana says, "Even if the bill arrives late, as a responsible cardholder, youhave to keep track when to pay." Besides, he adds, there are many methods ofpaying, including auto debit, the ATM, phone banking, and online.

Watch out for part two where I write about the fine print.

The Credit Card Trap (Part Two)

There's more to managing the way you handle credit cards than paying your bills infull and on time. To be a smart cardholder, you need to remember four words: readthe fine print.

Stick to two cards. One common denominator among delinquent cardholders isthey're holding on to so many cards. The average person in the major cities has 2-3cards.

Rana recommends two cards, with one for backup (make sure at least one is aninternational card). For a lot of people, however, the number of cards is for braggingrights. Having high credit limits give a sense of pride as well. Even the color of thecard is a status symbol.

But Rana advises that cardholders review their total credit. "It's not advisable tohave so many cards," he explains, "The annual fees on those alone [areprohibitive]."

And if you receive yet another pre-approved card in the mail, don't activate it. Cut itup to prevent identity theft. If you're not using a card, cancel it. "If it has no usageor payment history, it doesn't serve any purpose," says Rana.

Be wary of credit limits. Having a high credit limit or receiving a notification that yourlimit has been increased may give you a, well, high. But remember some aggressivecard companies will very high credit limits, even if it doesn't match your capacity topay, forcing you to revolve.

In the same way, they offer introductory lower rates (which they then jack up),freebies, huge rebates, and attractive rewards points to get to switch. Don't be easilytempted. Before biting, remember to

Read the fine print. You need to read the terms and conditions. If you don'tunderstand some items, and I'll bet there'll be some, call the company to get aclarification.

Figure out how interest is computed. One vague area that needs a clear explanationis the interest rate. Rana says Equitable Card charges 3.25% on your outstandingbalance, based on simple interest computation (principal x rate x time).

Other companies hide the total effective interest rate. They may charge 3.25% butbased on your average daily balance, not your outstanding balance. They may alsocompute interest based on a shorter number of days, instead of a full 30 days. So,instead of looking at the nominal rate, check the annual percentage rate or APR.


28/49

Figure out how the balance is computed. If your balance is P10,000 and you manageto pay P9,000, you'd think you'd be charged an interest for your remainingoutstanding balance of P1,000, right? Think again.

Many card companies use your average daily balance or ADB as the basis for interest

charges. So they take into account your beginning balance, new purchases,payments, and ending balance.

Figure out when your payment is posted. Some companies post your check paymentwhen it clears, not when you deposit it. Equitable Card considers your bill paid whenyou deposit it on the due date. Others will consider it late. Check the same whenpaying online. If you pay on the due date but after banking hours, some cards mightpost it the following day.

Learn when to transfer balances. When should you transfer balances to anothercard? If the new card has better features and rates. In most cases, however,revolvers are the ones who like to transfer to take advantage of lower rates offeredfor transferred balances. Some card companies even waive the annual fee. Just

make sure the interest on your succeeding regular purchases is competitive.

It doesn't hurt to ask. If you're ordinarily a transactor and was late on a paymentonce, such that you get charged a late penalty fee, call your card company and askfor it to be waived. Most likely, they'll comply.

Learn about billing cycles. Some cards don't charge a penalty even if you pay afterthe due date, as long as you do pay a few days before your statement date. Why?Because of the way their systems work. For instance, if your due date is on the 25thand your statement date is on the 5th, if you pay on the 30th, you won't get chargedanything because the system will check your balance perhaps a few days before the5th. It's an industry secret, but it doesn't apply to all credit card companies.

Learn what causes red flags. Credit card companies track several parameters, suchas usage, payments, and delinquencies. Don't get paranoid however if you're latewith a payment or two, or if you just pay the minimum, or max out your credit limit."The important thing," Rana says, "is paying it."

What to do when you can't pay. However, if you're delinquent, a collectionmechanism kicks in. A reminder is sent when you're 30 days past due. Atelemarketer may call you to remind you of a missed payment. You'll get a strongernote if you're 60 days past due. And your account is automatically suspended. Ifyou're 90 days past due, you'll receive a stronger letter and the card company sendsout its collection agents.

The worst scenario is when the card company files a suit to force you to pay. Whenyour card is reported as a delinquent account, you take the risk that won't be given aloan facility like a car or housing loan when you apply. And this is not erased fromyour record. And as Rana points out, it will take a lot of convincing again before youcan avail of a loan from a legitimate creditor.

If you find yourself in this situation, try negotiating with your card company to comeup with an acceptable restructured payment plan that will fix the numbers years youcan pay off your balance, the minimum amount you're expected to pay every month,


29/49

and the interest rate you'll be charged. You may be asked to issue post-dated checksand a stop credit facility will be enforced, such that you can't charge new purchasesto your card anymore.

If you have a spending problem, cut all your cards altogether and pay cash forpurchases.

The 13th Month Dilemma

It's the Christmas holidays and, indeed, 'tis the season to be jolly. This is the monthwe'll get our mandatory 13th month bonus. An entire month's pay for doing nothing!What a great concept!

So what's the dilemma in that? For most of us, nothing. We don't think twice aboutspending everything for shopping. It's Christmas, for crying out loud! We need theextra dough to buy gifts. Who's going to pay for all the useless knick-knacks you'll

exchange with your officemates? Who's paying for your kid's trip to Toy Kingdom?Who's paying for your trip to Toy Kingdom? Where will you get the money to buyyour husband a new pair of socks? How will you pay for your weekend trip toBangkok? Isn't that what your 13th month bonus for?

Well, in a word, yes. But I have something to tell you that will spoil your fun (andmine). There are other, better ways to use your 13th month bonus on. For thatmatter, it's not just that. It's the other automatic bonuses you may have receivedjust for showing up. It's the money you may have received from your parents (whichI like to call "pity money"). It's the 100-peso bill you found in the street. Money fornothing. Free money. Found money. Manna from heaven. Whatever you call it.

So, what do you do with extra cash that you have but did not earn? Okay, let me getback to the topic. What do you do with your 13th month cash bonanza? Let me countthe ways (and compute your financial returns).

Spend it. The obvious and common option. Why use your hard-earned savings onbuying gifts when you can fund them with your 13th month pay? It makes sense,right? It does, really, when the other options are to use up your savings originally setaside for a more important financial goal or to rack up more debt with your creditcard.

But this reflects poor financial planning in the first place. Irregular, once-or-twice-a-year expenses like Christmas gifts should be planned ahead, and saved for. I know,it's easier said than done. But it's these occasional but expensive expenses that take

a hit on our budget and our financial plans.

Return: 0%

Save it for now. I'm talking about delayed gratification. You'll still spend themoney, but not now. Maybe you're thinking of buying a new digital camera. Insteadof charging it to your card and pay part of it when your bill comes due and pay therest say a month later (at a monthly interest rate of 3.5%), why not set it aside,save the balance of the cost of the camera, and buy it when you can pay off the


30/49

whole thing in cash (or time in during a sale). Sure, all you did was save a little oncredit card interest. But congratulations! You're starting to form a good financialhabit - waiting.

Return: 3.5%

Invest it. Talk about waiting. This time, you don't even spend your bonus until,well, years or even decades from now. What if you place your 13th month pay of,say P25,000, to a mutual fund, treasury bond, or other similar investment thatreturns an average of 10% net a year. In five years, your bonus has grown toP40,000; in ten years, P65,000; in twenty years, almost P170,000. All just by sittingon your butt. That's a 579% jump, or an effective rate of 29% a year. That's thepower of compounding: you earn interest on your interest.

Return: 29%

Pay down debt. Okay, it only gets worse. What if I tell you that you can earn 42%in a year, but you won't receive a single centavo? How is that possible? If you carrycredit card debt for a year, you're paying 42% a year or 3.5% a month. And that's

conservative. Some credit card companies charge interest on your interest, reversecompounding so to speak.

Paying off your debt, or even part of it, saves you a lot more. You won't get anythingtangible in return but you can gain back greater control over your financial life.

Return: 42%

Donate it. Finally, you can give it away, to your church, a charity, or a family inneed of help. If you think you won't get anything in return, think again. Manygenerous people testify to the fact that they get back what they've given athousandfold. Maybe you'll get it back financially, maybe not. But the very act of

sharing and helping others is, well, priceless.

Return: 1,000%

The 10-Minute Investment Checklist

Now that you have an idea where you can invest P100,000, how do you decide thenwhich is the right one for you?

Before anything else, ask yourself two things:

What are you investing this for? (for retirement, for education, for travel,for a car) This is your investment objective or goal.

When do you need to achieve your goal? (this year, next year, 5 yearsfrom now, when you're 60) This is your investment horizon or time frame.

This will guide you in making investing decisions. Once you know what you want andwhen you want it, you can start evaluating your options.


31/49

Here's a useful checklist. Run this through the investment options I listed last timeand any other investment products you'll find in the market. It shouldn't take morethan 10 minutes to figure out if the product matches your objectives.

Rate of return. Obviously, this is probably the primary consideration we have wheninvesting. So what rate should you look for?

Here's a rule of thumb: Beat inflation. If your money grows less than the rate ofinflation (the change in the prices of a basket of goods), then you're actually worseoff. So, if inflation has averaged 6% a year, the returns on your investment shouldgrow more than that.

What's the big deal about inflation? Inflation eats up the value of your money. YourP100 now can buy a lot less stuff 5 years from now. We all know that. So, make sureyour investment grows faster than inflation.

Also, check if and how often returns are compounded. A fixed-rate Treasury bond(FXTN) gives you a fixed interest every quarter called a coupon. It doesn'tcompound, so it's straight interest.

On the other hand, a time deposit or a bond fund generates interest which, alongwith your principal, earns interest. So, the interest earns interest. That's compoundinterest. And that's the secret of successful investing. Compounding becomes evenmore powerful the more frequent it is. If it compounds daily instead of monthly, thenthe faster the growth.

Guarantee of return. If your investment returns 1,000%, is it guaranteed? That'swhy for "fixed income" investments like T-bills, time deposits, and bonds, returns aregenerally conservative because they are generally fixed. If you're promised returnsof 4% a month, then start wondering. That's equivalent to 48% a year. Where dothese guys invest or lend their money that allows them to guarantee you 48% a

year? Here's another rule of thumb: If it's too good to be true, it probably is.

But if an investment grows by 48% this year, 30% next year, 1% the next, -20%later, and then 15% thereafter, the the rate or return is obviously not guaranteed. Isthat bad? Of course not. Investments like stocks, real estate, and commodities actthis way. They are considered riskier because no one's promising you anything. Buthere's yet another rule of thumb: the higher the risk, the higher the return.

So, when evaluating an investment instrument, check if the rate of return isguaranteed, in which case, expect a relatively conservative rate. If it's not, thendemand a historically high average rate because you deserve a higher return for theextra risk you take.

Safety. Are you willing to risk everything, including the original amount of yourinvestment? Or do you want to make sure you keep your principal intact?

Well, the bad news is anything can happen. There is all sorts of risk that affectinvestments. But generally, fixed-income instruments keep your principal intact, thatis, if you keep them until they mature (they reach the end of their term). So, ifyou're a bit conservative, placing your money in T-bills, RTBs, or time deposits willgive you some peace of mind. The government will sure to pay you no matter what.Even if it goes bankrupt, it can just print more money. Your bank, well, that's


32/49

another matter. But here's their guarantee: your investment is insured and safe upto P250,000.

Now, if you're primary concern is to make sure you don't lose your principal, thenstocks and mutual funds are not for you. On the other hand, you'll be sacrificinggrowth for safety. Not a good thing if you're investing for the long haul. But very

much fine for short-term objectives.

Liquidity. Once you place your money, how soon can you take it out? That'sliquidity. Regular savings deposits are liquid because they're easy to get into and outof. You can withdraw them anytime.

But for time deposits, you need to keep your money a bit longer, otherwise youwon't earn as high an interest. Mutual funds and unit-investment trust funds are abit less liquid, because they generally require a one-year holding period (althoughyou can withdraw within a year for a fee).

Stocks are relatively liquid in the sense that you can buy and sell anytime. However,if the price of your stock goes a lot lower than the price you bought it for, and you

don't want to sell at a loss, then it's not very liquid, is it? Real estate investments arenot liquid because it's harder and takes a longer time to sell them.

So, how does this affect your investing decision? If you'll need the money quickly,you want to place it in liquid instruments.

Affordability. There are investments out there that earn a lot. The catch: you needa million bucks to get access to them. The good news is, there are a good number ofinvestment instruments that you and I can afford. Basically, all the ones I listed lasttime.

You only need P5,000 to buy RTBs and P10,000 to invest in mutual bond funds. The

lesson: even if you don't have a lot right now, don't let that stop you from investing.Because you can. So this is another factor to consider when investing: the initialminimum investment required.

Diversification. You know this rule of thumb: Don't put all your eggs in one basket.That means spreading your money across different investment instruments anddifferent institutions.

So, ideally, you should have money in stocks, bonds, government securities, moneymarket instruments, etc. This way, even if prices for stocks go down, you wouldn'tbe hit too hard if you have bonds, time deposits, etc. that offset your losses.Diversify across institutions also. So even if one bank or pre-need company closesdown, your life's savings don't go down the drain.

Most investments don't provide built-in diversification. You have to spread yourmoney yourself. However, mutual funds promise instant diversification since theyinvest in a whole lot of stocks or bonds, spreading your risk.

Fees. There's no such thing as a free lunch. You pay a broker's fee when you buystocks and an entry load and an annual management fee when you invest in amutual fund. Fees also come in the form of commission. When you get anendowment or pension plan, part of your premium goes to commissions.


33/49

Fees eat up your returns because instead of earning for you, the portion of yourinvestment that could have generated a return instead when into the pocket of thebroker or institution that sold the product to you. Is that bad? Well no. It's a productwhich has a price. The fee or commission is that price.

What you need to watch out for is how much is the fee or commission. Even if it'ssmall, it all adds up.

Taxes. Most investments are taxed. The government taxes bank deposits, stocktransactions, even government securities.

Mutual funds are tax-free and so are investments that are long-term (at least 5years). So, when comparing investments, compare the returns net of tax.

But like fees, don't get obsessed about taxes. Even if the fee or tax is relatively high,but the returns are consistently higher than competing investments, then that shouldtake precedence.

Convenience. Do you want to actively manage your investments yourself by tradingregularly? Or do you want to just dump your money and let it grow on its own?

You can trade stocks or foreign currency yourself, but that means you have to bewatching the market constantly. In contrast, you just leave your money to a mutualfund or UITF manager, a pro who's hired to think, plan, and implement for you(that's why there's a management fee).

Do you want to put a lump sum every year or do you like putting a little aside everymonth? For example, there are so-called lump-sum endowment plans and there areplans that are 5 years to pay.

The institution. Check what institution is issuing these investments. Is it thegovernment? Then consider it practically risk-free (or at least low-risk). Is it a top-notch corporation like Ayala Corporation whose corporate bond is highly rated?

Is it a bank? A mutual fund company? An insurance company? A pre-need company?Which one? How stable is the company? How has it performed in the past? Who arethe directors and officers? Where does it invest or lend its money?

This shouldn't preclude you from buying or investing from a new company of course.Even the big and old ones fail and close shop. The whole idea is to investigate. Andthen diversify.

Where to Invest P100,000

Okay, let's say you have a hundred grand to spare. You have no financial obligationslike credit card debt or immediate financial needs like travel. Where do you investP100,000?

And I don't mean investing in yourself or in a business. I'm talking about financial


34/49

instruments. Regulated, legitimate investment vehicles from financial institutions.

Well, here are some options:

Special savings deposits. You can place the money in a special savings accountthat earns a much higher interest than a regular savings account. Most commercial,

savings, and rural banks offer this. Shop around.

Time deposits. The favorite instrument of Filipino savers. You can choose to placethe money in 30-, 60-, and 90-day time deposits. Again, most banks have this.

Stocks. You can buy shares of publicly-listed stocks and ride the current bull run.Just call up your friendly neighborhood broker.

T-bills. If you want relative safety, place your money in short-term governmentsecurities like Treasury bills (T-bills). Dealers like commercial banks offer this.

RTBs. You can also invest in longer-term government securities like Fixed RateTreasury Notes (FXTNs). Alternately, you can invest in Retail Treasury Bonds (RTBs),

which require much smaller amounts.

UITFs. Replacing Comm

money minute

Documents