the pinoy financial planning guide - book 1

BOOK 1

By Mr. Alijeffty C. Gonzales, CIS, RFP

A True Story...

During a lull in a product orientation seminar of a life insurance company, the trainer noticed a participant who

stood out as he was obviously the “oldest” among this batch of new recruits. Curious, he wandered towards

the end of the room where the man was visibly struggling to come up with the solution to a computation

problem he asks the class to solve.

“May I help you sir?”

“Yes please, mahirap palang i-compute ito ng walang calculator...”

“How old are you sir, if I may ask?”

“I’m 68...”

“Mahirap ho ang buhay ng ahente, you may have to go all around to see a lot of people every day doing

the computation for each of them, are you sure you are up to this? Should you not just stay home, relax;

enjoy the company of your grandchildren...?”

In was then that he opened up..., He related that because of a recent incident in his daughter’s house where he

is currently staying, he has to go back to work to try to make a living, as he is beyond the mandatory retirement

The Pinoy Financial Planning Guide

is currently staying, he has to go back to work to try to make a living, as he is beyond the mandatory retirement

age of 65, it seems that his only option of earning an income is to become an agent. The old man with tears

starting to form in his tired eyes disclosed that the other day, he overheard his daughter on the phone talking

to his son.

“Kuya!, ano ba yan! Diyan naman sa inyo si tatay! Two weeks na siya dito at sinumpong na naman ng

sakit nya last week at kami ang nag-pagamot, nagagalit na ang mister ko!, Yung pinadala niyang pera na

dapat pambili ni junior ng cell phone, di ko na naibili dahil naipambayad ko sa ospital, diyan naman sa

inyo si tatay!”

IF YOU ARE THE OLD MAN, HOW WOULD YOU FEEL?

Let us just imagine that we can turn back time and re-write the story of the old man’s life, let us imagine...What

if the old man was able to save and invests during his productive time, this same conversation could have

turned out like this.

“Kuya!, ano ba yan!, Two weeks na dyan si tatay, dito naman sa amin!, mabuti nga yung mga anak mo

naibili na ng cell phone, tong si junior ko e wala pa!”

www.acgadvisors.net(1)


Most of us started to make a living earning just enough to

satisfy our physiological needs. Isang kahig, isang tuka ika nga,

After a while, our income have increased but our expense

seems to grow as well, kung dati ay happy na tayong naka-

pamasyal sa SM once in a while, ngayon, parang kulang ang

saya kung wala tayong bitbit pag-uwi.

SAYANG YUNG SALE! 50% OFF, LAKI NG NATIPID KO!

Naka-tipid ka nga ba? Yun bang nabili mo ay talagang kailangan

mo? Mas nakatipid ka siguro kung di mo binili?

Abraham Maslow, in his 1943 paper “A theory of Human Motivation” proposed that human needs


Abraham Maslow, in his 1943 paper “A theory of Human Motivation” proposed that human needs

can be stacked up in terms of their order of priority. This hierarchy of needs is often depicted as a

pyramid consisting of five levels, an individual normally works on the lower level needs first and

move up as his financial status improves.

From a financial planning perspective, this insight would explain why some of us are stuck in a day-

to-day, hand-to-mouth existence; it is because we never “graduate” from the lowest level of this

hierarchy. Once an individual has moved upwards to the next level, needs in the lower level will no

longer be prioritized. For instance, a businessman at the esteem level who is diagnosed with cancer

will spend a great deal of time concentrating on his health (physiological needs), but will continue to

value his work performance (esteem needs) and will likely return to work during periods of

remission.

(http://en.wikipedia.org/wiki/Maslow's_hierarchy_of_needs)


PART 1: WHERE ARE YOU NOW?Computing your net worth

Reviewing your income/expense patterns

Creating a budget

PART 2: WHERE DO YOU NEED TO BE?“Bakit gusto mong yumaman?”

TABLE OF CONTENTS


“Bakit gusto mong yumaman?”

Your personal definition of wealth

Setting your life goals

PART 3: HOW WILL YOU GET THERE?Your financial plan

The three portfolios of your life

START ON YOUR ROAD TO FINANCIAL INDEPENDENCE: COMPUTING YOUR NET WORTH

A financial plan is your road map; it is a comprehensive personal document that gives you an

overview of where you are financially. The basic components of a financial plan are:

A statement of your assets/liabilities, income/expense worksheet, budget plan, savings and

investment portfolio worksheet, and your insurance /risk management worksheet.

Where are you now?PART 1


The first step in coming up with your financial plan is to compute for your net worth, this is done by

listing down all your assets and liabilities: Categorize your assets into current assets: assets that can

be utilised or sold within the next three months, and other assets: these are assets that you own in

which you won’t and can’t easily be sold. Current assets include your bank account balances, cash

on hand and the market value of your marketable securities likes bonds, stocks and mutual funds.

List under other assets all other assets that you own including your car, house, furnitures and fixtures, the

cash value of your insurance policies, your interest in a business, jewelleries and others. Then categorize

your liabilities into current and other liabilities. Current liabilities are your obligations that requires

payments within the next three months or continuous regular payments like credit card bills, loan and

mortgage payments. Other liabilities would be financial obligations that require payments in a future date

three months hence.

Deduct the total value of your liabilities from the total value of your assets; you now have an estimate of

your NET WORTH.



One key consideration in managing your net worth is to try to minimize if not eliminate

high-costs debt, one typical example is consumer borrowings from credit cards, the

following table illustrates the “earnings” you gain by placing Php 10,000 in a savings

account and “interest expense” of a Php 10,000 credit card balance.

REVIEW YOUR INCOME/EXPENSE PATTERNS:

ACTIVE INCOME is generally considered is to be a variable; as it depends

on an individual’s ability to engage in an active pursuit of a job,

profession or business and this ability may be hindered by reasons of

health and other unforeseen events like accidents.

The pursuit of an active income large

enough to have some savings is the

primary reason why a lot of Filipinos

(myself included) go overseas to work.

While the initial intent is correct, a lot of



While the initial intent is correct, a lot of

us fail to established a base for financial

independence because we don’t have a

follow-through plan, surplus income

from an overseas posting are normally

spent on non-essentials or invested

arbitrarily (without consideration of our

needs and goals). This lack of a clearly

defined set of goals placed us in a

position where we tend to choose an

investment that looks better as

compared to its alternatives rather than

invest in something that matches our

goals.

--- MY OFW EXPERIENCE

Expenses can be managed better if we are able to categorize our expenses;

•FIXED EXPENSES are generally expenses associated with our day-to-day

predictable expenses such as food, clothing, shelter (the physiological needs

in Maslow’s hierarchy), it also includes essential spending on education,

transportation and communication.

•DISCRETIONARY EXPENSES on the other hand is unplanned non-essential

expenses like buying that 42” LCD TV while your 27” is still working. A careful

analysis of your spending patterns will reveal that discretionary expenses are

normally the culprit in an un-balanced budget.

PASALUBONG!

The many months or even years of

absence from our family and loved ones



absence from our family and loved ones

during our overseas posting normally

would evoke a certain feeling of guilt at

homecoming. The result of this is that we

tend to overspend when we buy our

“pasalubongs”.

Does my 4-year old kid really need a cell

phone? How about the 6 one-liter bottles

of johnnie walkers for my kumpares, I

think my wife will like the 40 gms. 18k

gold bracelet i got her...

While there is really nothing wrong with

this, we need to understand why we do

the things that we do.

--- MY OFW EXPERIENCE

A BUDGET PLAN CAN HELP IN

MANAGING EXPENSES

Aside from distinguishing your expenses into

fixed and discretionary expenses, it can also

help if you have a clear understanding of the

difference of expenses associated with your

needs and wants.

WILL BUYING A “GERM PROTECTION”

SOAP CLEAN YOUR CONSCIENCE?



Advertising and peer pressure plays a critical role in our perception of our needs and wants, consider a

bar of soap:

We buy soaps in order to make ourselves clean (a need), but a particular soap advertising contends that

being clean is not enough, we have to ensure that we are germ-free, thus, you “need” their product.

Another soap advertising claims that their product not only makes you clean, it also ensures your skin is

soft and smooth (to please your partner?), there is actually nothing wrong with this but if you consider

the additional expense involved, it may have an impact on how much would be your surplus (thus your

savings).

Prepare a budget plan by listing down all your household expenses, indicate the budgeted amount per

expense category, tracked your actual expenses on a month-on-month basis, include a column to

indicate actual and variance, this would prompt you if you are already going over the budgeted amount.

•SAVINGS IS THE KEY TO WEALTH ACCUMULATION, every one peso you save today is going to make you



•SAVINGS IS THE KEY TO WEALTH ACCUMULATION, every one peso you save today is going to make you

one peso richer tomorrow.

•Income from an active pursuit of a job, profession or business is “active income”. There is no absolute

certainty that we may be able to maintain this indefinitely as certain fortuitous events such as illness or

accidents may hinder or worse bring it to a halt, our goal therefore, is to “store” our savings from our

active income so that we can draw on this reserve on any eventuality.

•Allocating our savings into our three life portfolios (current needs, future needs, protection needs) is an

effective framework to help us maximize the benefits of our savings.

•Understanding our own personal life goals is needed in the creation of the three life portfolios.

WHY DO YOU WANT

TO BECOME 100 things to do and

Where do you need to be?PART 2


WEALTHY?100 things to do and

accomplish before I die…

*WEALTH is the ability to fully

experience life---HENRY DAVID THOREAU

HOW MUCH WEALTH IS ENOUGH?

ENOUGH FINANCIAL RESOURCES

TO ALLOW YOU TO ENJOY LIFE

…And achieve all your life goals.



…And achieve all your life goals.

HOW MUCH DO YOU

NEED TO BE ABLE TO

STOP WORKING?



A definite and measurable level of wealth is important in the achievement of financial independence, this

table shows how much you need to accumulate to stop working and enable you to enjoy the things you’d

rather do. The first column shows your average monthly household expenses; to have enough to support a

Php 50,000/month lifestyle for 15 years, you need to have a wealth base of Php 6.76M.

A. B.



PAYS ZERO PERCENTCAN’T OPEN TILL THE 20TH YEAR

PAYS TWENTY PERCENTCAN OPEN ANYTIME

If you set aside two pesos each day and placed one peso on each of the two piggy banks,

which piggy bank do you think would have more money at the end of twenty years?

The normal answer would be the piggy bank that pays 0% (A) interest for the reason that

we can’t open it. In our advisory practice in financial planning, we always advocate that

any financial plan that leads to an investment decision should be made with a specific goal

in mind.

Let me take myself as an example, i have a goal of ensuring that i have enough funds to

enable my children to go to the best schools in this country, and let us say they would be in

college in twenty years, i will now “attached” this goal to the one peso i placed each day

on the second piggy bank (B - the one that i can open anytime and pays 20%).



on the second piggy bank (B - the one that i can open anytime and pays 20%).

With a goal now attached to the second piggy bank, after twenty years, which one do you

think would have more money?

FINANCIAL PLANNING is the process of meeting your life goals

through the proper management of your finances, it provides direction

and meaning to your financial planning decisions.

?car, ?house, ?college fund for children, ?set

What Are Your

LIFE GOALS?



?car, ?house, ?college fund for children, ?set

up own business, ?comfortable retirement,

? financial independence, etc…

VISUALIZING – focus on the tangible benefits.

MEASURING – attaching a monetary price tag allows you to measure your progress.



If i am 45 years old now, it means that i still have 15 years to build up a Php 15M

wealth base. In implementing my investment plan, i can now compute how much i

need each month in savings to achieve this goal, if we do our financial planning

this way, do you think it is now more achievable?


IDENTIFY


THEN LAY YOUR GOALS ALONG A TIMELINE

PROTECTION PORTFOLIO

How will you get there?PART 3

your personal circumstances


your three life portfolios

core portfolio components

basic performance measures



Once you have identified a regular source of savings, the first

portfolio you need to build is your current income portfolio, try to

achieve a savings level at least equal to three to six months of your

average monthly expenses



For your future needs portfolio, the basic rule of thumb for selection

would be the timeline to your goals:•2 to 5 years – Bond Funds (peso or dollar)

•5 to 10 years – Balanced Funds

•More than 10 years – Equity Funds


DESIGNING YOUR PROTECTION PORTFOLIO

*Consider term

insurance when

buying life insurance

protection, it offers

the largest coverage at

the least cost.


the least cost.

*ILLUSTRATION:•30-year old

•20-year level term

•Php 1 Million coverage

•premiums on the 11th

year drawn from

cash/account value

November 15, 2008

Manila

Dear Reader,

Thank you for spending time to read this guide, although it may not be as extensive as i want it to

be, i hope that it has given you a broad understanding on how to lay down the framework for a

personal financial plan.

I would be coming out with a “Book 2” soon after where i would be discussing specific suggestions

on how to create a “future needs” portfolio, please email me at [email protected] if you’d like

to reserve a copy and please provide me with the following information which i would use as basis

for illustrations.


for illustrations.

NAME, AGE, LOCATION, MARITAL STATUS, NUMBER AND AGES OF

CHILDREN, DESIRED RETIREMENT AGE, MOST IMPORTANT LONG TERM

GOAL.

In closing, please allow me to share a guiding principle which have a profound impact in my own

quest for financial freedom – “A rich man is not one who have the most, but is one who needs the

least.”

Maraming Salamat,

Alijeffty C. Gonzales, CIS, RFP

the pinoy financial planning guide - book 1

Documents

old man

nagagalit na ang mister

weeks na dyan si tatay

weeks na siya dito

dito naman

laki ng natipid ko

sinumpong na naman ngsakit

diyan naman sainyo si