financial_freedom_cut_expenses.jpgThere is a curious bit of trivia that reflects how we handle money. Did you know that the Philippines is one of the biggest, if not THE biggest, consumer of shampoos sold through sachets? Apparently, this is the only place where 60% of the people prefer to shell out a few coins a day for shampoo rather than commit the full P50 for a bottle. Of course, it doesn’t matter that in the end they will end up paying 20% more for the same number of shampoos because of higher packaging costs on the sachet. The point is they do not sacrifice and save enough to make the one-time investment in the bottle so they end up spending more in the long-run. Ridiculous, but true.

Filipinos are not savers at heart. There are many historical reasons why this could be true—lack of confidence in banks following bank failures in the 70s, the erosion of the value of money through devaluation or inflation or even the lack of availability of savings products that are accessible to everyone. On a more personal level, there are also some cultural reasons that we do not save that much, such as the knowledge that family and friends are always there to fall back on. The fiesta mentality has also been ingrained in us such that we feel the need—and the social pressure—to blow savings or a bonus on grand occasions such as a first month anniversary with a new boyfriend, the baptism of a sixth child or the graduation of a niece from prep. True, it is indeed a great and enviable gift to be able to take joy and celebrate all these little victories. But given that the average annual income of a Filipino family, should we really be spending as much as we do?

Consider the present environment. The situation is somewhat less than ideal, to put it mildly, and nobody can really say when the much-awaited great economic recovery will finally hit. In the meantime, gas prices are soaring and electricity and telephone rates are expected to follow. Add to that the bills from the modern day necessities, such as cellular phones, internet accounts, and monthly highlighting of the hair, and you have on big headache for the consumer.

But then, it may not be completely our fault. Perhaps it also boils down to the fact that the average person in this country does not earn enough to cover his or her needs—even the most basic. With the rising costs of goods and services usually outpacing salary adjustments, a gainfully employed Filipino may not be inclined to place savings in the list of his priorities.

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So what is a person to do to avoid financial ruin? The first step is to assess how fiscally responsible you are about saving for a rainy day. Like an alcoholic, you have to accept and acknowledge if you are a financial time bomb. Then, make you financial gameplan:

1. Make a detailed list of all your expenses in the last month.
Break them down into the absolute necessities, (rent, basic food, transportation or gas, medicines and toiletries); the maintenance expenditures (clothing, occasional meal outside) and the luxuries (high-end meals, CDs, cellular phone, jewelry, travel, etc.). The classification are not cut and dried so if you are a music lover who doesn’t care what she wears, then clothing is a luxury and CDs are maintenance. Whatever it is, be honest with yourself about what you really need to live. What you need in order to be happy is another thing.

If you don’t earn (or receive) enough to cover your basic expenditures, you are in big trouble. No ifs and buts about it, you have to get a job—or a better paying job if you already have one. If you make enough to cover the basics and most of the maintenance, that’s not bad but you must realize that you are walking a thin line. Disasters such as a relative taken ill for a month or two without pay could disrupt your whole tentative balance. If you have maintenance covered and still have enough for an occasional luxury, that seems about normal. But normal isn’t good. We want you to be happy—that means being financially secure and empowered enough to point at your heart’s desire in a store and say, “I’ll take that” without looking at the tag.

2. Flash forward and think of all your future needs.
Do you have health insurance? What about your family—if they are financially dependent on you, shouldn’t you get health insurance for them, too? What about life or accident insurance, just to give you peace of mind that they will be taken care of no matter what happens to you?

For parents, there is the matter of your child’s educational plan and endowment plans. For those with elderly parents, there is the question of the pension plan. For those who are rolling into middle age, it’s time to think of the retirement plan. Just running through this list makes on realize it is very hard to have all the bases covered and still have a good time.

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3. Figure out how much you can save and where to put it.
Begin every year with a savings goal. Now don’t aim low and just settle for what’s in the piggy bank plus 5%—make it a stretch goal. This means you have to really stretch your patience, your budget and your endurance to make this savings goal come true.

Assuming you have pooled together some sort of investible funds—let us say P5,000 at the minimum—you can finally get to the fun part: deciding where to invest your money so you can see your savings grow. If you are new at this investment game, there are two things that you have to think about first before you start to shop around for the right product for you. The first is how long you can invest the money before you may need the cash for a purchase of another investment. Committing to park funds in a certain savings product for a longer period of time will get you better returns. Although most companies will allow you to pre-terminate your placements ahead of time if you suddenly need the funds, the pre-termination costs could negate a big part of the earnings you made. Some banks allow you to withdraw the interest but not the principal amount, so make sure you read the fine print.

Those who need to hone their fiscal discipline will do well to lock in the bulk of their funds in facilities that require you to commit for a certain period of time. That way, it won’t be that easy for you to succumb to temptation and start withdrawing funds you have placed in such investment instruments. Ideally, for those with a modest income and a relatively modest lifestyle, try to maintain two facilities for your money. One is your regular ATM account, which will basically cover your everyday needs. The bulk of your funds, however, should be placed in special investment instruments provided by banks, insurance companies and other financial institutions.

The second thing to think about is your appetite for risk. Do you want to put it in ultra-safe investments, which pay out low interest or high-risk investments with good yields? Although the second option may be more tempting, ask yourself: is this money you can afford to lose? Ideally, you should go for a mix between low and high yielding investments.

Astro del Castillo, research head of A&A Securities, uses the triangle formation in investing funds.

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“At the bottom of the triangle or the bulk of my savings are low risk investments like fixed income funds and cash. At the middle of the triangle are those which carry medium scale risks. The tip of the triangle is composed of investments with no guaranteed returns like stocks,” he explained.

Paul Favila, money market manager at Citibank, recommends small investors go into either a fixed income fund or an insurance product so “the investor is forced to keep on adding to the pool of funds to maintain a certain balance and to keep on earning.”

“I don’t agree with monthly time deposits because of the taxes, you don’t get much returns,” he said.

If you have dependents, life insurance plans or education plans are a good way of forced savings and a great way to secure your loved ones’ future needs. There are companies have special plans that cater especially for such needs. This is better than simply putting funds away in a normal bank account or a piggy bank because the amount the insurer will give or spend on your beneficiary in the end will be much bigger than the sum of all the monthly payments you will be making through the years.

There are many pitfalls that you have to watch out for that could ruin the value of your investment. Since this is your hard-earned money, shop around and call as many banks and investment houses as you can. When you find an establishment you can trust, ask the fun manager or investment adviser as many questions as you want until you are comfortable. Remember, no two products are exactly alike so make sure to have all the comparable information.

1. Are there fees for investing or joining a particular investment plan?
2. What is their net yield after taxes and fees on a per annum basis over the past five years?
3. Is there a guaranteed yield from this product? How does it compare with the t-bill yield?
4. If the yield is not guaranteed, perhaps the fund manager should give you an indicative rate of return you can expect, based on his past performance and present interest rates.
5. What are the pre-termination costs and procedures?
6. What is the minimum maintaining balance to be eligible to participate in a particular investment facility?
7. Finally, always remember that investing wisely is only half the battle that keeps you from going broke. In the end, spending wisely is just as important if not more important.

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“There is no substitute for prudence,” says Ma. Elena Sarmiento, first vice president, trust banking division of the United Coconut Planters Bank. “The cliché that ‘one should not spend beyond his means,’ common as it may be, should be at the top of one’s mind.”

Are You a Financial Timebomb?
Some people are perennially broke. You know the type—always asking you to spot them an extra P50 for the meal, always getting their credit cards rejected at stores, always in danger of getting their cellphones cut off for unpaid bills. They have jobs or at least good allowances from parents but money has a miraculous way of falling through their pockets in nothing flat the minute they enter a mall. While poor fund management may sound funny in the beginning (“Did you hear she had to wash her neighbor’s car to pay off her utang at the sari-sari store?”), bad fiscal habits can lead to major bankruptcy down the road (“Did you hear the bank repossessed their house because she didn’t pay off her debts?”). If caught early, there is hope for these individuals, if the desire or the need to reform is really there. Here are some tips:

    1. Divide your salary into separate envelopes to pay your necessities (utilities, credit card bills, contribution to household groceries) as soon as you get it. Lock the envelopes in a drawer until its time to pay the bill.
    2. Jot down all your expenses every day, even to the littlest centavo so you have a running balance of how much you spent and where your money really goes.
    3. Keep credit cards at home. If you do have to use them for emergencies, write down the expenditure in a logbook and set aside the cash to pay for it as soon as possible, even if the bill is not due yet.
    4. Always pay your credit card bill on time. If you cannot, try to get an emergency loan from a bank or a friend to cover the balance. Remember, credit cards charge around 3% a month – which works out to 36% a year. Practically any other loan you could get from a bank would be better than that!
    5. If you are low on funds but want to go out with friends, try to eat dinner at home first then just meet friends for dessert or coffee. Suggest that you start gimmick nights with a couple of beers in someone’s house, before you hit the bars.
    6. If you see something you really like in a mall, exercise some self-discipline and give yourself a 24-hour cooling period before you decide whether or not to buy it. If it’s an article of clothing or shoes, put it through the practicality test. Think of at least three outfits you can pair it with. Then think of at least three events you can wear these outfits to. Lastly, think about your existing clothes and try to see if any of your present stuff can also produce the same outfits to be worn to the same events that this piece can.
    7. If you see something on an installment plan, resist the temptation to buy it just because you think you can handle the low monthly payment. If it is not a crying need, it is better to save up the full amount and buy it in one blow because the deferred plan also has hefty interest rates built into it.
    8. If you are married, make one spouse take care of paying all the bills so he knows exactly how much the household spends altogether. It would be better if it was the thriftier spouse who was in charge of this.
    9. Open a separate bank account for the payment of household bills and other necessities from the account for savings. Agree on a penalty (such as no air-con for a week or no movies for a month) for dipping into the savings account or for failure to remit the required savings per month and stick to it.
    10. When setting aside funds for recreation—like travel or movies—make your budget on a quarterly basis rather than a monthly basis. That way, overspending on one month can be offset in the following months.

(Photo source: sxc.hu)

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