I’m featuring this personal finance article from Sunlife’s brighter life website because I like its graphics and since the content is lacking in detail, I’m sharing my thoughts :
1. Set goals- The goals you set have to be SMART: specific, measurable, attainable, realistic, and time-bound. For example, it’s not just enough to say I want to retire comfortably, I want to travel, I want to build a college fund for my child, or I want to buy a house. You have to define what a comfortable life is for you. If that means living the same way you do right now, then use your current monthly expenses as your reference and multiply that with the number of years you expect to leave after you retire. You have consider the rate of inflation in your computation. For your travel fund, don’t you do research and compare prices on the cost of airplane tickets, accommodation, tours and attractions? The same applies when planning to purchase your dream house. Various factors come into play such as location, size and number of rooms, if you’re buying from a developer so you get to enjoy a few amenities, the amount of equity you need to shell out and the monthly amortization you can afford for bank financing, etc. In building your child’s college fund, you have to know the tuition fees by the time your child enters college and save up for that amount. You want them to go to top universities twenty years from now? Below table shows Sunlife’s projections on college fees of top universities in five to twenty years from now, at a 12.25% rate of increase (the rate of increase per CHED’s 2008 data).
You need to plan, prioritize, and be specific in what you want because there are so many things to consider. If you’re keen on knowing how much you need to save and invest for your dreams, you can use Sunlife’s dream calculator, http://www.itstime.com.ph/brighterlife/. It’s very easy and simple. First, you have to select the dream you’re prioritizing: own a car, build a home, open a business, travel abroad, or setting up retirement or college fund. Once that’s done, you have to input how much you need, how many years you plan to save and invest for that goal, and how much you have saved already. It will then calculate how much you need to save monthly when you put your money in a bank account versus other financial instruments such as mutual funds, variable-unit linked insurance (VUL), stocks, etc.
2. Begin a saving habit. T. Harv Eker suggests a jar system of money management. It’s called a jar system because it’s a method of allocating one’s money, much like putting money into different jars which serve different needs and taking money from that jar to fund that specific need. Once money from that jar is depleted, you stop spending and don’t take money from other jars. The five categories are necessities, financial freedom, education, long term saving for spending, play, and give.
55% of your income goes to NECESSITIES like rent, mortgage, utilities, food, taxes, or anything that you need to LIVE. 10% goes to your FINANCIAL FREEDOM account which is used for investments and building passive income to make you financially independent. You DO NOT SPEND money on this jar, never. 10% goes to your EDUCATION account for your personal growth. Benjamin Franklin once said, investment in knowledge pays the best interest. Your growth in either work or business is limited to what you know, whether you’re a CEO, doctor, accountant, or a businessman, you have to continuously upgrade your skills. This is not limited to formal education like getting a masteral or doctoral degree, it could also be seminars, conferences, or trade fairs you can learn from. 10% goes to LONG TERM SAVING for SPENDING account which is used to bigger expenses that you need to save up for like a house, education fund, renovations, appliances, or trips. 10% goes to your PLAY account to reward yourself, like a spa treatment or dinner at an expensive restaurant because you need to pay yourself and enjoy your money now. Lastly, 5% goes to your GIVE account. You could increase this to 10% if you are tithing, or you can just give it to a charity, or to help out a friend or neighbor.
This is the recommended breakdown but of course this varies for everyone. For someone who earns a lot, the percentage for necessities could be smaller and there’s a bigger weight on the rest of the jars. For an average-income earner, necessities may take up as much as 60-70%. What you have to remember is that customizing your own jar system takes times and may require a few tweaks along the way as your needs or lifestage.
3. An emergency fund is a crucial aspect of risk management. This is what you use if there’s an unexpected incident which requires you to shell out money for the short term. This could be a temporary job loss/sickness/ market slowdown which deters you from earning the same rate of income for 1-6 months, or there’s a need to repair the house due to natural calamities. This fund should be at least 3-6 months of your monthly expenses and put in liquid assets like a savings account or money market instruments, not in stocks or mutual funds, which are prone to fluctuations. You don’t know when emergencies will arise and you don’t want to be cashing in your stocks when prices are down, just because you need the money. That will just make the paper loss real.
4. I’ve already emphasized the importance of both a life insurance (and a health plan) on my first article about risk management so I’ll just keep this short. Anybody who has anybody depending on them requires a life insurance. This is to ensure that whoever gets left behind has something to continue living. True, we all face risk everyday and the chance of you encountering an accident maybe small, but the probability of it happening is still there. When you buy a car or a house, don’t you get insurance for these non-life assets, because you’ve worked hard for it? In the same way, haven’t you also shed tears and sweat over the years to be where you are right now because you want a better life for yourself and family? Without you, who would take care of your family?
5. Inflation rate in the Philippines ranges between 3-6%. To beat it you need to earn at least 4-7%, otherwise, you’re just losing the value of your money. What does that mean? My mom told me that at her first job in the 1970’s her monthly salary was three hundred pesos and you can already have a decent snack at one peso. Nowadays, you can’t buy anything with just one peso and three hundred pesos is gone in a matter of days, or hours or minutes, depending on your standard of living. We need to beat inflation because we have specific needs and dreams we want to achieve over a specific time. If you’re saving for a 3 million pesos condominium which you want to move into 3 years from now, saving 1 million pesos for three years is not enough because the value of the condo will increase and you’ll fall short. Before you decide where to put your money, remember that you have to match your time horizon with the asset. If it’s a short term need, say you’re getting married next year, put your wedding fund in liquid assets so you can access them when you need to. If it’s a long term goal, then put your money in stocks, bonds, or mutual funds, and even variable-unit linked insurance, which historically have yielded above inflation returns.
6. If you don’t have a clue how to start your journey towards financial freedom, you can go to financial planning websites such as Flexscore (https://www.flexscore.com/). It analyzes where you are now financially and advises you on the steps you need to take to be financially independent. The goal is to have a score of 1,000 to be financially independent.
If this is too intimidating for you (as it requires you to input the amount of savings you have or life insurance coverage and other personal financial details), you can also consult with financial advisors (from banks or insurance companies) or hire a registered financial planner. If you’re financially literate and can create a plan for yourself, all the better, just remember that a good financial plan begins with a self-check and continuous monitoring. Personal financial plans are available in the internet, which you can use as reference in drafting your own.
7. Lastly, you have to be disciplined to persevere in carrying out your financial plan. Wealth is built over a long period of time, not in a day.