Principle #2: It's Not How Much You Earn, It's How Much You Get to Keep
If you went through the exercise of setting goals the last two issues, you would have by now set SMART goals which you've categorized by what you want to be, what you want to do, what you want to have, where you want to go, and what you want to give. And you would have prioritized your goals by drawing a timeline or listing them by short-, medium-, and long-term.
Now that you know where you want to go, you need to have a clear understanding of where 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, you will realize it is never enough (or perhaps, you already know this all along). If you're earning 20 thousand, you might think "If only I'm earning 50 thousand.". If you're earning 50 thousand, you might think "If only I'm earning 100 thousand." (If you have 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 to keep. That's Principle #2.
Remember the book "The Millionaire Next Door"? It's not the people who earn millions but also spend millions that are really rich. It's those who may be earning only thousands but accumulate money that eventually turn into millions. In other words, it's not income that matters, it's net worth.
Of course, the other idea espoused by another best-selling book "Rich Dad, Poor Dad" is that it's cash flow that really matters.
Well, whatever view you believe in, the next step after goal setting is to do your personal 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 find out 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 them before so I know how much I am worth financially and I know how much is going in and going out.
This will be the foundation of your financial plan and it will also be the primary tool to measure your progress.
Are you ready? Not yet? Good! Accept your fate this week and we'll do the dirty work next issue.
Make SMART Goals
Last time, I wrote about the need to set goals as the starting point in devising your financial 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 you how 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 that most, 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 business doesn'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 may have to spend for books and seminars on self-improvement.
So there. Almost all your goals require money. Therefore, it is imperative that you link your financial strategies to your goals. Again: Match your money strategy with your life goals.
Now, go back to your list of goals. Anything wrong with them? Are those all your goals in life? If it's hard to think of everything you need and want in life, try this approach:
Option 1: Sketch a timeline
Draw a long line on a piece of paper. The beginning of the line represents your age now. 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 good enough. 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 want your 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 gives you an idea which goals to prioritize.
If you don't want to draw a timeline, try this other approach:
Option 2: Make a classified list
Here, 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 to three years. Long term is anything beyond three. Then, under each heading, list down 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. The list is not meant to be exhaustive and final. The fun thing about it is you can always change, remove, and add goals as you go along.
Finally, I want you to go back to each goal you wrote and refine each. How? Make SMART 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. Where do 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 will know you can achieve your life goals if you attach money goals (which can be measured) to them. That way, you can track how near or far you are in achieving them. So instead of writing "to travel to Europe", find out how much it would cost to go on a European tour" and write "to travel to Europe on a 15-day package that costs $2,000". Ask "how much?" or "how many?"
Attainable. Some say "A" stands for "Agreed Upon" or "Acceptable". If you're sharing your goals with your partner, then it's important that you both agree to them. 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 more than you are able to do, then they're not realistic. For instance, becoming a millionaire 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 "in the future", "some day", "when I'm old", "after I retire", "soon" and the like. Set a year, 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 have a clearer picture of what you want in life. It is just the first step in taking control of your 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 much you get to keep."
Principle #1: You Won't Get Anywhere If You Don't Know Where You're Going
Ever get lost while driving? Remember how it feels like going round and round in circles? What about the time you were on vacation abroad and you spent the whole morning 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 you tried (operative word is "tried") to go on a diet without setting specific weight or waistline goals, most likely you would have lost ten pounds in a week and gained everything 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 getting anywhere. 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 to save and invest. Then came sudden events that require a lump of cash that I didn't have (the market was down that time). If I had set clear goals and planned well, I would 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 other words: goal setting.
Set goals. Goals give us direction. They're also an excellent way of getting us motivated and disciplined. So the next time you pass off that Frapuccino to save up for something, you won't feel too bad.
Write them down. There's power in writing down your goals. It's one thing to day dream about what you want, it's another to cast it, well, on paper (or in Excel if you like).
Tell people. There's even greater power in telling loved ones about your goals. It takes stronger commitment when others know about what you want to achieve. And it somehow makes you more accountable for your words.
Now, how do you go about this exactly? Take a piece of paper and follow this exercise. Better yet, open Excel or Word.
Ready? Here you go: I want you to day dream. Go ahead. Close your eyes and think about your dream life. Imagine your ideal life in the future. What do you see? Be very specific. What kind of house do you have? What kind of cars? How many kids do you 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 your life 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 job do 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 do you want to travel?
5. What do you want to give? This is about giving back -- to your church, a charity, 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 continue this exercise on goal setting. But it will be more detailed and organized.
10 Principles for Managing Your Money
Managing your money can be quite daunting. But financial planning really boils down to a few key ideas, some of which are so familiar they sound so cliche. Yet knowing is not the same as doing. Most personal finance experts and financial planners agree on these principles. They just differ on their strategies and financial vehicles. Here are "10 Principles for Managing your Money":
Principle #1. You won't get anywhere if you don't know where you're going. A major mistake people make when it comes to their finances is they don't set their goals. Don't invest just for the sake of investing. Or buy insurance just to get the pesky 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's common for us to say: "If only I earn more money" or "If only I was born rich". But wealth 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, do you? So where did your money go? Small expenses here and there pile up. But it also 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 to keep 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 improve your bottom line.
Principle #5. It may not happen, but it can. You don't blink when you have to pay for car insurance. Yet, you put off buying insurance for your life and health. Doesn't compute.
Principle #6. You first, then others. Who do you work for? It seems many of us work for others, and I don't mean our family. We pay the government, banks, credit card companies, utility companies, and others first before we set aside anything for savings 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 off preparing for death because it seems so distant and, right now, unlikely. And we just accept paying taxes because, in most cases, we have no choice. Denial and acceptance. But we should, and can, do something about both.
Principle #8. Match the right instrument with the right requirement. Before you invest, 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 right product based on what your need is.
Principle #9. Make a life, not a living. Managing and earning your money just to accumulate more money for the sake of it is a tragic way to live your life. Financial freedom 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 successful people believe not just in giving back, but in getting back what they give, and then some.
In the succeeding weeks, I'll discuss each principle at length and show you step by step how to do your own financial plan.
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