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 unpleasant subject but because it's so distant.
Discuss with your loved ones. Maybe you haven't built a big enough estate to even think about estate planning. But have you ever thought about how you want to be buried? Do you want to be cremated? Do you want a short wake? Do you want a closed casket?
There's nothing morbid about this if you share these things to a loved one. I think it'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 not enough to make a will. Talk to a lawyer or a trust banker who can explain to you how wills, trusts, gifts, etc. work. Going through the process gives you a good idea how much you have, which beneficiaries should receive what, and how they can minimize the payment of estate tax. Otherwise, your loved ones will be left with a mess.
Someone I know experienced this problem recently. Her dad passed away and they were left with missing documents, unpaid obligations, angry employees and suppliers, and a huge tax burden. It took months to fix everything. That's not a good way 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 an employer, 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 to allowable deductions (at least until the government succeeds in shifting to gross income taxation).
If you're employed, you know almost a quarter of your salary goes to the government. 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 businesses are 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 helpless with withholding taxes on your compensation, but you still have choices when it comes 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 think about already. Taxes may be an inevitable occurence that you have little control over, but it's still something you can plan for.
Citibank Online Savings Account
Here's one deposit product to check out. Citibank launched a Citibank Online Savings Account. The 5% interest is the main selling point, but keep in mind you need an initial deposit of P100,000. You can do the same things as with other regular savings accounts from banks that have Internet banking. So what's different? Mainly, you can transfer funds to an offshore account.
Doomed in 2 years
That's the prediction of 11 faculty members of the UP School of Economics. The Philippines will face an economic collapse due to our public debt and deficit, unless the government adopts cost savings and new revenue measures. The government already has acknowledged that we have a fiscal crisis. Read the paper here.
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 a better life, sparing them from hardships and possibly not making them work another day of their lives.
We were also brought up to think that our parents become our responsibility when they become old and unable to work. After all, they sacrificed so much to get us to where 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 "The Millionaire Next Door", you've learned that millionaires never spoiled their kids by giving 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 hard because they see you as their human ATM.
There's also nothing wrong with taking care of our parents when they get old. But remember 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 to give a little something back. If that's your situation, then by all means provide financial support.
If your parents have enough saved for their retirements, thank them for being responsible parents. Then follow their example.
Either way, you have to start with yourself so you don't repeat the cycle. Ask yourself: Do you want to be a financial burden to your children when you're old and grey? If you believe in giving everything to your kids, then perhaps you expect to be treated 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 money for 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't be the case.
If you do agree that funding your own retirement and long-term care is the right thing to do, then you have to accept the principle of putting yourself first before others.
Sure, there may be things you would not compromise, like quality education for your kids. 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 on junior. That's selfless.
House to push PERA bill
Six bills have been filed at the House of Representatives for setting up the Personal Equity Retirement Account (PERA). This is equivalent to the 401(k) retirement plans in the US. This is excellent news for you who want to regularly save for our retirement. Obviously, the SSS won't be able to pay you enough to retire. Pre-need pension plans are quite expensive. And not all companies offer generous retirement plans. Under PERA, contributions will be deductible from taxable income and earnings of contributions will also be tax-exempt. Your investments are tax-deferred. You get taxed only when you withdraw them upon retirement. One version of the bills puts that yearly contribution cap at P50,000 per year. That's not very high. In the US, some companies match their employees's contribution, so it's free money. And employees can move their plans when they transfer to another company. Hopefully, the PERA bill gets passed this year. Cross your fingers.
Non-tax solutions
Former NEDA chief Cielito Habito gave a briefing to legislators about non-tax reforms that should go hand in hand with new taxes. He's certainly right on the money. 1. plug massive tax leakages due to graft and corruption 2. improve the absorptive capacity of national government agencies 3. conform legislators' pork barrel to government's priority programs (ha! my favorite) 4. address the fiscal problems of government-owned and -controlled firms, especially the National Power Corp. (Napocor)
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 and mom, you're excused).
In this case, what you need is disability and accident insurance. If you meet an accident and get disabled, this kind of insurance will compensate for physical loss (in case 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, and cars. You'll need fire insurance, homeowner's insurance, and car insurance. Some policies cover valuables inside your house. But you don't want to insure items that won't constitute a catastrophe if you lose them.
To protect your dependents. If you have people dependent on your income, like your spouse, children, and even business partners, you need life insurance.
To protect your net worth. It's possible you can get sued for practising your profession or operating your business. You don't want to end up penniless, that's why consider personal liability insurance (or comprehensive general liability insurance).
To comply with requirements. Sometimes you have no choice. Like when you get a housing loan, your bank will require you to get credit life insurance. So in case you die 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 you need 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 other day. For next issue, we'll tackle Principle #6.
SSS contributions should rise
When will it all end? Now, the Department of Finance recommended that the Social Security System (SSS) increase the monthly contribution rates of its more than 20 million members. Yes, that includes you. That means less take-home pay for a still measly pension when you retire and measly loan amounts you can take out. And we have to suffer because of the SSS's inept management of investments.
PDIC coverage up P250,000
The good news: Now, your bank deposit is insured for up to P250,000 from the previous P100,000 by the Philippine Deposit Insurance Corp. (PDIC). This now fully covers 96% of total deposit accounts or about 24.9 million depositors, the state-run firm said. The bad news: The new law, R.A. 9302, covers the sum of all accounts that a depositor has in one bank. Unlike before when you can split your money into chunks of P100,000 per account, this time, you're only insured up to P250,000 only for all your accounts.
Home Guaranty Corp. to issue zero-coupon bonds
State-run Home Guaranty Corp. (HGC) is planning to issue zero coupon bonds to raise P10 billion later this year. Zero coupon bonds do not pay periodic interest. Instead, you buy the bonds at a deep discount and you receive the face value at maturity. It's another investment alternative to look at. Another piece of good news. HGC is intent on helping develop a secondary mortgage market in the country. That means new investment instruments like mortgage-backed securities can be introduced, giving more options to investors.
Pending finance bills and how they affect you
The Arroyo government is reviving several bills on the capital markets which were not passed by the previous Congress because the morons were busy with politics. Here are some you need to know about: The Pre-need Plan Code of the Philippines. You know what happened to CAP and other pre-need companies. This bill provides protection for pre-need investors and planholders. The PERA bill. This is like the 401(k) in the US, the main retirement vehicle among Americans. It's a savings and retirement plan for employees, which allows them to invest in bonds and equities in a tax-deferred program. The Lending Investors bill. This will regulate activities of lending investors, to provide protection to borrowers who can be victimized with very high rates. The Revised Investment Company Bill. This will help the further development of the local mutual fund industry by lifting certain restrictions on the operations of investment companies. Hopefully, this will spur the creation of more mutual funds to give Filipino investors more options. These are important to you and me. Right now, we only have few alternatives when it comes to investing our money. We don't have the tax advantages of a 401(k). Many companies still administer costly traditional defined benefit plans. And a more developed mutual fund industry means more competition, which may lead to lower or even zero sales charges and management fees. Plus, we need protection from financial services companies, including those that sell pre-need plans, loans, credit cards, and insurance. E-mail or fax your Congressman and our senators.
Credit cards' past due receivables surge
Credit card debt is becoming a major consumer problem. The Central Bank reported that past due credit card receivables went up by 66% year on year. From P5.5 billion in the first quarter last year, it has now surged to P13.8 billion. To help curb this problem, the Central Bank has been proposing the creation of a credit bureau that would require credit card companies to share information about their cardholders, giving them a glimpse of our credit history. Right now, companies use a crude method of calling up some of the bigger card companies or check with the negative databank shared by banks. But this, along with other reforms to modernize our capital markets, requires legislation. And you all know the performance of our Senate when it comes to legislation.
Quadruple whammy
When will the bad news ever going to end? First, there's the government's proposed tax bills, which, among others, include a shift from net to gross income taxation. There's also the text tax. It's hard to accept new taxes when we know the real problem is poor tax collection and corrupt practices. Second, there's the rise in oil prices. That directly affects every motorist who have to yet again put up with higher gasoline costs. And it will indirectly impact consumers who may have to bear some of the burden in terms of higher prices of goods due to higher transportation costs by companies. Time to rethink oil deregulation in our current oligopoly? Third, there's rising inflation. That's partly due to rising oil prices. But prices of food and utilities are going up as well. Which brings us the fourth whammy: the Central Bank announced it might have to raise interest rates to curb inflation next year. So, if you have loans like a mortgage, auto loan, or a business loan, can you say "heavier debt burden"?
Mutual funds continue to grow
Total assets for the mutual fund industry grew almost 60% year-on-year as of May. It's now a P49 billion industry. Goes to show the increasing acceptance of mutual funds as an investment vehicle for Filipinos. As expected, fixed-income or bond funds have the bulk (94%) of the total assets, given the conservative nature of Pinoys when it comes to investing (I mean, many still place their money in bank deposits).
Ayala Corp.'s bonds get top rating
Here's one example of a blue-chip corporate bond. Philippine Ratings Services Corp. (Philratings) rated Ayala Corp.'s planned issuance of a P5 billion fixed-rate five-year bonds PRS Aaa. That's the highest rating, meaning the bonds have minimal investment risk. This is the kind of investment that your mutual fund or common trust fund ought to have.
Inflation surges to 6%
Here's the bad news: inflation in July leaped from 6% from 5.1% in June. Previously, it has been steady at 3-4%. The BSP has set the target at 4-5% for the year. Now, analysts say inflation will breach 5% What's to blame? Rising oil prices. Plus an increase in food and utilities prices. So that means we'll pay more for gas, food, electricity, water, etc. The good news? BSP says it won't raise interest rates...yet. Raising interest rates help arrest inflation, but it also increases the cost of borrowing. Either way, expect a slowdown in the economy. Like, what's new?
You Don't Need Insurance...
If you're not earning income. Remember that you're insuring against loss. For life insurance, it's loss of income upon death. For disability and accident insurance, it's loss of income upon being disabled due to an accident. Insurance is supposed to replace 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. No amount of money can replace the loss of a child, or any of your loved ones for that matter. But if can afford and willing to pay for insurance for your kids, knowing full well 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 life insurance. (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 loved ones 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 not earning any income, you still have economic value. Because the services you do at home (cooking, cleaning, babysitting, etc.) represent actual expenses if done by somebody else. So you need to be insured.
If you have no dependents. Even if you have income, but no one's depending on your income, then life insurance is not necessary. If you're single or living with your parents, and you're not supporting anyone, you don't have to be insured.
If you're newly married, and you're both working, perhaps you don't need life insurance yet, as the surviving spouse can support him/herself. But if it's going to be a 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 have dependents, you might still need to be insured in case you're unable to work because of an accident or disabiity. In this case, you are supporting yourself. Who's going to pay for your expenses if you can't work? Of course, if your family can and is willing to support you, then you don't have to be insured. On the other hand, do you want to be a burden to your family?
If there's no catastrophic loss. Please keep in mind you are insuring not just any loss, 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 a catastrophe.
But if your car gets stolen or crashed, that's a catastrophe. If your house or office burns to the ground, that's a catastrophe. If you get sued for millions, that's a catastrophe. 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 personal liability.
So, ask yourself "Do you really need to be insured?".
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