Money Minute

Fitness Workout for Your Financial Muscles

2005-11-23T15:13:00.000+08:00

So you bought the financial freedom books, but your bank account has yet to reap the rewards? Consider this:

Your financial success can be developed just like a muscle... and if you're not seeing results, you may be on the wrong "financial fitness" plan.

You were running on a treadmill to trim some "financial fat." The result? Your wallet got "skinny." You weren't building your financial muscles. Why not?

Much like a good muscle-strengthening or exercise program, you need expert training, inspiration, and a "financial workout" that's tailored to your specific goals.

Following are five of the Greatest Financial Challenges people typically face in their lifetime. Take the financial fitness challenge and see what muscles you need to start strengthening!

(Note: please consult a Financial Fitness Professional before attempting any of these exercises.)

Challenge 1. "I'm afraid to take financial risks."

Financial Fitness Solution: Develop your Courage muscle.

If you're sitting around waiting for the "right" stock or real estate to invest in, you're dealing with the symptom, not the source. Consider that people who have acquired wealth are not smarter or luckier. They have developed the financial muscle called Courage. Here, Courage refers to acting in spite of your fear. The fear doesn't get smaller, your confidence gets larger. As your confidence grows... so does your ability to make financial decisions that lead to increased wealth!

Challenge 2. "I just don't have enough money to do what I want, when I want."

Financial Fitness Solution: Develop your Desire and Belief muscles.

There are many factors that are at the source of not having enough. For starters, the financial muscles to develop are Desire and Belief. The mere presence of your Desire is evidence that you have the capacity for its fulfillment. If you have Belief that your Desire is possible, then there is no question of "if," but rather "how" and "when". How can I achieve what I desire, and when can I start seeing positive results? The best-laid plans for success begin with the Belief that you can do it and the Desire to make it happen!

Challenge 3. "I'm constantly worried, stressed and frustrated about money."

Financial Fitness Solution: Develop your Attention muscle.

If I told you that you had a winning lottery ticket and the numbers would be called someday this year, would you be worried or excited? Most would say excited. The financial muscle to exercise here is Attention: where are you focusing yours?

Race car drivers are taught to always look in the direction they want to go. If you look at the wall, you will drive into the wall. Put your Attention on what you want… and you'll get more of what you want. Stress, worry and frustration come from looking (now) at what you don't want to happen (in the future), and believing that what you don't want will actually happen. Get better control of your financial Attention muscles, and start driving your finances to a state of continuous growth.

Challenge 4. "I just can't get control over my finances and spending."

Financial Fitness Solution: Develop your Purpose muscle.

Going on a spending "diet" as a measure of "control" over your finances is limiting rather than expansive behavior. The financial muscle to start developing here is best described as Purpose. Your Purpose, for example, might be a long-term plan for financial acumen. If you have a Purpose that's broader in scope than your day-to-day financial survival, then you won't need "discipline" or "control" over your spending. Instead of thinking in terms of what you can't do, you'll begin to think opportunistically as to what you CAN do, as part of your Purpose. Thus, you'll choose to spend based on what is most aligned with this Purpose.

Challenge 5. "I just can't get my finances in order."

Financial Fitness Solution: Develop your Integrity and Responsibility muscles.

The most underdeveloped financial muscles associated with financial disorder is Integrity and Responsibility. Integrity and Responsibility requires that you be accountable to the promises you make to yourself and others. Borrowing and bill-paying are forms of promises you made. When you break those promises, you will find yourself in disorder or clutter. Develop the financial Integrity and Responsibility muscles to keep these promises and you will find order. From order comes structure, and from this comes a financial fitness plan for building long-term wealth, success and happiness!

You've got Step One in a Fitness Workout for your Financial Muscles...Now What?

This Financial Fitness Plan is only a place to start. If this were training for a marathon, you have just learned the warm-up routine for the 26.2 mile run. The real source of your financial challenges or success is your emotional relationship to money.

You just learned some truths about finances, and you may be wondering how to develop these financial muscles and what's the next step in your personally-tailored financial workout. Contact financial fitness expert and "trainer," Mayumi King at http://clubfreedomprogram.com

Mayumi King, CPA and Certified Life Coach, invites you to set yourself free to live the life you create! To get started on your personal path to Financial Freedom, call now at 888-265-4892 or submit an interest form at http://clubfreedomprogram.com.

Article Source: http://EzineArticles.com/?expert=Mayumi_King

Personal Finance 101

2005-11-10T08:21:00.000+08:00

The subject of personal finance is very broad, but as a beginning, I would like to discuss what I consider the foundations of personal finance: Security, Stability, Growth and Protection & Management.

Security
Security to me means that I am prepared for the "hit by a bus" scenario.

I have life insurance to provide for my wife and children. Health, disability, auto and home insurance policies also provide me additional protection in their respective areas. I also have a list of where these policies are, who my agents are, phone numbers and basic policy information (#s, amounts, costs, etc.) I keep this information both in a file at my house and in a safety deposit box at the bank (a friends home will also work - think: "house burns down" scenario). Also my wife and my brother and sister-in-law who live nearby also know where these things are.

I also try to maintain an emergency fund of cash in a bank account or money market account (with checks) so that I am prepared for a financial disaster, layoff, or natural disaster. It took several years to build up this cash fund. I started with a goal to have enough cash for 6 months of my normal financial needs (mortgage, food, insurance, transportation, etc.). Now I am trying for 12 months' worth. I do this by saving a little each month, and "investing" a portion of all "found" money (gifts, inheritances, tax returns, anything unexpected).

I have a will and update it each year around New Year's to reflect any changes in my life during the past year (new children, new home or business, etc.). Most people don't need an extensive will, the forms you buy at your office supply store will do. But in some states if you die without one, watch out. What happens to your money and even your children could be entirely up to some state or court appointed official.

Stability
The next level of personal finance is stability.

Stability to me means that first of all I live within my means. I don't spend more than I earn. Otherwise I am spending my savings, investments, emergency money, or getting into debt. I have a lot of debt, but most of it is real estate which is producing some income. I try to avoid credit card debt and purchase everything with money I already have. I don't buy things expecting that next month I will have more money or I will get a big raise or promotion. You can't sell me a car based on a monthly payment amount; I want to know the final price!

In order to make sure that I am living within my means, I created a simple budget and I track my expenses using Simple Joe's Expense Tracker. I can tell how much I have spent in each budget category and I know when to keep a closer eye on certain types of expenses, or when and where I can cut expenses and what I can live without in order to stay within my budget. Counting pennies is pretty tedious, but tracking where the dollars go can be eye-opening.

Another aspect of stability is avoiding or eliminating debt. Debt in itself is a form of stability; you always have to make those payments until it is all paid off.

Some recent reports show that the average American is $7,000 - $20,000 in debt. Most of it is consumer debt: credit cards, store accounts, rent-to-own, auto loans, etc. And those types of consumer debt usually charge a higher interest rate than any savings account, CD, or money market account; even more than most high-flying risky investments.

This means that $1,000 in debt at 18% is costing you 9 times what your $1,000 savings account at 2% is producing. Consumer debt is a dangerous spiral that is very hard to get out of.

The first problem is, as mentioned before, living within your means. Don't get further into debt to support an extravagant lifestyle. Or even if you are frugal, if you are using credit cards and debt to finance your purchases, you either need to stop purchasing luxury items or find a way to increase your income to support these purchases/payments.

You may even have to lower your standard-of-living because you have racked up considerable debt and need to free up some money to pay it down. But don't wait to start. Those minimum payments are often designed to keep you paying 18% interest for 40 years! That's longer than most home loans. You could even end up paying more than 10 times the original cost of the item just in interest payments. Is that new stereo really worth that much?

To help people get themselves out of debt we created the "Pay Off My Debts" tool in Simple Joe's Money Tools. It is also available as a stand-alone product called Simple Joe's Debt Eraser. These tools help you create a Rapid Debt Reduction Plan which shows you how much to pay on each debt each month in order to save as much on interest charges as possible and pay off your debts as soon as possible.

These tools can help you systematically eliminate your debts whether you owe $1,000 or $100,000. The key is to start living below your means and start focusing on paying off your debt.

It doesn't make much sense to be worried about whether or not your 401k earns 8 or 9% this year, if you are paying 21% on your credit card debt.

A third aspect that starts in the stability category and transcends to the next personal finance level, growth, is the concept of investing in yourself. By this I mean spending time to educate yourself in personal finance matters, as you are doing right now and spending time gaining more knowledge and improving your skills or even developing new ones.

As an employee, this can have a direct relation to who gets laid off during the next round of cutbacks. If you have some skills or have demonstrated some abilities that are not possessed by your co-workers and these skills make you a more valuable employee, you are less likely to get the pink-slip.

Also while you are making yourself more valuable to your current employer, you are also making yourself worth more to future employers. It is much easier to land a job if you have some special skills that are in high demand or even if you bring some special knowledge or experience that you fellow job-seekers may have overlooked or failed to invest in.

Being in the computer industry, I have to spend hours each week reading trade magazines, exploring web sites, and reading emailed newsletters to keep abreast of what is new in my field. If I stopped learning just five years ago, I would have missed out on the Internet revolution, email, web sites and the majority of the income I now enjoy.

Keeping myself informed and up to date takes time and resources, but it helps me protect my current income and expand my skills to help me earn income in other areas. This increases my stability by allowing me to not have to rely on one client, employer or source of income. A chair with four legs will always be more stable than a stool with only three.

Growth
The next level of personal finance, as I alluded to before, is growth.

Once you are secure and stable, you can begin to think about building your wealth. Not that you have to figure out how to become the next Bill Gates or Warren Buffet. But you have to start building the "nest-egg" that you will rely on when you retire.

And don't think that Social Security has you covered, or that your 401k will grow back to what it was a couple years ago. Or that your current employer is going to re-institute the generous pension plans of yesteryear. 401ks are much cheaper to administer and you, the employee, take the hit when the market goes down, not the employer.

My father is nearing retirement age and I think he has a good plan. He has done some research and estimated what his expenses are going to be when he is retired. He then took a look at his potential sources of income during his retirement.

He figured that Social Security would cover about a third of what he wanted to live on. Only a third! And he has worked his entire life. Would you like to instantly have to live on only one third of what you currently make? Retirement is suppose to be the golden years, so where's the gold?

Luckily throughout his career, my father has worked for companies that have had pension plans and he had worked long enough at each company to be eligible for some pension money. This is rare these days because today the average worker will change jobs and companies at least five times during his/her career. Also, as I mentioned before, companies are switching to lower cost 401k plans that do not guarantee you any fixed payments.

In my father's situation, his pension money would cover another third of the retirement income he wanted. So now he had to either figure out where the last third was going to come from, or start cutting out expenses during retirement, like not visiting his children so much. None of us liked the sound of that.

So my father started learning about the stock market and investing in stocks and mutual funds. He made a plan for growing his wealth and then educated himself as to how he could accomplish his plan. I wish I could say that he is doing better than he is, but luckily he has some time still to put his plan into action and ride out any market downturns. (He can do this because he has the security of insurance and emergency money, and the stability of little debt and a strong set of skills.)

By learning about how stocks, bonds, mutual funds, index funds, options, futures, commodities, real estate and other financial tools work you lay the foundation for growing your wealth. You may start with just $100 in a bank CD, but as you learn more and become more sophisticated, you can invest in more and more opportunities.

You will learn about how risk and reward are related, that as the risk increases so does the size of the potential reward. Just like at the race track, you'll make more on the long shot, but the odds are against it. Also you can learn how to tilt the odds in your favor and protect yourself against risk.

For those who are just starting out in the growth phase or who want to dabble a bit before completing the other levels of personal finance, my suggestion would be to look into index mutual funds. Especially no-load index funds (no initial/sales fee).

These funds are made up of the same stocks that make up the popular market indexes like the Dow Jones, S&P and NASDAQ100. The costs are low because management is simple and as a mutual fund you can invest a little at a time. Also they are easy to follow since you see them on all the news shows and in the newspaper.

Protection and Management
The final level of personal finance is the protection and management of your wealth. Most people never develop wealth enough to need this level. But some of the concepts can be applied to any amount of wealth you possess, $10,000 to $10,000,000.

Part of the protection harks back to your will as we discussed on the first personal finance level: security.

With any significant wealth or valuable asset (your home, car, heirlooms, 401k, IRA, business, etc.) you will want some way of disposing of that asset upon your death. Whether it is go to go your family, favorite charity, or local church, if no one knows about it, "it ain't gonna happen".

As you start to accumulate wealth in excess of $350,000, you may want to consult an attorney about creating a trust. A trust is an entity that can own property and pass that property to anyone you name in your will. Usually the trust is designed to provide income to children from the assets that are placed in the trust.

The trust can survive you so that your assets and income may be passed on to your children or next-of-kin without excessive taxation and legal entanglements. Some states will take up to 55% of your assets as taxes when you pass away.

Protection also relates back to insurance. Now it may be time to look at a multi-million dollar umbrella policy that will protect you from lawsuits designed to part you and your wealth. You may now be a bigger target, so purchase a suit of armor.

The management aspect comes into play where you may start to concern yourself with taxation, ownership, distribution of income and possibly endowments to charities or other non-profit institutions.

You may hire a person or company to manage your wealth, or you may choose to do it yourself. Most people who have earned their wealth through the "sweat of their brow" have already become adept at managing their assets. Some continue to personally manage their wealth because of the enjoyment or challenge it gives them.

Others are ready to turn it over to a trustworthy manager (who only gets paid a percentage of your increase) and travel the world, or sit on a beach and count the waves.

Whatever your dreams for retirement (and why wait until you are 65), understanding the different levels of personal finance and spending the time and resources to educate yourself will pay off whether you live next to Bill Gates or Homer Simpson.

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© Simple Joe, Inc.
David Berky is president of Simple Joe, Inc. a marketing company that sells simple software under the brand name of Simple Joe. One of Simple Joe's best selling products is Simple Joe's Money Tools - a collection of 14 personal finance and investment calculators.

Credit Card Consolidation - What You Need to Know Before Consolidating Debt

2005-11-09T20:33:00.000+08:00

By Amy L. Cooper-Arnold, CardRatings.com Reporter

Consolidate! It seems to be the new fad in the world of consumer debt - the magic bullet that will effectively rid your life of all problems with credit card debt.

The advertisers, credit counselors, and financial experts are all shouting out:

"Slash your interest rate!"
"Save thousands of dollars!"
"With one low, monthly payment you’ll have extra money!"

And you know what? Consolidation can be a great option for digging your way out of credit card debt. But what the advertisements don't tell you is that it's not a magic bullet. Consolidation is a re-payment plan that is successful only when you are determined to do what it takes to make it work. It will take planning, determination, and a little elbow grease. But you can do it! Here's what you need to know.

Find the Underlying Cause
The first step in any debt re-payment plan is determining the underlying cause; otherwise, the problem will happen again and again. Typically the problem is not the credit card itself. They are a great tool of convenience and security. Many people use them in a financially responsible way everyday. So if the problem is not the credit card, what is?

Overspending Habits
Let's go ahead and face it. Sometimes the problem comes with just the bad habit of spending too much money. Credit expert Gerri Detweiler, author of The Ultimate Credit Handbook and founder of DebtConsolidationRx.com, says the two largest areas people tend to overspend is in the area of food and transportation. She's heard of people spending $160 a month at the office vending machine! So maybe it's time to take a reality check. Spend a month tracking every single expense down to the penny to see where your money is going. Then take the time, and maybe even help from a credit counselor, to set up a budget and a plan to stick with it.

A Life Crisis
Emergencies happen to everyone. Unfortunately people we love die, life-long careers disappear, and, as we've all seen in the news lately with Hurricane Katrina, natural disasters create havoc. All too often we are unprepared for such events and we end up putting a lot of expenses on credit cards. As you analyze your budget, it's a good idea to determine a set amount to save each month for emergencies. Ideally, if your budget allows for it, a good amount is 5-10% of your take-home income. But if you can't manage that much, then set aside as much as you can.

Big Life Events
Now I'm talking about events we expect - weddings, babies, college educations, family vacations, etc. Don't let these events sneak up on you without some financial planning. The earlier you start, the better off you'll be. And if for some reason the anticipated event doesn't occur, at least you've built yourself a nice little nest egg.

Setting Aside Credit Cards for a Time
When you start consolidating debt, it's important not to accumulate any new debt. Trying to deal with a consolidation loan along with new consumer debt only builds layer upon layer of financial trouble. The accounts don't have to necessarily be closed, but at least put the credit cards in an inconvenient location such as in a cup of frozen water in the back of the freezer, a safe deposit box, or even six feet under in your backyard! Once the consolidation loan is paid off, you've brought your finances back under control, and you've learned new healthy financial habits, then go ahead and bring them out from hiding if you want.

Lower Payment vs. Lower Cost
A big mistake many people make when consolidating debt is looking at the payment amount alone. Sure you can lump all your payments together into one low monthly payment, but what is your interest rate, fees, and length of the loan? A $5,000 loan at 10% for 15 years with a monthly payment of only $53 will cost you $2,000 more than the same amount at 18% for 5 years with a monthly payment of $126.

Consolidation Options
Now let's take a look at some of the options for consolidating. When it comes to consolidating your credit card debt you have several options at your disposal, each with its own set of pros and cons. Here's a brief description of some popular options along with their relative pros and cons.

Low-Rate Credit Cards
If your credit rating is good enough to qualify for a low-rate credit card, possibly even a zero percent introductory rate, transferring all your higher rate credit card balances could be a good option. This option generally works best if you can pay the balance off within one year. Check out our Card Reports section to evaluate different low-rate credit card offers.

Pros

If you qualify for a low-introductory rate card you may get the benefit of not paying any interest for a time.

Cons

Excessive transfer and new account activity on your credit history could cause you to have a poor credit score. This is bad when your low-rate credit card expires and you aren't able to qualify for a new card. You could be stuck with a high interest rate.

Watch out for balance transfer fees. Fees could potentially outweigh any interest savings that you might realize.

Home Equity Loan or Home Equity Line of Credit
Because you're using your home as collateral for this type of debt, it's imperative that you really understand your repayment plan and deal with the issues that got you into debt in the first place. Detweiler suggests this is not a good option in a hardship or crisis situation, including a job loss, since failure to pay back a home equity loan could result in the loss of your home.

Pros

Usually a lower interest rate.

Interest is normally tax deductible.

Your monthly payment will usually be lower so you can use the difference between it and your fixed monthly debt payment to start building an emergency fund.

Cons

You will be trading unsecured debt for secured debt putting your home at risk. If you miss even one payment you could lose your home, whereas if you left it as credit card debt you would still have a place to live.

You could end up paying a lot of money in fees such as closing costs and appraisal fees. Make sure you shop around to find the best deal.

The entire loan must be repaid before you can sell your house.

Personal Loan
Because of the potential effects of high credit card debt on your credit rating it may be difficult to qualify for an unsecured personal loan with a decent interest rate. If your credit rating is good you may qualify for a rate in the low-teens, but if it's poor you may end up paying around 20 percent. Shop around at a variety of financial institutions including credit unions to compare the cost of fees and interest. And be aware that generally the extra products they try to sell aren't worth the cost you'll pay.

Pros

Can get good rates, especially if you are a member of a credit union and have good credit.

Unsecured so you don't have to worry about losing your home.

Cons

Your credit rating could drop further because of credit inquiries, closing old accounts, and opening new accounts.

Additional fees.

Now you've got some tools under your belt to help dig your way out of credit card debt. You can also browse our Articles Section for more information about credit cards and debt. Good luck in your quest to be debt free!

Avoiding Credit Card Debt - Preventive Medicine is Best

2005-09-09T20:37:00.000+08:00

By Amy L. Cooper-Arnold, CardRatings.com Staff Writer

We all know the key to good health begins with a dose of prevention - eat right, exercise regularly, and get a good night's sleep. Your financial health is no different. By taking a few steps of prevention today, tomorrow your finances will have a clean bill of health freeing you to live a life of opportunity rather than of difficulty.

Keep the Right Perspective
Much of the problem with credit card debt problems comes from changes in credit card availability, advertising, and values over the past 75 years. According to Linda Tucker, Director of Education for Consumer Credit Counseling Service in North Little Rock, Arkansas, it wasn't until the 1960s that credit cards started becoming available to the average consumer. Now today, nearly everyone has access to a credit card.

Advertising plays a role too. Howard Dvorkin, author of Credit Hell: How to Dig out of Debt and founder of Consolidated Credit Counseling Services, an organization that provides education on debt and a debt management program, says that according to one survey consumers are exposed to 300-400 advertisements every day. Combine this with a shift from saving for the future and we have a society trying to keep up with the Jones' satisfying the desire of the moment. Add the purchasing power that comes with a credit card and you have the perfect formula for disaster.

But it doesn't have to be this way. If there's one thing Dvorkin wants consumers to know, it's that you don't have to be a slave to the credit card company or even to the seduction of advertising. You can have control over your financial health without depending on a credit card!
Manage your finances

Starting with a strategy will help keep you on track before you ever even pull out the credit card. According to Tucker the first step is determining your monthly income and needed expenses. As part of these monthly expenses, figure in 5-10% of your income to set aside for emergencies, long range savings such as a retirement account, and short term savings. If you have some savings then you avoid having to put large amounts of debt on a credit card in times of a crisis.

Setting up a budget is not always easy, so if you want some help Consolidated Credit Counseling Services offers free budget counseling. You can also consult your phone book to see if your community has a local office of Consumer Credit Counseling Service.

Setting up a budget is just the first step; sticking to it is the next, and often more difficult task. To help keep you on track set goals and put motivators in place. Tucker suggests setting a savings goal with a deadline. Savings goals can include emergencies, vacations, cars, and of course don't forget long range goals such as retirement. Tucker also says a reward program can be a great motivator as well. Just keep in mind that whatever you choose as a reward, it shouldn't compromise the hard work you've done in managing your finances.

Finally, you need to monitor how much you charge on your card in relation to your credit limit. You should never charge more than 30-50% of your available limit otherwise your credit score could go down. For more information on credit scores read our article On the Path to a High Credit Score.

Shop for the Right Card
Dvorkin says it's important to really shop around and get a credit card personalized for your particular situation. Ideally he suggests getting one with no or very low fees and low interest. It will take a little time to compare various offers, but with the high saturation of the market you'll find the perfect fit for your wallet. Browse the Card Reports section of CardRatings.com to shop for every kind of credit card including reward, low-rate, business, and cards for those with poor or no credit.

Read the Fine Print
An afternoon reading the fine print probably doesn't sound very appealing, but that one hour spent reading can save you hours of headaches and hundreds of dollars in the long run. You'll understand everything from your interest rate and fees to how to earn rewards and how long of a grace period you have.

Know Your Interest Rate
If you're going to use a credit card, regardless if you pay the balance in full each month, you need to know the interest rate. This means not only knowing what interest rate you were offered, but also the interest rate the issuer actually gives you on approval. In addition, check the rate on your monthly statements because credit card issuers can raise your rates for little or no apparent reason and with little warning.

Even those who don't carry a balance need to know their interest rate because emergencies do happen. Unfortunately, cars break down, jobs are lost, deaths happen, and marriages end. While it's always a good idea to have an emergency fund, sometimes the job search takes longer than expected or the second car breaks down too leaving you with no other choice but to put some expenses on the card. If you're not up to date on your interest rate, you might end up paying more in interest than you have to.

Pay the Balance in Full
This is important in keeping control of your credit cards. Before using a credit card for a purchase, ask yourself, "Do I have the funds to pay for this?" In cases of emergencies where your emergency fund won't cover the whole amount you need to charge, experts say at least pay more than the required minimum payment.

Pay on Time
Michael Killian, credit and debt management guide for About.com, says never make a late payment to anyone including car and house payments. Because of the universal default clause in credit cards' terms and conditions, credit card companies can raise your interest rate if you are late paying any creditor or even your utility company. Read our Universal Default article for more information.

In fact, Killian recommends being very early if at all possible to account for mail time and processing by the credit card company. If your payment arrives before the actual due date you will end up saving money on interest because any interest you pay is calculated based on the average daily balance; so if your payment can bring down that average you will pay less interest.

Some people have turned to online bill paying to avoid potential problems with the mail. While Killian doesn't recommend this form of payment because of the increased risk for fraud by hackers - especially if the company is not reputable or doesn’t offer encryption - it is definitely a better option to a late payment.

Use it Like Cash, Not a Credit Card
In one sense, you need to use your credit card like cash by paying your balance in full each month. But remember it's really not cash. Imagine the feel of that sleek, plastic card in your hand. It's so sleek that it slides right out of your wallet with little effort at the check out counter. Each time you pull it out it looks and feels the same. You cannot physically feel your charges climbing higher and higher.

Now imagine a wad of twenties. The first time you pull it out its thickness fills your hand...you feel rich (well, at least you feel like you can afford the purchase your making). :0) But with each purchase the wad gets a little smaller until eventually it's gone...and now you know you can't afford any more purchases. Dvorkin calls this the green factor - with cash you can physically feel how much or how little you have.

The point is that you need to be in control of your credit card and spending habits. It's much easier to be swept away if you use a credit card for all your purchases.

Limit the Plastic in Your Wallet
Every credit card comes with its own set of terms and conditions including varying interest rates, penalties, fees, grace periods and due dates. It is much easier to make payments on time, remember which card has the lowest rate, and save you from making a mistake that will affect your credit history if you only have to keep track of one or two cards.

Avoid Extra Expenses
Sometimes it's the little extra expenses that sneak up on you before you even know it.

Cash Advances
Typically cash advances come with a much higher interest rate, fees, and no grace period. The moment you take a cash advance you start paying interest on that balance, which means even if you pay the entire balance in full each month you still pay interest.

In addition, credit card companies apply payments to the balances with the lowest interest rate first. So your $200 cash advance will continue earning 20% interest until your $2000 purchase balance is completely paid off.

Extra Products
Credit card companies will try to get you to purchase additional products such as fraud protection and insurance. The truth of the matter is you usually don't need it. By law you are liable for a maximum of $50 if the victim of fraud, and in most instances you are not liable for any amount.

Early Education
The best method for prevention is teaching our youngest generation all about money before they even qualify for a credit card. Statistics show that students are entering college without ever having a personal finance class or knowing how to balance a checkbook. Yet once students arrive on campus credit card issuers are eager to sign them up. College students are racking up the bills. Some even drop out of college to find a job so they can pay their credit card bills. And those who do graduate typically enter adulthood with thousands of dollars in credit card debt and student loans.

In addition, advertisers market more to younger and younger children, so it's imperative to teach them very early about the lure of money and how to manage finances. The earlier children learn how to manage finances the less likely they will be to fall into credit card and debt problems as an adult.

Fortunately many wonderful resources exist for parents and educators. If you have elementary aged children check out The "It's a Habit!" Company and introduce your children to Sammy the Rabbit who will teach them all about the importance of saving and developing good money habits. The Jump$tart Coalition for Personal Financial Literacy is another organization dedicated to providing resources for teaching children from Kindergarten on up through college valuable lessons in personal finance.

So there you have it. Some simple steps you can start taking today to avoid the trap of credit card debt and to help others do the same!

Top 10 Credit Card Mistakes

1. Not knowing the interest rate
2. Spending maximum credit limit
3. Depending on the credit card
4. Not allowing for mail and processing time
5. Buying things not needed
6. Reacting to advertising
7. Paying only the minimum
8. Not reading the fine print
9. Choosing the wrong card
10. Paying late

Who needs pre-need?

2005-07-14T21:32:00.000+08:00

The pre-need industry has taken a beating recently, with primarily giant education plan providers like CAP and Pacific Plans getting into trouble. With all that's happening, are pre-need products still a wise and safe investment?

My answer: a qualified yes [full disclosure: I am connected with two pre-need companies, both not on the SEC watchlist by the way].

Keep in mind that pre-need products are really just savings plans. Pre-need companies make different variations of basically the same thing: you invest a fixed amount of money for a number of years, usually five, and after a determined number of years, you will get an amount over and above your total investment.

What got some pre-need companies into trouble was the amount promised. I'm sure you all know what went wrong: traditional educational plans promised to pay whatever the tuition was when it was time your kid enters college. Before, tuition was regulated -- it cannot increase beyond 10%. Then, the industry became deregulated, and it became a free for all. The obvious result: pre-need companies, particularly those selling traditional educational plans, could not keep up.

So, should you stay away from pre-need products? Not necessarily. Remember: other pre-need products such as pension and memorial are not affected, because they promise a fixed, pre-determined amount, not an open-ended one.

But what about those selling educational plans? Businessworld has this excellent article that enumerates what you need to watch out for. You can also read the Money Minute primer on pre-need products.

1. Make sure the company is really authorized to sell pre-need plans.

"...the initial step for a prospective client is to ask the Securities and Exchange Commission (SEC) whether or not the company has a dealer's license."

That's easy enough. You can go to the SEC website and check the directory of pre-need companies.

2. Check if the company is financially healthy, if its directors and officers are well-qualified, and if it has a good track record.

"You have to look at the financial statement of the company."

Specifically, look at profitability, capitalization, and liquidity. The pre-need company should be able to provide you with its financial statements. And your trusty old accounting textbook will help you with the formulas for financial ratios.

3. Compute the ratio of its trust fund to actuarial reserve liability (ARL).

"Ideally, the ratio of trust fund to ARL should be 1:1. This indicates a pre-need's ability to pay the benefits expected by each and every plan holder."

The trust fund, which is actually managed by a third-party trust department of a commercial bank, is invested in various instruments that will allow it to increase in value in order to cover the pre-need company's future obligations to its planholders. The ARL represents the company's obligations.

The trust fund, then, should be more than 1, meaning it should be able to more that cover the ARL. But it's also important to check where the trust fund is invested. How much is invested in equities? In real estate? In fixed-income securities?

Now, back to my answer: a qualified yes. Why qualified? I have some reservations about educational plans.

They are quite expensive for one thing, especially if it's for grade school and high school, because those plans need a shorter period of time for your investment to grow. I think the cost of open-ended college plans, on the other hand, are more reasonable. So you may want to go with a college pre-need plan but consider other ways to fund your kid's early education.

On the other hand, you may also want to rethink paying for college through an educational plan. While the cost is significantly lower compared to plans for grade school and high school, I am a bit skeptical nevertheless. That's because you can set aside a much smaller amount to come up with the guaranteed annual payouts that these plans offer. What makes them more expensive (in this case relative to a do-it-yourself savings plan) is that they promise a hefty graduation gift at the end of the plan. You pay for that gift. It's not a freebie generously promised by the pre-need company. They're also expensive because they include commissions to the agent who sold the plan to you and a portion that will help pay for the company's overhead expenses, and then some. Sure, you pay commissions or fees for other investments, but commissions for pre-need plans are much more generous.

But they're not all that bad.

What's good about these plans is that they force you to save. The disincentive to miss a payment is strong (you don't get anything). So if you have trouble setting aside savings diligently, this is one way to go.

They may not be able to pay for all the future costs of a college education (the plan you chose may not be worth as much when you see the actual tuition bill, plus there are other expenses like dorm fees, textbooks, supplies, and junior's weekly allowance to pay for), but at least, a guaranteed payout assures you that you'll get something (I know, you might be too cynical to believe you will get anything at all, but that's where doing your homework instead of relying on an agent's rosy promises comes in).

So, you don't have to rule out educational plans altogether. It might be a good idea to augment one with a do-it-yourself savings plan. But if you're very disciplined with savings, and you invest them wisely, it's very possible you will end up earning more just by doing your own thing.

One of these days, I'll come up with actual numbers to demostrate this (and hopefully prove my point more convincingly). In the meantime, think about it. The days when securing your child's future meant paying off a traditional educational plan are over.

Saving

2005-07-05T13:18:00.000+08:00

Many people do not save because the amount they can save seems so small that it is not worthwhile. Others believe that God is not pleased with saving.

1. Scripture encourages saving.
We are encouraged to save to prepare for future needs. Saving means not spending today so you will have something to spend in the future. Joseph is an example of a person who saved. In Genesis 4l , Joseph saved during the seven years of plenty so that there would be enough to live on during the seven years of famine. Proverbs 21:20 (TLB) reads, "The wise man saves for the future, but the foolish man spends whatever he gets. "

Save only if also giving.
The only time we should be saving is when we are giving so that our hearts will remain focused on the Lord.

Jesus told this parable. "The ground of a certain rich man produced a good crop. He thought to himself, `What shall I do? 1 have no place to store my crops.' Then he said, `This is what I'll ~do. I will tear down my barns and build larger ones, and there I will store all my grain and my goods. And I'll say to myself, "You have plenty of good things laid up for many years. Take life easy; eat, drink and be merry. "' But God said to him, `You fool! This very night your life will be demanded from you...This is how it will be for anyone who stores up things for himself but is not rich toward God (Luke 12:16-21).

Jesus called the rich man a fool because he saved all of his goods and was not giving generously.

Save regularly.
The fundamental principle you need to practice to become a successful saver is to spend less than you earn. Then save and invest the difference over a long period of time. "Steady plodding brings prosperity; hasty speculation brings poverty" (Proverbs 21:5 TLS).

You do not have to earn a lot of money; rather, save consistently. "Go to the ant, you sluggard; consider its ways and he wise! It has no commander, no overseer or ruler, yet it stores its provisions in summer and gathers its food at harvest" (Proverbs 6:6-8). Ants are small creatures incapable of saving a great quantity, yet they are called wise because they save for future needs.

How much should we save?
There is only one example of saving a particular amount in the Bible. Joseph saved 20 percent per year during seven years of plenty so that the nation would have enough food for the following seven years of famine. "Let Pharaoh appoint commissioners over the land to take a fifth of the harvest of Egypt during the seven years of abundance" (Genesis 41:34). In our opinion, it is wise to attempt to save ten percent of our income.

2. Investments
People place some of their savings in investments with the expectation of receiving an income or growth in value. Investments vary in different cultures and economies. Farms, animals, food, real estate, precious metals, stocks and bonds are all examples of investments.

Scripture also encourages us to avoid risky investments. "There is another serious problem 1 have seen everywhere-savings are put into risky investments that turn sour, and soon there is nothing left to pass on to one's son. The man who speculates is soon back to where he began-with nothing. This, as I said, is a very serious problem, for all his hard work has been for nothing; he has been working for the wind. It is all swept away " (Ecclesiastes 5:13 TLB).

3. Gambling
The Bible does not specifically prohibit gambling; however, many who gamble do so to get rich quickly. This is a violation of Scripture. "A faithful man will be richly blessed, but one eager to get rich will not go unpunished" (Proverbs 28:20).

Make a commitment never to gamble, even for entertainment. We should not expose ourselves to the risk of becoming compulsive gamblers, nor should we support an industry that enslaves so many.

[The text is from "Principles of Financial Success", a seminar presented by Crown Financial Ministries.]

10 ways to save on gas

2005-07-02T12:47:00.000+08:00

One of the things that worries me nowadays is the ever-increasing cost of gas. With spiralling world crude prices and the impending effect of the expanded VAT, we'll be spending a bigger chunk of our budget on gas.

Already, our gas consumption has practically doubled. My P500 used to go a long way, now it just buys me about half the mileage. So if you're a motorist like me, what can you do to save on gas? Here are 10 ways experts say can cut your gas consumption and stretch your money farther:

1. Don't be idle.
I admit, I often let the engine run, with the airconditioning on, while waiting for my wife to get down from her office. Well, that's bad. It's actually more wasteful than restarting the engine. So, if you have to wait more than a minute, open the car windows and turn the engine off. In the same way, make your warm-ups short. Half a minute is long enough, so drive off.

2. Don't be fast and furious.
Don't rev up your engine, even if you think you're Vin Diesel. And be gentle. However, with the kind of traffic -- and crazy bus, jeepney, and cab drivers -- we have, we end up slamming the brakes and accelerating too fast to catch up for lost time. But hard stops and fast starts waste fuel. So keep enough distance and don't tailgate, and keep your cool. Think of your gas and brake pedals like you're stepping on eggs -- accelerate and brake gently. Drive at a steady speed, fast enough but not too fast (I'm sure you can sense if you're working your engine too hard). But don't drive too slow either. And if you're driving an automatic, switch to overdrive when driving fast. If you're driving a manual shift car, switch to high gear when driving fast. And place the gear on neutral when at a stand still (instead of just stepping on your brake pedal). Driving right can improve fuel consumption by 5 to 10 percent.

3. Gas up properly.
For one, be more conscious which gas station to patronize. The difference maybe just a few centavos per liter, but it adds up. I like Petron because pump prices are usually a bit lower than the Shell and Caltex. And this is new to me: buy gas at cooler hours, like early morning or at night, to reduce gas evaporation. Also, avoid buying higher octane gas than necessary. And try to fill 'er up to avoid water condensation (though some advise against this, as it adds to the weight). But don't overfill the tank to prevent evaporation.

4. Don't be a drag.
If you're like me, your car can sometimes look like a trailer, with all sorts of stuff dumped in the backseat or trunk. Take out stuff you don't need. Every extra 100 pounds of excess weight reduces fuel economy by 1 to 2 percent. A joke: lose weight.

5. Use the A/C wisely.
If you're driving in the countryside or the highway, you're not saving gas by shutting down the air condition and rolling down the windows for fresh air (if you're in Tagaytay, not EDSA). You're actually using up as much as 10 percent more gas due to air drag. But if traffic is stop-and-go, you can do that to save money. On second thought, you don't want to die from pollution or heat stroke. But early morning or at night, when it's cooler, and if traffic is light, you can switch it off and roll down your windows just a bit to let outside air in, without causing too much drag. Consider switching it off also when you're quite near your destination. And when you park, find a shaded area or get a windshield shade. That way, you don't have to turn the A/C at full blast. And if it's too hot inside, a greater amount of evaporative emissions take place.

6. Take care of your tires.
Make sure your tires are properly inflated, otherwise it will take your engine more effort and energy to run. It's costly too, adding six percent to fuel consumption for every pound the tire is underinflated. And make sure they're properly aligned. When you have to replace your tires, consider steel-belted tires radial tires, which can increase gas mileage up to 10%.

7. Tune up.
Get a regular tune-up (especially if your car is not exactly spanking brand new), as recommended by your car manufacturer (check the manual). That includes changing your oil and filters regularly, to keep the engine running smoothly. Poorly tuned engines increase fuel consumption by 10 to 20 percent.

8. Plan your trips.
It's obvious, but you have to start planning your trips and your routes better. The less often you have to drive and the shorter the distance, the better. If you can join a car pool, do so. If the distance is just short, try walking. And if you can, avoid rush hour traffic by leaving earlier or later. You save gas, you save time, and it will keep you from going insane. And if your work allows you to telecommute a few days a week, that would be perfect.

9. Consider a more fuel-efficient car next time.
If you're buying a new car, remember that automatic transmissions burn more fuel than manual ones. SUVs are obviously gas-guzzlers. Larger enginesburn more gas.

10. Reconsider buying energy-saving devices.
You've probably been tempted like me to buy energy-saving devices you've seen or read about, like the Khaos Super Turbo Charger. But do a little more research or ask from people who've bought devices like this. This blog entry makes a convincing case against it.

Keeping these tips in mind should go a long way in saving you money and cutting your gas consumption.

Giving

2005-06-27T13:16:00.000+08:00

Giving can be one of the most fulfilling parts of the Christian life. Throughout the Bible we are encouraged to be generous. In fact, there are more verses related to giving than any other subject dealing with money.

l. It is important to give with the proper attitude.
God evaluates our giving based on our attitude. Jesus said in Matthew 23:23: "Woe to you, teachers of the law and Pharisees, you hypocrites! You give a tenth of your spices - mint, dill and cummin. But you have neglected the more important matters of the law - justice, mercy and faithfulness. You should have practiced the latter, without neglecting the former. " The Pharisees had been careful to give the correct amount - down to the last mint leaf in their gardens. However, because they did not give with the proper attitude, the Lord rebuked them.

Give because you love.
For giving to be of any value to the giver, it must be done out of love. "If 1 give all l possess to the poor... but have not love, I gain nothing " (1 Corinthians 13:3). God the Father set the example of giving in love. "For God so loved the world that he gave his one and only Son " (John 3:16). Because God loved, He gave.

The best way to give in love is to give each gift as if you are giving it directly to Jesus Christ. When you give to the Lord, it can be an act of loving worship because God is our Savior and faithful provider.

Give cheerfully.
"Each man should give what he has decided in his heart to give, not reluctantly or under compulsion, for God loves a cheerful giver" (2 Corinthians 9:7). The word translated "reluctantly" means sorrow or grief. The word translated "cheerful" means joyful and happy. We are not to give reluctantly; rather, we should give because we are joyful for the opportunity to help others.

2. Give to God first.
Part of our responsibility as a faithful steward is to give back to God a portion of what He has entrusted to us. "Honor the Lord from your wealth, with the first fruits of all your crops" (Proverbs 3:9).

God doesn't need our money, but we need to give. Giving to the Lord is a reminder that God owns all we possess and that He is our Provider. It is also an indicator of our obedience to God's principles.

3. Amount to give
A tithe, or ten percent of our income, is the foundation of our giving. "Yet you rob me ...in tithes and offerings. You are under a curse - the whole nation of you - because you are robbing me" (Malachi 3:8-9).

In addition to the tithe, God's people in the Old Testament gave offerings. The New Testament builds on the foundation of tithes and offerings, teaching us to give in proportion to what we receive.

Jesus praised sacrificial giving. "A poor widow came and put in two very small copper coins, worth only a fraction of a penny ...Jesus said, `I tell you the truth, this poor widow has put more into the treasury than all the others. They all gave out of their wealth; but she, out of her poverty, put 1 n everything-all she had to live on "' (Mark 12:42-44).

We are convinced that a tithe is the minimum amount we should give to the Lord, desiring then to give more than the tithe as the Lord prospers or directs us.

4. Blessings of giving
The Lord intends for giving to be a blessing to the giver. "Remembering the words the Lord Jesus himself said: `It is more blessed to give than to receive "' (Acts 20:35). If a gift is given with a proper attitude, the giver benefits in four ways.

(1) Giving draws our hearts toward Christ.
Above all else, giving directs our heart to Christ. "For where your treasure is, there your heart will be also" (Matthew 6:21). This is why it is necessary to give each gift to Jesus Christ. When you give your gift to Him, your heart will automatically be drawn to the Lord.

(2) Giving develops godly character and helps us conform to Christ.
Our heavenly Father wants His children to be conformed to the image of Jesus Christ. The character of Christ is that of an unselfish giver. Unfortunately, humans are naturally selfish. One of the ways we become conformed to Christ is by giving.

(3) Giving allows us to put treasures in heaven.
Matthew 6:20 reads, "But store up for yourselves treasures in heaven, where moth and rust do not destroy, and where thieves do not break in and steal" (Matthew 6:20). The Lord wants us to know that we can invest for eternity. Paul wrote, "Not that 1 am looking for a gift, but I am looking for what may be credited to your account" (Philippians 4:17). When we give, there is an account for each of us in heaven, an account we will enjoy for eternity.

(4) Giving can produce a material increase to the giver.
"One man gives freely, yet gains even more; another withholds unduly, but comes to poverty. A generous man will prosper; he who refreshes others will himself be refreshed" (Proverbs 11:24-25).

Whoever sows sparingly will also reap sparingly, and whoever sows generously will also reap generously...God is able to make all grace abound to you, so that in all things at all times, having all that you need, You will abound in every good work. As it is written: `He has scattered abroad his gifts to the poor; his righteousness endures forever. 'Now he who supplies seed to the sower and bread for food will also supply and increase your store of seed and will enlarge the harvest of your righteousness. You will be made rich in every way so that you can be generous on every occasion" (2 Corinthians 9:6-11).

These verses teach that giving results in a material increase: "will also reap generously... in all things at all times... having all that you need... you will abound... will supply and increase your store of seed ...enlarge the harvest ...you will be made rich in every way. " But note why the Lord is returning an increase: "so that you can be generous on every occasion. " The Lord provides a material increase so that we may give more and have our needs met at the same time.

5. To whom should we give?
Scripture encourages us to give to the work of Christ and to the needy.

Give to the local church, Christian workers and ministries.
The Bible tells us to give to the church and those serving in ministry. "Pastors who do their work well .should be paid well and should be highly appreciated, especially those who work hard at both preaching and teaching" (1 Timothy 5:17, TLB). "The Lord has commanded that those who preach the gospel should receive their living from the gospel" (1 Corinthians 9:14).

In our opinion, a minimum of ten percent of our income should be given to our church. But we also believe we should give to others who are teaching us God's Word. "Anyone who receives instruction in the word must share all good things with his instructor" (Galatians 6:6).

Give to the poor.
Hundreds of verses deal with meeting the needs of the poor. In Matthew 25:34-45 we learn one of the most exciting truths in Scripture. "The King will say... 'I was hungry and you gave me something to eat, I was thirsty and you gave me something to drink'... then the righteous will answer him, 'Lord, when did we see You hungrv, and feed You, or thirsty and give you something to drink?"... The King will reply, 'I tell you the truth, whatever you did for one of the least of these brothers of mine, you did for me.' Then he will say to those on his left, Depart from me, you who are cursed, into the eternal fire... I was hungry and you gave me nothing to eat, I was thirsty and you gave me nothing to drink ...whatever you did not do for one of the least of these, you did not do for me. "' Jesus, the Savior of the world, identifies Himself with the poor. When we give to the poor, we are actually giving to Jesus.

[The text is from "Principles of Financial Success", a seminar presented by Crown Financial Ministries.]

Is your MasterCard safe?

2005-06-22T19:19:00.000+08:00

You've probably heard the news: last week, over 40 million million credit card accounts of MasterCard International were compromised by a security breach in the U.S.

In the Philippines, there are around 3.5 million MasterCard users. MasterCard Philippines said about 2,000 of those were affected, or 0.03% of the total. Owners of the accounts have already been informed and their cards will be replaced.

The hacking incident happened at a third-party processor of payment card data. It's shocking, to say the least. But research shows that credit card fraud, at least in the U.S., is actually declining. Unbelievable?

Also, in incidents such as this security breach, only 2% of affected accounts experience fraudulent activity. Still, you can't just brush it off. To make doubly sure your account is safe (whether it's MasterCard, Visa, or American Express, since the latter two have been affected as well), follow this advice:

Check your balance and recent transactions. You can do this online (if your issuing bank Internet facility allows you to view your credit card account) or through the phone (most banks have 24/7 phone-banking services).
Monitor your credit card statements thoroughly, not just now but always.

Remember, this is only one way wherein your credit card account could be stolen. Identity thieves have so many tools and schemes, including phising and hacker attacks. And don't forget good old physical theft, which happened to us. The worst part is that Citibank Philippines forced us to pay the fraudulent transactions because the stolen card was reported after the transactions were made, pointing that this is part of their terms and conditions. We tried our best to contest it but they won't back down.

In the U.S., the cardholder is liable only to the first $50. Here, you get screwed not just once (some thief use your card), but twice (your credit card company will force you to pay). There should be new legislation to protect consumers.

Debt

2005-06-19T22:09:00.000+08:00

The use of debt by individuals is growing rapidly in many countries around the world. Debt is money which one person is obligated to pay to another. Debt includes money owed on credit cards, bank loans, loans from family and friends, and property loans or mortgages.

1. God's Perspective on Debt
Debt is discouraged.

The Bible does not say that it is sin to be in debt, but it does discourage the use of it. "Let no debt remain outstanding" (Romans 13:8). The reason the Lord discourages debt is found in Proverbs 22:7, "The rich rule over the poor, and the borrower is servant to the lender. " The Lord wants His people to be free to serve Him, and not be financial servants to lenders.

In the Old Testament, being out of debt was one of the rewards for obedience.

"If you fully obey the Lord your God and carefully follow all his commands I give you today, the Lord Your God will set you high above all the nations of the earth. All these blessings will come upon you. You will lend to many nations but will borrow from none" (Deuteronomy 28:1-2, 12).

2. How to get out of debt
Here are some steps for getting out of debt.

(1) Pray.
In 2 Kings 4:1-7, a widow was threatened with losing her children to her creditor, and she asked Elisha for help. Elisha told her to borrow empty jars from her neighbors. The Lord multiplied her only possession, a little oil, and all the jars were filled. She sold the oil to pay her debts and free her children.

The same God who provided for the widow is interested in helping us becoming free from debt. The most important step is to pray, seeking the Lord's help.

(2) Accumulate no new debt.

(3) List all your debts and everything you own.
List your debts to determine your current financial situation. Then decide whether you should sell any possessions to reduce debt.

(4) Use a written spending plan or budget.
Develop a written spending plan to ensure that spending does not exceed income. Some people need to lower their spending to get out of debt.

(5) Establish a repayment plan for each debt.
Most creditors are willing to work with people who honestly want to repay their debt, so communicate regularly and follow through.

Try to pay off the smallest debts or those with the highest interest rate first. Once you have paid off the first debt, add that payment amount to the regular payment for the second one you want to pay off. Then, when that one is paid off, apply both payments to the next debt and so forth until all debts are paid.

(6) Consider earning additional income.
Many people hold jobs that simply do not produce enough income to meet their needs even if they spend wisely. They may need to earn additional income to stay out of debt.

3. When is debt acceptable?
Scripture is silent on when using debt is acceptable. In our opinion, it is permissible to owe money for your business, for the purchase of a home, or for education for your vocation. If you borrow for any of these uses, follow these guidelines:

o Make debt the exception and not the rule.
o Plan to repay what was borrowed as soon as possible.
o Create a written repayment plan.

4. Cosigning
Cosigning relates to debt. Anytime you cosign, you become legally responsible for the debt of another. It is just as if you borrowed the money and gave it to your friend or relative who is asking you to cosign. The Bible discourages cosigning. Proverbs 17:18 reads, "It is poor judgment to cosign another's note, to become responsible for his debts" (TLB).

[The text is from "Principles of Financial Success", a seminar presented by Crown Financial Ministries.]

Are long-term negotiable certificates of deposit a good investment?

2005-06-14T07:39:00.000+08:00

Well, for one, that's quite a mouthful. If you haven't seen the newspaper ads yet, these are investment instruments being offered by Banco de Oro (the first in the country) and Citibank.

What is a long-term negotiable certificate of deposit (LTNCD) anyway? Let's break it down:

Deposit: It's a bank deposit product. So it's insured by the PDIC (up to P250,000).
Certificate of Deposit: Better known as a CD. So it earns interest. And it's debt instrument offered by a bank. But CDs, as we commonly think of, are short-term and non-negotiable. This is a new animal.
Negotiable: That means you can sell them before the maturity date at the current market price.
Long-term: In this case, we're talking about 5 years and 1 day, making the interest income exempt from withholding tax, if it's kept that long.

So it's like a deposit in that a bank issues it and it is covered by the PDIC. Yet, it's also like a bond because it's negotiable and long-term and pays interest every quarter. In other words, it's a hybrid product.

And it's marketed as a better alternative to government Treasury bills (T-bills) and to an ordinary bank deposit like a time deposit or a regular CD. Well, is it?

Let's take a look:

LTNCD vs. T-bills
1. Safety. T-bills, by nature, are safer because they are issued by the government. LTNCDs are issued by a bank, which is obviously not as safe as the government. However, they are covered by PDIC up to P250,000, so they are as safe at least up to that amount. And given the track record of the issuing banks, they are quite safe.
2. Affordability. It's not exactly true you need at least P200,000 to buy T-bills while you only need P100,000 to buy LTNCD. You can buy T-bills directly for P100,000. But you don't need that much to buy government securities. Retail Treasury Bond (RTBs) are available for as little as P5,000 (although some banks require at least P100,000). Alternatively, you can invest in fixed-income mutual funds (bond funds) for P10,000 or so, which invest in all types of government securities and corporate bonds (however, they are not insured).
3. Income. Indeed, LTNCDs have a premium over the 91-day T-bill. But look, we're comparing apples to avocados. LTNCDs are 5-year instruments; 91-day T-bills are, well, 91-day instruments. Wouldn't a long-term Treasury Bond be a better benchmark? Keeping LTNCDs for 5 years at a small premium over a 91-day T-bill doesn't sound like a great investment.
4. Liquidity. Okay, you can sell them before the maturity date. But you can do the same with government securities.
5. Taxes. Probably the only real advantage of LTNCDs is that, if you keep them for the entire period, your interest won't be subject to withholding tax. T-bills are subject to 20% withholding tax. However, if you sell your LTNCD before that, it's subject to the same 20% tax.

LTNCD vs. Time Deposit
1. Safety. Both time deposits and LTNCDs are issued by a bank, and are covered by PDIC up to P250,000. No advantage there.
2. Affordability. You need just P1,000 to put money in a 90-day time deposit.
3. Income. The rate for a 91-day T-bill is about 5-6%, add a premium and you get a rough idea what to earn from an LTNCD. Here, they are superior to a time deposit of a typical commercial bank, which offers about 4-5% for a 364-day time deposit at P100,000. But some banks, particularly savings and rural banks (disclosure: we have a rural bank), offer higher yields, such as double your money in 5 or so years time deposit products (about 15% compounding).
4. Liquidity. You're stuck with a time deposit to earn the full interest. But if you choose a short-term time deposit, as little as a month, it's practically liquid.
5. Taxes. If you place money in a long-term time deposit (5 years and 1 day), just like the LTNCD, the interest is tax-free. For short-term time deposits, it's subject to 20% withholding tax, so the net interest may actually be comparable to a short-term time deposit.

The verdict?

If you're not keeping LTNCDs for 5 years, government securities like T-bills and RTBs are still safer and better investments (as LTNCDs won't be tax-free). If you're holding on to them for the entire maturity period, compare the interest rate that you will earn from the LTNCDs not with the rate of a 91-day T-bill but with a comparable 5-year Treasury Bond or Fixed Rate Treasury Note. Even if they're subject to the 20% withholding tax, the net interest rate would be higher. So, LTNCDs still lose against government securities.

Compared to time deposits, LTNCDs may just have a comparable rate on a net basis to short-term time deposits, since they'll also be subject to withholding tax. And if you're looking at 5-year investments, you can find long-term time deposits (5 years) that offer much higher rates.

So, are LTNCDs a bad idea? Well, I don't see distinct advantages. As a comparable substitute and for diversification purposes, maybe. But as a superior alternative, I think not.

Spending

2005-06-13T15:40:00.000+08:00

There are several biblical principles that should influence our spending.

1. Learn to be content.
The word contentment is mentioned seven times in Scripture, and six times it has to do with money. Paul wrote, "I have learned to be content whatever the circumstances. I know what it is to be in need, and I know what it is to have plenty. 1 have learned the secret of being content in any and every situation, whether well-fed or hungry, whether living in plenty or in want. I can do everything through him who gives me strength" (Philippians 4:11-13). Paul "learned" to be content. We are not born content; rather, we learn contentment.

"If we have food and clothing, we will be content with that" (1 Timothy 6:8). Biblical contentment is an inner peace that accepts what God has chosen for our present financial situation. "Keep your lives free from the love of money and be content with what you have, because God has said, `Never will I leave you; never will I forsake you "' (Hebrews 13:5).

2. Learn to avoid coveting.
Coveting means craving another person's property, and it is prohibited in Scripture. The last of the Ten Commandments reads, "You shall not covet your neighbor's house. You shall not covet your neighbor's wife, or his manservant or his maidservant, his ox or donkey, or anything that belongs to your neighbor" (Exodus 20:17). In other words, we are commanded not to covet anything that belongs to anyone!

Do not determine your spending by comparing it to others. Some spend more than they can afford because they want to spend as much as their friends can afford.

3. Live simply.
Some possessions can demand so much time or money that they harm our relationship with the Lord and our loved ones. Scripture encourages us to live a quiet, simple life. "Make it Your ambition to lead a quiet life, to mind your own business and to work with your hands, just as we told you, so that your daily life may win the respect of outsiders and so that you will not be dependent on anybody" (1 Thessalonians 4:11-12).

4. Needs should be met within the body of Christ.
The early church was a model of meeting needs. "Our desire is not that others might be relieved while you are hard pressed, but that there might be equality. At the present time your plenty will supply what they need, so that in turn their plenty will supply what you need. Then there will he equality, as it is written: 'He who gathered much did not have too much, and he who gathered little did not have too little "' (2 Corinthians 8:13-15).

5. Be aware of the influence of advertising.
Many of us are exposed to advertising that creates discontentment with what we have. It often communicates the deceptive message that if we buy something we will be happy. However, the purpose of advertising is to prompt you to spend money. Seek the Lord's guidance and godly counsel when making a spending decision. If you think a purchase would not please God, do not buy it.

6. Develop and use a spending plan (budget).
We are encouraged to plan our spending and to be aware of our possessions. "Be sure you know the condition of your flocks, give careful attention to your herds" (Proverbs 27:23). Using a spending plan is a practical way to spend wisely.

[The text is from "Principles of Financial Success", a seminar presented by Crown Financial Ministries.]

Mutual fund laggard

2005-06-10T23:45:00.000+08:00

It's not surprising that the Philippines lags behind other Asian countries when it comes to the mutual fund industry. According to the AIM study, our assets under management (AUM) as of end of 2003 is a mere $792 million (as of end of March 2004, it has gone up to $1 billion), compared to Indonesia, which has $8 billion, already considered one of the smallest.

Worse, China's mutual fund industry, just 6 years old, has $20 billion AUM. To think we started in the 1950s (though it only took off in the early nineties). Here's how we fare:

1. Japan - $349 billion with 2,617 funds
2. South Korea - $250 billion with 6,736 funds
3. Hong Kong - $250 billion with 963 funds
4. Taiwan - $76 billion with 401 funds
5. China - $20 billion with 110 funds
6. Malaysia - $18 billion with 217 funds
7. Thailand - $11 billion with 333 funds
8. Indonesia - $8 billion with 186 funds
9. Philippines - $792 million with 21 funds

Why are we such laggards? Well, for one, the requirements to put up an investment company are quite prohibitive (at least P50 million in capital), opening the business to just a few players. There's not much public education on and promotion of mutual funds. And, frankly, Filipinos have a very low savings rate.

That's a pity as mutual funds offer better rates than most savings and time deposits offered by commercial banks. [Disclosure: I'm a registered mutual fund agent, but the facts speak for themselves.] You can check the rates of returns of available mutual funds and find bond funds that return more than 8% and equity funds that return more than 10%.

So, seriously consider mutual funds as part of your investment portfolio. It's the primary investment vehicle for many regular folks in the U.S. and other countries. And it is where we put most of our long-term savings.

How to kill the non-life insurance industry

2005-06-09T11:25:00.000+08:00

Many have criticized the SEC for somehow partly causing the current woes of CAP and Pacific Plans after changing the ARL rules for the pre-need industry (of course, these companies are also at fault). Now, the Insurance Commission released a proposed circular that requires non-life insurance companies to triple their minimum paid-up capital from P50 million to P150 million by yearend (!!!), then double to P300 million by the end of 2006 (!!).

An industry association, aghast over the announcement, noted that some 86 of the 96 non-life insurance companies are in danger of folding up as only 10 are capitalized over P300 million. Another 8 are capitalized over P150 million. But almost half have only some P50 million in capital.

Of course, the idea is to strengthen the industry, but such a drastic measure will only weaken it. Having to triple capital by P100 million in about six months is close to impossible. Mergers and acquisitions take time. The best way is to do the transition incrementally at a gradual pace. Otherwise, it will certainly cause policyholders to panic and lose faith in the system.

So, if you're a holder of a non-life insurance policy, such as fire, car, residential, etc., you better check how your insurance company is holding up. The advantage in this case is that unlike life insurance policies and pre-need plans, you're not tied up for years.

Non-life insurance is usually renewed every year, so if you feel your insurance company might be in trouble if this circular becomes effective (it's still a proposal so don't panic), don't cancel your policy yet. But do start to shop around particularly with the better-capitalized companies so you can transfer your business before your current policy expires.

Mercury Drug-Citibank Card

2005-06-07T23:08:00.000+08:00

Here's another co-branded card: the Mercury Drug-Citibank Card. As you know, co-branded cards are another twist in the credit card business. Credit card companies partner with certain institutions, throw in some special features, and promote the card to a more niche market segment.

Equitable Card has done that with MTV. UnionBank has done that with Slimmers World and The Pan Pacific. HSBC has done that with Philippine Airlines. And, of course, Citibank has done that with Shell and Cathay Pacific.

Now, the latest co-branded product is with Mercury Drug, which makes a lot of sense. And from the looks of it, it seems like a compelling offer:

you get a 2% rebate (as a credit on your card bill) on all Mercury Drug purchases and 0.5% for all else (with a cap of P5,000 for the latter)
you get special discounts from the likes of Healthway (free annual physical exams plus generous discounts, not bad if you don't have an existing health card), Lifeline Arrows (free emergency quick response service), Medical City (10% off on in-patient bills), Fitness First (waived joining fee and 25% off on monthly dues), and Asian Eye Institute (25% off on LASIK surgery)
you get the usual Citibank features like PayLite installment plan, One Bill, worldwide acceptance, etc.
first year annual fee waived (for new Citibank cardholders)

Okay, that's the good part. Here's what you need to consider:

if you have an existing Mercury Drug "Suki" card, which gives you a 0.5% rebate, getting the co-branded Citibank card gives you just an extra 1.5% (the 0.5% is already included in the total 2%)
rebates make sense if you make a lot of purchases at the partner institution, in this case Mercury Drug, such that your total rebates are much more than what you'll spend on the annual fee (the first year fee is waived if you haven't had a Citibank card for the last 6 months, in which case, you're already ahead)
there's typically no reward program for co-branded cards with rebates (the rebate program is already your reward program)
Citibank is quite notorious for high fees (3.5% monthly interest rate) and aggressiveness (in pushing their cards, approving applications, and collecting)
we have a bad experience with Citibank on disputed fraudulent transactions due to a stolen card (unfortunately, Citibank won't budge; it's a pity it treats long-time loyal customers in this manner)
if you have an existing health card with an HMO through your employer or one that you bought for yourself, the Healthway and Medical City promos lose their relevance, though I admit the other give-aways and discounts are appealing

Now, before you think about applying, remember, if you already have 2-3 cards, resist the temptation. Cancel one if you really want this card. And make sure you do need it, i.e. the special features add real value to you.

Otherwise, if you don't spend too much at Mercury Drug, have an HMO card already, have emergency services via your car insurance or motoring club, have gym membership, want a rewards program more, want a lower interest rate, or otherwise don't see enough value, then ignore this product altogether.

Chinatrust Bash Your Balance Loan

2005-06-06T23:57:00.000+08:00

You've probably seen Chinatrust's promo on newspapers called "Bash Your Balance Loan". It's an interesting and relevant twist on the usual personal loan.

The concept is to sell this loan to employees burdened with huge credit card debt. The idea is Chinatrust will lend from P30,000 to as much as P1 million, which will be paid off in 24 months for a much lower rate. The bank will even pay half of the first month's amortization. The promo is only until June 30, 2005.

It sounds like a good idea. Except: isn't there such a thing as a balance transfer? Most credit card companies offer this. If you're burdened with huge credit card debt with Card Company A, you can transfer the balance to transfer to Card Company B, which will lend you the money to pay off the debt. In turn, you will have to pay off your transferred balance at a fixed period for a much lower rate. Sounds familiar?

The thing is, Chinatrust's add-on rate is 1.59% a month. Sure, it is lower than the regular add-on rate of 2.75% to 3.25% that credit card companies charge. But the same credit card companies have balance transfer offers of as little as 0.99% for an 12-month period, as in the case of HSBC. Some even offer 0% interest (but with a 5%-7.5% processing fee) for a 3- to 6-month period, like Equitable Card.

Okay, we're not exactly comparing apples to apples. Chinatrust's fixed period is 24 months, which means, of course, a higher rate. But HSBC's 12 months, at 0.99%, is still a lot lower. Its 18-month option takes the rate to 1.25%. If it has a 24-month option (which it doesn't), then they're probably on equal footing.

In the case of Equitable, at 24 months, the rate goes up to 1.7%, making it more expensive than Chinatrust's 1.59%. But, check out Citibank's 24-month balance transfer add-on rate (click on the Statement of Certain Credit Card Fees and Charges link), which is just 1.5%. Not bad, eh?

I'm not saying Chinatrust's promo is no good. It could be, particularly if you're carrying a huge debt and you need a much longer period (like Chinatrust's 24 months) to be able to afford the monthly amortization. Otherwise, it makes more sense to pay it off quickly and just get charged a much lower rate.

But look also at alternatives, like balance transfer promos of credit card companies that charge even lower for a 24-month period. Consider also other possible hidden charges like processing fees. Make sure as well that you're comparing similarly-defined interest rates (add-on versus effective).

Lastly, remember: shop around for rates and always ask, ask, ask!

Our Responsibilities

2005-06-06T17:38:00.000+08:00

We are to be faithful stewards of God's possessions.
A steward is a manager of someone else's possessions. God owns all that we have, and He has given us the responsibility to manage our things faithfully according to the financial principles of Scripture. "It is required in stewards that a man be found faithful " (I Corinthians 4:2 NASB).

We are to be faithful with whatever we have, even if it is little. "Whoever can be trusted with very little can also be trusted with much, and whoever is dishonest with very little will also be dishonest with much " (Luke 16:10).

If we are faithful with small things, God will trust us with greater responsibilities. We must not handle our money and possessions in ways that would displease Him because this would make us unfaithful stewards.

Read what is said to the faithful steward, "Well done, good and faithful servant! You have been faithful with a few things; I will put you in charge of many things. Come and share Your master's happiness" (Matthew 25:21). Now, compare this with what is said to the unfaithful one, "You wicked, lazy servant... take the talent [an amount of money] from him" (Matthew 25:26-28). The Lord wants us to understand the importance of being a faithful steward.

Be careful of extreme teachings on wealth and poverty. One extreme is that godliness can only occur in poverty.

Money and possessions can be used for good or evil. A number of godly people in Scripture were among the wealthiest people of their day.

In the Old Testament the Lord extended the reward of abundance to His people when they were obedient, while the threat of poverty was one of the consequences of disobedience. Deuteronomy 30:15-16 reads, "I set before you today life and prosperity, death and destruction. For I command you today° to love the Lord your God, to walk in his ways, and to keep his commands ...and the Lord your God will bless you. "

Psalm 35:27 reads, "The Lord ...delights in the prosperity of His servant. " [NASB] We may legitimately pray for prosperity when our relationship with the Lord is healthy and we have a proper perspective of possessions. "Beloved, I pray that in all respects you may prosper and be in good health, just as your soul prospers" (3 John 2 [NASB]). The Bible does not say that a godly person must live in poverty. A godly person may have material resources.

The opposite extreme is that all Christians who truly have faith will always prosper financially. This extreme is also an error.

Study the life of Joseph. He is an example of a faithful person who experienced prosperity and poverty. He was born into a prosperous family, then thrown into a pit and sold into slavery by his jealous brothers. While Joseph was a slave, his master promoted him to be head of his household. Later he made the righteous decision not to commit adultery with his master's wife. The result? He suffered years in prison for that right decision. But then, in God's timing, he was elevated to Prime Minister of Egypt.

The guideline for prosperity is found in Joshua 1:8, "Do not let this Book of the Law depart from your mouth; meditate on it day and night, so that you may be careful to do everything written in it. Then you will be prosperous and successful. "

This passage offers two requirements for prosperity. Meditate on the Scriptures and do everything they command. When you do this, you place yourself in the position to be prospered financially. There is no guarantee, however, that God will choose financial prosperity for you. He knows what is best for you and requires that you trust Him for whatever He chooses.

	Poverty	Steward	Prosperity
Possessions are:	Evil	A responsibility	A right
I work to:	Meet only basic needs	Serve Christ	Become rich
Godly people are:	Poor	Faithful	Wealth
Ungodly people are:	Wealth	Unfaithful	Poor
I give:	Because I must	Because I love God	To get
My spending is:	Fearful and joyless	Prayerful and responsible	Carefree and consumptive

[The text is from "Principles of Financial Success", a seminar presented by Crown Financial Ministries.]

God's Responsibilities

2005-05-30T11:22:00.000+08:00

The Word of God reveals two sets of responsibilities in the handling of money: God has certain responsibilities and we have others.

1. God's Responsibilities

God is the owner.
God created all things. "In the beginning God created the heavens and the earth " (Genesis 1:1). He never transferred the ownership of His creation to people.

The Lord owns everything. "To the Lord your God belong ...the earth and everything in it" (Deuteronomy 10:14). "The earth is the Lord's, and everything in it" (Psalm 24:1).

God owns the all the land: "The land must not be sold permanently, because the land is mine (Leviticus 25:23). God owns all the gold and silver: "'The silver is mine, and the gold is mine,' declares the Lord Almighty " (Haggai 2:8). God owns every animal: "Every creature of the forest is mine, and the cattle on a thousand hills ...the creatures of the field tire mine. If I were hungry, I would not tell you, for the world is mine, and all that is in it" (Psalm 50:10-12).

God is in control.
Our loving heavenly Father is in ultimate control of every event. "The Lord does whatever pleases him, in the heavens and on the earth, " (Psalm 135:6). "I praised the Most High... He does as he pleases with the powers of heaven and the peoples of the earth. No one can hold back his hand or say to him: 'What have you done?'" (Daniel 4:34-35)

It is comforting for those who follow Christ to realize that God uses everything, even difficult circumstances, for ultimate good. "We know that in all things God works for the good of those who love him, who have been called according to his purpose" (Romans 8:28).

God provides our needs.
The Lord is the one who provides our needs. In Genesis 22:14 God is spoken of as Jehovah-jireh, which means, "the Lord will provide." "My God will meet all your needs according to his glorious riches in Christ Jesus" (Philippians 4:19).

The Lord promises to provide our needs if we put Him first in our lives. "Seek first his kingdom and his righteousness, and all these things [food and clothing] will be given to you as well" (Matthew 6:33). The same Lord who fed manna to the children of Israel during their 40 years of wandering in the wilderness, and who fed 5,000 with only five loaves and two fish, has promised to provide our needs.

[The text is from "Principles of Financial Success", a seminar presented by Crown Financial Ministries.]

Next issue, we'll talk about "Our Responsibilities".

Money and the Bible

2005-05-23T17:32:00.000+08:00

[Note: This is a series on the "Principles of Financial Success" based on a seminar presented by Crown Financial Ministries.]

God loves us. And because He cares for us, He gave us guidelines in His Word for handling money in a way that would be best for us and please Him. In fact, the Bible contains more than 2,350 verses dealing with money and possessions. Jesus taught more about money than almost any other subject. The Lord said so much about money and possessions for spiritual reasons and very practical ones.

1. Spiritual Reasons
Money is a primary competitor with Christ for first place in our lives.
As our loving Creator, God understands us perfectly. He knows that people often choose to put possessions ahead of Him. In Matthew 6:24 he tells us, "No one can serve two masters. Either he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve both God and Money. "

It is important to understand that money or possessions are not evil. 1 Timothy 6: l0 says, "The love of money is a root of all kinds of evil." Money is not evil, but the wrong attitude towards it is. For example, money can be used for good to help people in need or for evil to purchase illicit drugs.

How we handle money affects the intimacy of our fellowship with Christ.
Jesus Christ told us, "If you have not been faithful in the use of worldly wealth, who will entrust the true riches to you? (Luke 16:11 NASB). What are the "true riches " in life? The true riches are a close relationship with Christ.

How we handle money is an indicator of our true relationship with Christ. It demonstrates whether we believe in God and obey the principles revealed in the Bible.

2. Practical Reasons
Every day we make decisions about money. The Lord knew we needed His insight to use it wisely. Scripture reveals His principles for working, earning, spending, saving, investing, giving, getting out of debt, and teaching children how to handle money. Everything you need to know about money and possessions is found in the Word of God.

Unfortunately, most of us have not been taught God's way of handling money, so we do it from the world's perspective rather than God's.

Next issue, we'll talk about "God's Responsibilities".

Jobless growth continues

2005-03-25T18:06:00.000+08:00

It's not easy finding a good job nowadays. Which is a bit odd given the number of want ads on the Sunday classifieds. This column makes a good point about the real cause of growing unemployment, which has risen to 11.3% in January compared to the same period last year, or about 4 million jobless Filipinos.

So, how come there are more Filipinos without a job when our economy grew by 6.1% and there seems to be an insatiable demand by companies?

Is there simply a mismatch between demand and supply? Call centers need to fill about 35,000 this year, yet the acceptance rate is just 3-5%. Sure, there is. But it's not really that.

"The main cause of unemployment in the Philippines is the lack of effective demand for new workers. Economic growth is largely driven by consumption, sustained by the remittances of the nation’s lifesavers—the overseas Filipino workers. In the 'real' or 'productive' side of the domestic economy, there are no signs of any major expansion in any sector outside of the telecoms and call-center industries, both of which are now reaching saturation points."

Makes sense to me.

The 10-Minute Investment Checklist

2005-02-14T23:06:00.000+08:00

Now that you have an idea where you can invest P100,000, how do you decide then which is the right one for you?

Before anything else, ask yourself two things:

What are you investing this for? (for retirement, for education, for travel, for a car) This is your investment objective or goal.
When do you need to achieve your goal? (this year, next year, 5 years from now, when you're 60) This is your investment horizon or time frame.

This will guide you in making investing decisions. Once you know what you want and when you want it, you can start evaluating your options.

Here's a useful checklist. Run this through the investment options I listed last time and any other investment products you'll find in the market. It shouldn't take more than 10 minutes to figure out if the product matches your objectives.

Rate of return. Obviously, this is probably the primary consideration we have when investing. So what rate should you look for?

Here's a rule of thumb: Beat inflation. If your money grows less than the rate of inflation (the change in the prices of a basket of goods), then you're actually worse off. So, if inflation has averaged 6% a year, the returns on your investment should grow more than that.

What's the big deal about inflation? Inflation eats up the value of your money. Your P100 now can buy a lot less stuff 5 years from now. We all know that. So, make sure your investment grows faster than inflation.

Also, check if and how often returns are compounded. A fixed-rate Treasury bond (FXTN) gives you a fixed interest every quarter called a coupon. It doesn't compound, so it's straight interest.

On the other hand, a time deposit or a bond fund generates interest which, along with your principal, earns interest. So, the interest earns interest. That's compound interest. And that's the secret of successful investing. Compounding becomes even more powerful the more frequent it is. If it compounds daily instead of monthly, then the faster the growth.

Guarantee of return. If your investment returns 1,000%, is it guaranteed? That's why for "fixed income" investments like T-bills, time deposits, and bonds, returns are generally conservative because they are generally fixed. If you're promised returns of 4% a month, then start wondering. That's equivalent to 48% a year. Where do these guys invest or lend their money that allows them to guarantee you 48% a year? Here's another rule of thumb: If it's too good to be true, it probably is.

But if an investment grows by 48% this year, 30% next year, 1% the next, -20% later, and then 15% thereafter, the the rate or return is obviously not guaranteed. Is that bad? Of course not. Investments like stocks, real estate, and commodities act this way. They are considered riskier because no one's promising you anything. But here's yet another rule of thumb: the higher the risk, the higher the return.

So, when evaluating an investment instrument, check if the rate of return is guaranteed, in which case, expect a relatively conservative rate. If it's not, then demand a historically high average rate because you deserve a higher return for the extra risk you take.

Safety. Are you willing to risk everything, including the original amount of your investment? Or do you want to make sure you keep your principal intact?

Well, the bad news is anything can happen. There is all sorts of risk that affect investments. But generally, fixed-income instruments keep your principal intact, that is, if you keep them until they mature (they reach the end of their term). So, if you're a bit conservative, placing your money in T-bills, RTBs, or time deposits will give you some peace of mind. The government will sure to pay you no matter what. Even if it goes bankrupt, it can just print more money. Your bank, well, that's another matter. But here's their guarantee: your investment is insured and safe up to P250,000.

Now, if you're primary concern is to make sure you don't lose your principal, then stocks and mutual funds are not for you. On the other hand, you'll be sacrificing growth for safety. Not a good thing if you're investing for the long haul. But very much fine for short-term objectives.

Liquidity. Once you place your money, how soon can you take it out? That's liquidity. Regular savings deposits are liquid because they're easy to get into and out of. You can withdraw them anytime.

But for time deposits, you need to keep your money a bit longer, otherwise you won't earn as high an interest. Mutual funds and unit-investment trust funds are a bit less liquid, because they generally require a one-year holding period (although you can withdraw within a year for a fee).

Stocks are relatively liquid in the sense that you can buy and sell anytime. However, if the price of your stock goes a lot lower than the price you bought it for, and you don't want to sell at a loss, then it's not very liquid, is it? Real estate investments are not liquid because it's harder and takes a longer time to sell them.

So, how does this affect your investing decision? If you'll need the money quickly, you want to place it in liquid instruments.

Affordability. There are investments out there that earn a lot. The catch: you need a million bucks to get access to them. The good news is, there are a good number of investment instruments that you and I can afford. Basically, all the ones I listed last time.

You only need P5,000 to buy RTBs and P10,000 to invest in mutual bond funds. The lesson: even if you don't have a lot right now, don't let that stop you from investing. Because you can. So this is another factor to consider when investing: the initial minimum investment required.

Diversification. You know this rule of thumb: Don't put all your eggs in one basket. That means spreading your money across different investment instruments and different institutions.

So, ideally, you should have money in stocks, bonds, government securities, money market instruments, etc. This way, even if prices for stocks go down, you wouldn't be hit too hard if you have bonds, time deposits, etc. that offset your losses. Diversify across institutions also. So even if one bank or pre-need company closes down, your life's savings don't go down the drain.

Most investments don't provide built-in diversification. You have to spread your money yourself. However, mutual funds promise instant diversification since they invest in a whole lot of stocks or bonds, spreading your risk.

Fees. There's no such thing as a free lunch. You pay a broker's fee when you buy stocks and an entry load and an annual management fee when you invest in a mutual fund. Fees also come in the form of commission. When you get an endowment or pension plan, part of your premium goes to commissions.

Fees eat up your returns because instead of earning for you, the portion of your investment that could have generated a return instead when into the pocket of the broker or institution that sold the product to you. Is that bad? Well no. It's a product which has a price. The fee or commission is that price.

What you need to watch out for is how much is the fee or commission. Even if it's small, it all adds up.

Taxes. Most investments are taxed. The government taxes bank deposits, stock transactions, even government securities.

Mutual funds are tax-free and so are investments that are long-term (at least 5 years). So, when comparing investments, compare the returns net of tax.

But like fees, don't get obsessed about taxes. Even if the fee or tax is relatively high, but the returns are consistently higher than competing investments, then that should take precedence.

Convenience. Do you want to actively manage your investments yourself by trading regularly? Or do you want to just dump your money and let it grow on its own?

You can trade stocks or foreign currency yourself, but that means you have to be watching the market constantly. In contrast, you just leave your money to a mutual fund or UITF manager, a pro who's hired to think, plan, and implement for you (that's why there's a management fee).

Do you want to put a lump sum every year or do you like putting a little aside every month? For example, there are so-called lump-sum endowment plans and there are plans that are 5 years to pay.

The institution. Check what institution is issuing these investments. Is it the government? Then consider it practically risk-free (or at least low-risk). Is it a top-notch corporation like Ayala Corporation whose corporate bond is highly rated?

Is it a bank? A mutual fund company? An insurance company? A pre-need company? Which one? How stable is the company? How has it performed in the past? Who are the directors and officers? Where does it invest or lend its money?

This shouldn't preclude you from buying or investing from a new company of course. Even the big and old ones fail and close shop. The whole idea is to investigate. And then diversify.

Where to Invest P100,000

2005-02-04T11:00:00.000+08:00

Okay, let's say you have a hundred grand to spare. You have no financial obligations like credit card debt or immediate financial needs like travel. Where do you invest P100,000?

And I don't mean investing in yourself or in a business. I'm talking about financial instruments. Regulated, legitimate investment vehicles from financial institutions.

Well, here are some options:

Special savings deposits. You can place the money in a special savings account that earns a much higher interest than a regular savings account. Most commercial, savings, and rural banks offer this. Shop around.

Time deposits. The favorite instrument of Filipino savers. You can choose to place the money in 30-, 60-, and 90-day time deposits. Again, most banks have this.

Stocks. You can buy shares of publicly-listed stocks and ride the current bull run. Just call up your friendly neighborhood broker.

T-bills. If you want relative safety, place your money in short-term government securities like Treasury bills (T-bills). Dealers like commercial banks offer this.

RTBs. You can also invest in longer-term government securities like Fixed Rate Treasury Notes (FXTNs). Alternately, you can invest in Retail Treasury Bonds (RTBs), which require much smaller amounts.

UITFs. Replacing Common Trust Funds (CTFs), Unit Investment Trust (UITFs) are an improved version, as market prices are updated daily. A lot of commercial banks with trust departments offer this.

Mutual funds. Similar to UITFs but more regulated, mutual funds pool money from thousands of investors. There are different types depending on your investment objectives. Only a few investment companies offer this.

Foreign currency. You can exchange your P100,000 into dollars. Now that the peso is appreciating, and the dollar is relatively cheap, it's a good time to buy. Alternately, check out the euro since it's going stronger than the dollar. Banks and forex brokers let you do this.

Insurance plans. Whole life insurance plans have a savings component. A variation is the variable (also called unit-linked) insurance plan, which gives you greated control on how your premiums are invested. A few life insurance companies offer this.

Endowment plans. These are insurance products but don't provide lifetime coverage. They are often positioned as investment products because the emphasis is on the returns. A lot of life insurance companies offer this.

Pension plans. You can buy a pre-need pension plan, that is, if you're undeterred by the negative news on certain pre-need companies.

These are just some options for you. Now, which is best? Well, it depends. On what? Your objective, your risk appetite, your time frame. Beyond that, each has its pros and cons. Next issue, we'll talk about the factors to consider when investing.

The 13th Month Dilemma

2004-12-16T19:37:00.000+08:00

It's the Christmas holidays and, indeed, 'tis the season to be jolly. This is the month we'll get our mandatory 13th month bonus. An entire month's pay for doing nothing! What a great concept!

So what's the dilemma in that? For most of us, nothing. We don't think twice about spending everything for shopping. It's Christmas, for crying out loud! We need the extra dough to buy gifts. Who's going to pay for all the useless knick-knacks you'll exchange with your officemates? Who's paying for your kid's trip to Toy Kingdom? Who's paying for your trip to Toy Kingdom? Where will you get the money to buy your husband a new pair of socks? How will you pay for your weekend trip to Bangkok? Isn't that what your 13th month bonus for?

Well, in a word, yes. But I have something to tell you that will spoil your fun (and mine). There are other, better ways to use your 13th month bonus on. For that matter, it's not just that. It's the other automatic bonuses you may have received just for showing up. It's the money you may have received from your parents (which I like to call "pity money"). It's the 100-peso bill you found in the street. Money for nothing. Free money. Found money. Manna from heaven. Whatever you call it.

So, what do you do with extra cash that you have but did not earn? Okay, let me get back to the topic. What do you do with your 13th month cash bonanza? Let me count the ways (and compute your financial returns).

Spend it. The obvious and common option. Why use your hard-earned savings on buying gifts when you can fund them with your 13th month pay? It makes sense, right? It does, really, when the other options are to use up your savings originally set aside for a more important financial goal or to rack up more debt with your credit card.

But this reflects poor financial planning in the first place. Irregular, once-or-twice-a-year expenses like Christmas gifts should be planned ahead, and saved for. I know, it's easier said than done. But it's these occasional but expensive expenses that take a hit on our budget and our financial plans.

Return: 0%

Save it for now. I'm talking about delayed gratification. You'll still spend the money, but not now. Maybe you're thinking of buying a new digital camera. Instead of charging it to your card and pay part of it when your bill comes due and pay the rest say a month later (at a monthly interest rate of 3.5%), why not set it aside, save the balance of the cost of the camera, and buy it when you can pay off the whole thing in cash (or time in during a sale). Sure, all you did was save a little on credit card interest. But congratulations! You're starting to form a good financial habit - waiting.

Return: 3.5%

Invest it. Talk about waiting. This time, you don't even spend your bonus until, well, years or even decades from now. What if you place your 13th month pay of, say P25,000, to a mutual fund, treasury bond, or other similar investment that returns an average of 10% net a year. In five years, your bonus has grown to P40,000; in ten years, P65,000; in twenty years, almost P170,000. All just by sitting on your butt. That's a 579% jump, or an effective rate of 29% a year. That's the power of compounding: you earn interest on your interest.

Return: 29%

Pay down debt. Okay, it only gets worse. What if I tell you that you can earn 42% in a year, but you won't receive a single centavo? How is that possible? If you carry credit card debt for a year, you're paying 42% a year or 3.5% a month. And that's conservative. Some credit card companies charge interest on your interest, reverse compounding so to speak.

Paying off your debt, or even part of it, saves you a lot more. You won't get anything tangible in return but you can gain back greater control over your financial life.

Return: 42%

Donate it. Finally, you can give it away, to your church, a charity, or a family in need of help. If you think you won't get anything in return, think again. Many generous people testify to the fact that they get back what they've given a thousandfold. Maybe you'll get it back financially, maybe not. But the very act of sharing and helping others is, well, priceless.

Return: 1,000%

The Credit Card Trap (Part Two)

2004-11-22T07:42:00.000+08:00

There's more to managing the way you handle credit cards than paying your bills in full and on time. To be a smart cardholder, you need to remember four words: read the fine print.

Stick to two cards. One common denominator among delinquent cardholders is they're holding on to so many cards. The average person in the major cities has 2-3 cards.

Rana recommends two cards, with one for backup (make sure at least one is an international card). For a lot of people, however, the number of cards is for bragging rights. Having high credit limits give a sense of pride as well. Even the color of the card is a status symbol.

But Rana advises that cardholders review their total credit. "It's not advisable to have so many cards," he explains, "The annual fees on those alone [are prohibitive]."

And if you receive yet another pre-approved card in the mail, don't activate it. Cut it up to prevent identity theft. If you're not using a card, cancel it. "If it has no usage or payment history, it doesn't serve any purpose," says Rana.

Be wary of credit limits. Having a high credit limit or receiving a notification that your limit has been increased may give you a, well, high. But remember some aggressive card companies will very high credit limits, even if it doesn't match your capacity to pay, forcing you to revolve.

In the same way, they offer introductory lower rates (which they then jack up), freebies, huge rebates, and attractive rewards points to get to switch. Don't be easily tempted. Before biting, remember to…

Read the fine print. You need to read the terms and conditions. If you don't understand some items, and I'll bet there'll be some, call the company to get a clarification.

Figure out how interest is computed. One vague area that needs a clear explanation is the interest rate. Rana says Equitable Card charges 3.25% on your outstanding balance, based on simple interest computation (principal x rate x time).

Other companies hide the total effective interest rate. They may charge 3.25% but based on your average daily balance, not your outstanding balance. They may also compute interest based on a shorter number of days, instead of a full 30 days. So, instead of looking at the nominal rate, check the annual percentage rate or APR.

Figure out how the balance is computed. If your balance is P10,000 and you manage to pay P9,000, you'd think you'd be charged an interest for your remaining outstanding balance of P1,000, right? Think again.

Many card companies use your average daily balance or ADB as the basis for interest charges. So they take into account your beginning balance, new purchases, payments, and ending balance.

Figure out when your payment is posted. Some companies post your check payment when it clears, not when you deposit it. Equitable Card considers your bill paid when you deposit it on the due date. Others will consider it late. Check the same when paying online. If you pay on the due date but after banking hours, some cards might post it the following day.

Learn when to transfer balances. When should you transfer balances to another card? If the new card has better features and rates. In most cases, however, revolvers are the ones who like to transfer to take advantage of lower rates offered for transferred balances. Some card companies even waive the annual fee. Just make sure the interest on your succeeding regular purchases is competitive.

It doesn't hurt to ask. If you're ordinarily a transactor and was late on a payment once, such that you get charged a late penalty fee, call your card company and ask for it to be waived. Most likely, they'll comply.

Learn about billing cycles. Some cards don't charge a penalty even if you pay after the due date, as long as you do pay a few days before your statement date. Why? Because of the way their systems work. For instance, if your due date is on the 25th and your statement date is on the 5th, if you pay on the 30th, you won't get charged anything because the system will check your balance perhaps a few days before the 5th. It's an industry secret, but it doesn't apply to all credit card companies.

Learn what causes red flags. Credit card companies track several parameters, such as usage, payments, and delinquencies. Don't get paranoid however if you're late with a payment or two, or if you just pay the minimum, or max out your credit limit. "The important thing," Rana says, "is paying it."

What to do when you can't pay. However, if you're delinquent, a collection mechanism kicks in. A reminder is sent when you're 30 days past due. A telemarketer may call you to remind you of a missed payment. You'll get a stronger note if you're 60 days past due. And your account is automatically suspended. If you're 90 days past due, you'll receive a stronger letter and the card company sends out its collection agents.

The worst scenario is when the card company files a suit to force you to pay. When your card is reported as a delinquent account, you take the risk that won't be given a loan facility like a car or housing loan when you apply. And this is not erased from your record. And as Rana points out, it will take a lot of convincing again before you can avail of a loan from a legitimate creditor.

If you find yourself in this situation, try negotiating with your card company to come up with an acceptable restructured payment plan that will fix the numbers years you can pay off your balance, the minimum amount you're expected to pay every month, and the interest rate you'll be charged. You may be asked to issue post-dated checks and a stop credit facility will be enforced, such that you can't charge new purchases to your card anymore.

If you have a spending problem, cut all your cards altogether and pay cash for purchases.

The Credit Card Trap (Part One)

2004-11-12T13:46:00.000+08:00

Plastic. For a growing number of Filipino consumers, credit cards have become the preferred mode of payment, from dining out in a restaurant to paying for the wide screen TV on installment.

It's also becoming a major problem for regular people who find themselves tens of thousands of pesos in debt. In the first quarter of this year, credit card bills that were past due topped P13.8 billion.

We talked to Fol Rana, Jr., Vice President for Sales & Marketing - Retail of Equitable Card, one of the major players in the industry, on how to manage our use of credit cards.

It's just a tool. Rana stressed that credit cards are just an aid in your finances. "If you don't have cash, it allows you to purchase items." Combining the billing period and the grace period before you're charged interest is the equivalent of 30-45 days of free money (that is, if you pay the balance in full when it's due).

But it's still a loan that you have to pay. Unfortunately, there's a certain detachment when we charge for purchases, as if there's no tomorrow. It's just not the same as when we grudgingly pull out cash from our wallet. Says Rana, "With cash, you see value. With a credit card, you see plastic."

Have a good credit record. Keep this in mind when you miss a payment…again. Your credit card payment history affects your credit record, which is a factor when you apply for other loans, like a mortgage or housing loan.

Although there's no credit bureau in the country, credit card companies have an arrangement to check balances of their customers. They also check the banking industry's negative file information system.

So it is a good idea to use a credit card to establish your credit record when you're just starting out. "A person with a credit card history has a better chance than someone with none," Rana points out.

Get rewarded. The other good thing about using credit cards is the payoff like free airline miles, rebates, discounts, and reward points, which you can use to claim items or waive your annual fee. If you're a good customer, you can get invited to special events and promos. However, these extra features should not be your top priority when choosing among credit cards, particularly if you're not the type who pays in full.

Study your finances. Find out how much you're earning and spending every month to give you an idea how much you can afford and how much credit you really need. Rana explains, "If your card can cover your expenses, then don't ask for more cards." More cards and higher limits mean greater temptation to overspend.

Track your expenses. The problem with credit cards is you'll only find out your bill once a month. Often, you get shocked by how much you charged. There's another way. Use the phone or the Internet to track transactions and balances, if your credit card company offers such facilities (perhaps this should be one of your criteria in choosing a credit card provider).

Control your expenses. If you track them, you can better control them. Don't exhaust your credit limit. Rana says you can even request the card company to decrease your limit. He also suggests you just carry one or two cards instead of all.

And if you really want to keep your credit card costs low, don't do cash advances, which charge you an interest the moment you get the money. Pay at least the minimum to avoid late payment charges. In fact, pay more than the minimum to lower interest charges. Better yet…

Pay in full. Rana explains there are two types of cardholders - revolvers, who pay the minimum amount due, and transactors, who pay in full.

Card companies love revolvers more, because they earn from interest charges. They are also less likely to cancel, as they always have a balance to pay. If you're a revolver, don't worry about being seen as a bad customer. Paying just the minimum doesn't trigger concerns as long as your credit limit is commensurate to your capacity to pay. Just don't expect to get an automatic increase in your limit or an upgrade.

But don't feel guilty if you're a transactor and want to help your friendly neighborhood credit card company. Card companies still make money off you through annual membership fees. But even if you manage to have this waived, they still earn from their member merchants.

Pay on time. Even if you can afford to pay the minimum, pay it on time. Late payments trigger red flags if they happen regularly. There's no excuse for not paying. Rana says, "Even if the bill arrives late, as a responsible cardholder, you have to keep track when to pay." Besides, he adds, there are many methods of paying, including auto debit, the ATM, phone banking, and online.

Watch out for part two where I write about the fine print.

Six Feet Under

2004-11-01T10:34:00.000+08:00

It may sound morbid, but the topic of death, particularly the expenses related to burial, is quite fascinating. The costs can really kill you and the rituals can sometimes be ridiculous.

Nowadays, you can have a fancy burial with photo and video coverage, a band, balloons, the works. A party when you're dead.

But even the basics can be quite steep. A casket, for instance, sells for as low as P20,000, made in wood, and can go upwards of P850 thousand for solid brass.

A cemetery lot can go for P45,000 to more than P800,000 while a mausoleum costs about a million and upwards of eight million.

No wonder cremation is becoming a more popular and more practical alternative. The cremation cost about P9,000. A wooden urn goes for just P1,500, although brass ones cost P25,000 to P65,000. And if you want a bone or ash niche in a columbarium, it would cost P50,000 to P65,000. You can, of course, just keep it at home.

You do get freebies from package deals. Otherwise, you have to consider other related expenses:
Viewing room: P3,000-P5,000 per day
Flowers: P500-P5,000
Garden: P1,500-P8,000
Hearse: P5,000
Police escort: P700-P1,200 per policeman
Burial: P18,000-P25,000
Headstone/Marker: P700-P5,000
Grave diggers/Niche watchers: P500-P2,000 per person
Sandwashing: P7,000-P15,000
Obituary space: P2,000-P50,000

As you can see, dying can cost you an arm and a leg. You can say the funeral services industry is making a killing. With these expenses, who wants to die?

I know it's something you and your loved ones would rather avoid but part of a financial plan is anticipating for the cost of your or their funeral. Here are some things to remember:

1. Shop around.
You won't have the luxury of comparing prices if a loved one suddenly dies, or worse, if you die. Not all funeral homes or cemeteries are the same. Compare prices if the likelihood of someone in your household dying soon becomes apparent, such as due to old age or serious illness. At the very least, ask around and be aware which ones are reputable and recommended.

2. Don't be pressured.
Remember, it's not called the funeral industry for nothing. So don't think of funeral directors as clergy. It's not that they're vultures but it's still a business for them. So don't buy products and services you don't need or want.

3. Avoid emotional overspending.
You don't have to buy the most expensive casket or the biggest mausoleum you can (or can't) afford to honor a loved one or cure guilt pangs. Show your love when the person is alive. A simple, dignified memorial and funeral service is sufficient.

4. Plan ahead.
If you can to buy a memorial lot or casket in advance, it would not only come cheap, it will give your loved ones peace of mind.

But even if you don't purchase ahead, at the very least, talk to your family about your wishes (and solicit theirs if they're open about it). Why buy an imported solid brass casket when your loved one really just wants to be cremated and doesn't want any viewing?

5. Consider a pre-need plan.
Memorial plans today are really just another form of investment. Pre-need companies sell packages that pay out an agreed-upon amount in a lump sum. They do offer value-added services like professional assistance. And memorial parks also offer plans that you can pay in advance.

Principle #10: The More You Give, The More You Get

2004-09-27T10:33:00.000+08:00

Some people hold on to their money too hard that they eventually lose it. It's like clutching sand in your hands. Others freely give and they never seem to run out of money.

My sister-in-law has a generous heart and she's blessed financially. Give a little and get back a hundredfold. Many people attest to the power of giving.

To me, there are three things we can all put into practise to make this principle work in our lives.

Stewardship
If you come to think about it, we're really just stewards of whatever we have. Of course, we think we own what we have because we worked to get them. But even our abilities are God-given.

If we put that into perspective, we become better stewards of money. To be sure, that's easier said than done.

But if we do think of ourselves as stewards, part of being good stewardship is growing our money and sharing it.

TIthing
Part of being stewards is tithing, which is giving ten percent of our income to the church.

Tithing is an acknowledgment that everything belongs to God. It's also an act of faith, because it's hard to give ten percent when we can hardly pay the bills.

But many people who diligently practise tithing testify that the promise of tithing is real.

Charity
Of course, the concepts of stewardship and tithing are Biblical concepts that you may not ascribe to.

Whether or not you share these beliefs, there's a third way of applying this principle: charity.

A lot of rich people like Bill Gates and Oprah Winfrey give back a lot to society. But you don't have to be rich. You don't even have to give cash. You can give your time and effort, which also have financial value, if you think about it.

Principle #9: Make a Life, Not Just a Living

2004-09-17T10:31:00.000+08:00

Money is not the root of all evil. What the Bible says is "the love of money is the root of all evil." It's one thing to keep in mind when we deal with the subject of money.

Money is a tool, a means to an end. If it becomes the end in itself, then we should ask ourselves about what really matters.

Unfortunately, for some people, rich or poor (yes, even the poor), the pursuit of wealth for its sake has become their philosophy and lifestyle.

And for many people, including you and me, making money has often stood in the way of enjoying our lives. It's quite ironic: we work hard to make money to pay for things that make us and our family happy. But we end up neglecting the important things in life, like quality time with our loved ones or simply enjoying the little things.

Surely, many good things in life are free. And we should invest our time and effort in them. But there are also some good things in life that we spend for, and ought to invest in. Let's not just spend for material things that we accumulate or for necessary living expenses. Let's also spend for things that help us enjoy life more. There are three I recommend.

Recreation
Part of enjoying life is recreation. Is recreation part of our lifestyle? Or is the one-week holiday abroad too much to handle when we're always worrying about the work we left back home?

It's good to work to pay for a house, groceries, travel, cars, tuition, gadgets, clothes, and all those mundane things. But you should include recreation in the things you spend for. That includes sports and hobbies that you enjoy and enrich your life.

Education
Education is also part of enriching your life. That means continuing education classes, seminars, workshops, books, magazines, and traveling. Do you invest in your education? Learning continuously is a great way to live our lives.

Avocation
And then there's our avocation. Is there something you like to do off hours? There are things that we spend time, effort, and even money on, even if don't get anything concrete in return, just a sense of fulfilment.

For me, Money Minute and promoting financial literacy is my avocation. I enjoy writing and teaching and learning. That's a reward in itself. There are also other things I want to pursue in the future. What's yours?

Whatever it is, it's okay to spend for things that give you satisfaction. And the point is, it doesn't have to be (and should be) just material things. Recreation, education, and avocation that enrich your life are often more long term or more deeply satisfying.

Principle #8: Match the Right Instrument With the Right Requirement

2004-09-09T10:30:00.000+08:00

Okay, this principle doesn't sound so catchy. For sure, the familiar warning "If it's too good to be true, it probably is." plays better on the ear.

But it doesn't quite capture what's most important when it comes to investments. When it comes to investing your money, the key principle to remember is "matching". This should guide you when making investment decisions.

If you don't match your investments with your requirements, you'll end up making poor choices. When I started investing, all I knew was that stocks was the way to go. So I invested in stocks with no particular objective except to save and invest "for the future".

But I should have taken into account my immediate needs, like wedding expenses and a mortgage. That way, I should have invested in bonds, government securities, and other fixed income instruments.

Matching investments with specific needs helps you determine how much you should expect and can take (risk and return), how much to invest (asset allocation), how long to be invested (time period), and what to avoid (speculation and scams).

Risk and return
Everyone has a different appetite for risk. Some are conservative investors who only keep their money in safe instruments like bank deposits and government securities. Others are risk takers, putting money into speculative stocks and even get-rich-quick schemes. Most of us are in between.

But our risk attitude as investors and our expectations for returns should really take into account our goals. Example, if you were planning for retirement, then investing in equities, which has a higher risk, is an appropriate decision. Putting money in bank deposits is not a good idea because inflation will eat up your measly returns. There's no way you'll accumulate enough wealth for retirement purposes if you're too risk averse.

In the same way, if you're saving for a downpayment for a car loan by next year, you shouldn't be investing in stocks. Don't expect double-digit returns in a short period of time if your goal is short term. Even if you have a high appetite for risk, you should be guided by your specific need.

Asset allocation
How much of your money should you put into stocks, bonds, real estate, money market accounts, government securities, and cash?

It all depends on your goals. If your goal is something immediate and you don't want to risk losing your principal, then allocate money into short term and relative safe instruments. If it's long term, then allocate more into equities.

Time period
Now, how long should you keep your investments? Again, if you have no particular objective for your investments, and you're invested in stocks, you may be easily tempted to pull out when the market goes down. But if those investments are for the long term, then you can ride the ups and downs of the stock market.

If you have short term needs but you invest in long term instruments, you may end up losing money if you're forced to sell your investments.

If you have long term requirements but you just invest in short term instruments, you may risk not earning enough on the smaller returns.

Speculation and scams
Lastly, this principle should guide you in avoiding get-rich-quick schemes and investment scams. If your need is to protect your income, then you certainly shouldn't play with speculative investments, and worse, potential scams.

If you have play money you don't care to lose (lucky you), then putting it in high risk investments is a gamble, as long as you know what you're getting into. Still, I don't encourage it. Wasting money, even play money, is still a waste.

So, if you have money to invest, go back to the financial goals you set (remember the exercise we did before?). What is it you want to achieve first? When you determine your need, you can now make the right choice on what type of investment can best meet that need.

Principle #7: There Are Two Things Certain in Life

2004-08-26T10:23:00.000+08:00

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

2004-08-24T17:59:00.000+08:00

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

2004-08-24T17:52:00.000+08:00

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

2004-08-20T10:22:00.000+08:00

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

2004-08-16T10:07:00.000+08:00

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

2004-08-13T19:38:00.000+08:00

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...

2004-08-12T10:21:00.000+08:00

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

2004-08-12T10:00:00.000+08:00

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

2004-08-12T09:52:00.000+08:00

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

2004-08-12T09:41:00.000+08:00

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

2004-08-11T10:13:00.000+08:00

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

2004-08-11T10:02:00.000+08:00

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

2004-08-11T09:47:00.000+08:00

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

2004-08-06T09:42:00.000+08:00

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

2004-08-06T09:26:00.000+08:00

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%

2004-08-06T09:17:00.000+08:00

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...

2004-08-04T10:20:00.000+08:00

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?".

Principle #5: It May Not Happen, But It Can

2004-07-29T10:03:00.000+08:00

When you're young, you don't think about old age or death. When you're healthy, you don't think about getting sick. When you're living a normal, quiet life, you don't think about getting into an accident. When you have a nice, cushy job, you don't think about financial catastrophes.

You'd think "It couldn't happen to me." But the thing is, it can. Of course, the probabilty of you dying when you're healthy and twenty five is small. The likelihood of you being hospitalized when you're living a healthy, active lifestyle is low.

But should you wait till you're sick, or disabled, or laid off, or dying? You can say the same thing about your properties like your house and cars.

For forget about probability first. I want you to play a game called "What if?" It's simple. Just ask yourself:

- What if I get fired from my job?
- What if my business goes belly up?
- What if my house burns down to the ground?
- What if get into a car accident?
- What if I get disabled?
- What if I get cancer?
- What if I become diabetic?
- What if I die?

Does all these sound morbid? The thing is, we avoid thinking about these things because a.) they're unlikely to happen, b.) you have too many problems to even think about these things, c.) you just don't want to think about it.

But instead of burying your head in the sand, be honest to yourself and ask these questions. You don't have to have the "right" answers. Just be honest.

Say, if you lose your job, maybe your spouse's income can sustain your expenses for six months. Or maybe, you have enough cash stashed away for three months.

If you get disabled, say you have rich parents who can and are willing to support you for life.

Or you discover you have a heart problem. Your company has a group health care plan that gives you coverage.

If you die, well, maybe there's not much financial loss since you're single and just started working.

On the other hand, say, your car gets carnapped. You only have the basic mandatory insurance. What do you do then?

Or you get sued because a customer in your restaurant got food poisoning. What do you do?

Maybe you travel a lot, but you're not insured at all. And your wife is a stay-at-home mom. What will happen to them if a plane crash happens?

So, as you ask these "what if" questions, you get a clearer picture of the possible responses to what could happen.

There are two other questions that you need to answer. And I'll discuss them in the next issue.

Principle #4: Live Within Your Means, Then Increase Your Means

2004-07-22T10:02:00.000+08:00

Many personal finance experts emphasize managing debt and controlling costs, along with investing your savings, as the primary approach to increasing wealth.

And certainly the old adage "Live within your means" is a very fundamental principle in personal finance. As I pointed out before, it's not how much you earn, it's how much you get to keep.

However, I also subscribe to the idea that we ought to find ways all the time to increase our income, not just watch our expenses.

That is, increase your means.

To me, it includes getting a raise or increasing sales (if you own a business or work on a commission). But it's more than increasing your income from its current source. I believe in finding alternative sources of income.

Robert Allen calls it "multiple sources of income". Whatever you think of the guy, the concept has its merits. It's the same thing for companies. Those that diversify their sources of income are better able to sail through rough times during the usual business boom-and-bust cycle.

They diversify by selling various products and services, by selling to different market segments, and by acquiring other companies.

You have to start thinking the same way. If you're dependent on a single source of income, say, a salary, what would happen if you get fired? Or get a cut? It happens all the time.

If you own a restaurant, and some major crisis forces you to close down your restaurant, or stiff competition suddenly lowers your sales significantly, and your income comes solely from it, how would you cope?

Do I suggest getting another job on the side? Another business? Well, it depends on your situation.

If you're a full-time employee, consider getting a franchise that can later run on its own with minimal supervision. Or get into network marketing, or even, a part-time sales job, that you can do on weekends or evenings.

If you're a freelancer or entrepreneur, consider another business. Or, simply expand your products or services. If you're doing PR, consider handling events. If you're selling pastries, maybe start selling coffee. Whatever.

Or if you're generating substantial income, you can diversify by investing in income-producing assets. Put your money in stocks, bonds, mutual funds, rental properties, etc.

If possible, diversify without over-extending yourself or going into totally unchartered territory. That is, diversify without losing your focus.

The point is, just like with investments, you don't want to put all your income eggs in one basket. Ideally, you receive regular, predictable income, plus commissions, fees, or royalties as well as interest and capital gains. In other words, multiple streams of income.

So think about your own diversification strategy.

Philam funds hit P20 billion mark

2004-07-15T13:02:00.000+08:00

Mutual funds in the Philippines are showing a good performance. Last year, the BPI Asset Management Group, fund manager of the Ayala Life Fixed Income mutual fund, hit P20 billion in assets under management (AUM). Now, Philam Asset Management Inc. (PAMI) hit the mark.

PAMI manages five funds. Its biggest is the Philam Dollar Bond Fund with total placements of P11.4 billion. Philam Bond Fund has P7.5 billion, GSIS Mutual (Kinabukasan) Fund Inc. has P1.03 billion, Philam Fund Inc. (PFI) has P171.8 million, and the Philam Strategic Growth Fund has P24.4 million.

It's targeting P36 billion in AUM this year. The entire mutual fund industry -- with 30 funds managed by less than 10 asset management firms -- is targeting around P60-billion in AUM this year.

iSilver, away!

2004-07-15T11:19:00.000+08:00

International Exchange Bank (iBank), recently launched iFund Silver, a peso-denominated unit fixed-income investment trust fund.

These funds, also known as common trust funds (CTFs), are just like mutual funds -- pooled funds from various investors that are then placed in various fixed-income instruments such as government bonds and commercial papers, or stocks, or a combination, depending on the investment objective of the fund.

Investors also buy and sell at the net asset value (NAV) per unit for the day. The difference is, they buy units in the fund. In a mutual fund, which is a stand-alone company, investors buy shares in the company.

Another difference is a mutual fund is regulated by the SEC and is required to submit quarterly and annual reports to the SEC and to its investors. CTFs are under the trust department of a bank, which is regulated by the Central Bank. One key difference is that CTFs are subject to the reserve requirements imposed by the BSP, so not all your money can be invested. Just by that, expect lower returns compared to similar mutual funds.

iFund Silver requires a minimum initial investment amount of P100,000, with a minimum holding period of 90 days. Not bad. Mutual funds usually require a one-year holding period if you want to avoid the 1% exit fee.

Would I recommend CTFs over mutual funds? Well, I see more advantages for a mutual fund. Besides, there's greater transparency. Just check out Business World for the NAV/unit and average returns, and you'll see at a glance how your mutual fund performed against competitors. For a CTF, you have to call the bank to find out (and call other banks to compare returns).

But don't let this stop you from considering CTFs. There are more CTFs available in the market than mutual funds. You might want to consider them as an alternative to 90-day time deposits as they'll likely yield higher returns. So if you have short-term goals or if you're building a 6-month emergency fund, this may be a good place to park your money. Ask your bank about them.

CAP expecting equity infusion

2004-07-15T10:56:00.000+08:00

Troubled pre-need education market leader College Assurance Plan Philippines, Inc. (CAP) announced it's expecting a $100 million equity infusion from foreign investors by month end.

CAP had a P17 billion variance in its trust assets last year. It only had P8 billion in trust assets managed by trustee banks versus an actuarial reserve liability (ARL) of P25 billion.

That means CAP doesn't enough money set aside to service future needs of its planholders, such that when it's time their plans mature, the company won't have enough to pay the proceeds for the tuition fees of all the plans.

How did that happen? Well, CAP didn't do as good a job in projecting the growth in tuition costs, interest rates, and inflation. The other reason is the company got overexposed in poor real estate investments.

The SEC has approved CAP's asset-building program. And it's to our best interest -- the pre-need industry and the general public -- that CAP recovers.

Now, you know why pre-need companies now sell non-traditional educational plans. Before, they sold plans that paid the schools directly, such that you as a planholder is guaranteed your kid's tuition gets paid, no matter how much it is. There are restrictions of course as you had to make sure your child gets accepted in the school picked in the plan.

Nowadays, pre-need companies will pay you the planholder directly the proceeds from the plan. The good thing is that there are practically no restrictions. It doesn't matter which school your child attends. In fact, when the plan matures, and you decide to use the proceeds for something else, you're free to do so. On the downside, you have to project the tuition costs fairly accurately, or you end up having to cough up more money when it's time to enroll. Remember, you're not guaranteed full coverage of the actual tuition, unlike before. In other words, educational plans today are just savings programs packaged as educational plans.

So, are these educational plans still a good investment? Personally, I think so. Although I did a computation that showed you'll be slightly ahead with a mutual fund, there are advantages to a pre-need plan.

It's forced savings. It's like paying a bill. Can you diligently set aside funds by yourself? Doubtful. If you do have that discipline, you can consider that route.

It's guaranteed. That is, you'll get what you paid for. If you come up with your own savings program, the returns are not guaranteed. Plus, many educational plans have insurance attachments, such that whatever happens to you during the paying period, the proceeds will get paid. However, if you already have sufficient insurance coverage, this may not matter as much.

What's my problem with educational plans? They're expensive, particularly if you're paying for grade school plans. Why? Because they attach extras like graduation gifts and insurance riders. However, you can use the lumpsum graduation gift to pay for either the entire high school or the entire college tuition costs.

Whatever you decide, the CAP situation only stresses the fact that it's important which company you entrust your money to. Of course, who would have thought it can happen to CAP.

More on Treasury bonds

2004-07-15T10:36:00.000+08:00

Consider this: P37 billion raised by the government on its first sale of retail treasury bonds. These are attractive to small investors as they're available for as little as P5,000, they have better yields than bank deposits, plus they're practically risk-free.

The offering ended yesterday. You can imagine the appetite for government bonds, which raise debt yields. It was trying to raise just P10 billion on three- and five-year bonds, at a coupon rate of 11% and 11.75%, respectively, but ending up selling more than thrice its target.

P37 billion has just been drained out of the system, which is now in the hands of the government for its own use. That means a less liquid market. Less cash supply means less money available for lending and therefore higher interest rates. At the secondary market, both debt papers rose 11.2289% and 12.0423% respectively.

So, yes, we're looking at higher interest rates for loans, but also higher returns for fixed income investments.

Principle #3: A Little Goes A Long, Long Way

2004-07-14T10:00:00.000+08:00

Do you think you can't save another centavo anymore? We often feel we've done everything to cut costs. That's why we always think: If only I earn more, I can save money.

Of course, we want to earn more. But don't you notice the more you earn, the more you spend? But even at our current income, we can find ways to save money.

Remember the previous exercises on coming up with your Personal Cash Flow Statement and Spending Plan? Certainly you've seen where your money goes. But look deeper.

If you track your expenses on a daily basis for a week or so, go through each expense item. Perhaps you ignore the "little" things. You know, coffee, cigarettes, dessert, movies, parking. Maybe you've lumped these under a single category such as "Daily Expenses". After all, you don't want to account for every peso that comes out of your pocket.

But the little things count a lot. A penny saved is a penny earned. And as you will learn, it will earn a lot, lot more.

David Bach, author of "The Automatic Millionaire", calls it "The Latte Factor".

If you drink latte from a fancy cafe every work day, calculate how much the "opportunity cost" is if you had invested the money in an investment such as a mutual fund.

How much does a cup of latte cost here? Say 70 pesos. That's P350 a week or P1,400 a month. You can invest as little as P1,000 in a bond fund (after the initial investment of P10,000). So if you put in P1,400 in a bond fund that returns an average of just 8% a year, and you do this diligently for 5 years (or a total investment of P84,000), you'll end up with P100,810.25 by the end of the 5th year. On year 10, it's P148,123.33. On year 15, it's P217,641.76. On year 20, it's P319,787.15.

That's almost P320,000 just for saving P1,400 a month! What if you set aside more each month? What if the fund or some other instrument averages 9% or 10%?

If you save P5,000 a month for 5 years, by the 20th year, you'll have more than a million pesos.

That's the power of compounding. When the gains from your investment (interest income, dividends, capital gains) revolve such that they too earn further gains, your money compounds. For example, for an investment that returns 10% on average per year, your P100,000 earns P10,000. That P10,000 then also earns 10%, or P1,000 in the second year, such that you now have P121,000 (i.e. P110,000 plus 10%.) And so on.

So the earlier you invest, the more you put aside, the further you hold on to the investment, and the more regular and often you save, the more powerful compounding works.

That puts your caffeine fix into perspective, right? I used to hang out at Starbucks or Figaro or some other cafe and drink brewed coffee, or a capuccino, with friends or by myself practically every afternoon. Imagine how much I could have earned if I set aside the cash for investments.

I still drink coffee, but I stopped thinking I should get my fix at Starbucks or Seattle's Best. Like today, I had coffee at Mister Donut for a third of what it would cost me at Starbucks. And most days, I don't drink at all. Sometimes, it's all in the mind. Do I flog myself if I ocassionally find myself ordering a Frapuccino? No, since it has stopped becoming an expensive and unnecessary habit.

Again, this is not about coffee-bashing. I love coffee. If a daily latte won't make much of a dent in my savings, then who really cares? But right now, it does.

And there are a myriad of things you can save on. Go through your list of expenses. Paying too much for electricity? Cell phone bills? Eating out? Shoes? CDs? Movies? You can go on and on.

All I'm saying is you can cut down a little across all these items without totally giving up on them or depriving yourself on some small luxuries. Gee, I'm not giving up going to the spa with my wife. But I don't have to do it every month. I mean, whatever.

Just cut a little across a lot. Because, as you can see, a little goes a long, long way.

10-year Treasury bonds at 12.75%

2004-07-14T09:04:00.000+08:00

I heard 3-year T-bonds are fetching 11.4% and 5-year T-bonds at 12.14%. Not bad, right?

Just to give a brief background, Treasury bills, better known as T-bills, are certificates of indebtedness issued by the government. IOUs, in other words. They're called T-bills if they're less than a year to maturity. But if they're more than one year, they're called Treasury bonds, or T-bonds.

There are different kinds, such as Fixed Rate Treasury Notes or FXTN, and Retail Treasury Bonds or RTBs, which are available to retail investors like you and me.

What's attractive about government bonds is that they're practically risk-free. Why? Because the government is committed to pay of its obligation. In fact, it can print money if it has to. That's why T-bills are used as a benchmark for other investments.

I bought RTBs a few years ago with some four years into maturity. The rate was 14.25%. Very, very good.

Between putting your money into time deposits and T-bills, you're better off with T-bills.

And contrary to what most people think (including myself before), government bonds are liquid. You're not stuck with a 5-year FXTN for 5 years. You can liquidate it through the bank or securities dealer who sold it to you.

Now, are T-bills or T-bonds better than mutual funds? I did some number-crunching. Say 12% fixed rate for a government bond and an 8% average return for a bond mutual fund. In the mid term, 6 or 7 years, you'll make more in government bonds. In the long run, you'll earn more in a bond fund. The disparity increases the longer you hold on to the fund.

So, if you put in P100,000 in a 5-year 12% FXTN, you'll receive an interest of P12,000 a year (you'll get the interest every quarter). By year 5, you have earned P60,000 on your P100,000 investment, or 12% a year. Well, actually, you'll receive less than that, as there's a 20% withholding tax, so effectively you'll earn only 9.6%. But let's keep it simple.

Now, if you placed P100,000 in a bond fund, which averages 8% a year, by year 5, you would have earned some P54,000. Not bad. The difference is it's tax free. But there's a sales load for most mutual funds, usually 1.5%-2% on your investment, although that has a minor effect on your returns.

But if it were a 10-year investment, say, investing in a 10-year FXTN or in another 5-year FXTN versus holding on to the bond fund for 10 years, then you would have earned P120,000 on the FXTN but P136,000 on the bond fund, a P16,000 difference. Not much, but another 5 years and the difference balloons to P84,000!

Now, if we use the 9.6% effective return, in just 3 years, you're better off with a bond fund.

So why is that? Well, government bonds pay you straight interest. Bond funds compound, that is, the fund's earnings also make money. You make interest on the interest, to make it sound simple. So, the longer you hold on to your investment, the bigger the returns. That's the power of compounding.

Are government bonds then not a good investment. Not exactly. If you want guaranteed income, this is a good way to go. But if you're building wealth, you're better off with a bond fund.

Putting It All Together

2004-07-07T09:55:00.000+08:00

Now what?

Okay, we've gone through the basics of financial planning:

- setting financial goals
- calculating your net worth
- determining your cash flow
- preparing your spending plan

What's next? Well, by this time, you probably have realized you have a long way to go to meet all your financial goals. That's why we went through the exercise of prioritizing them, because for most of us, the way to achieve them is accomplish them one goal at a time.

So, start with the most immediate goal. Knowing how much cash goes in and out, find out how how you can fund that goal. Good for you if you have enough. Better yet if you can finance more than one goal at the same time.

However, if you're running a tight ship at the moment, then you have to look at several choices. Ask yourself how will you be able to achieve each of your financial goals.

Just like a business, there are various ways you should consider:

1. increase your income find a higher-paying job
- get yourself promoted
- moonlight or freelance
- get into networking
- buy a franchise
- put up a small business

2. decrease your expenses live within your means
- cut unnecessary expenses
- be a smarter buyer

3. increase your assets
- increase your portfolio income by buying paper assets
- invest in real estate for rental income

4. decrease your liabilities pay off your credit card debt
- accelerate your loan payments
- refinance your mortgage
- extend the term of your loan

As you can see, there are so many things you can do, and many of them at the same time. Of course, some are easier said than done. My suggestion: start with what's easier to do, such as cutting unnecessary expenses or paying off your credit cards, thus freeing up cash for financing your goals.

In fact, even before you think about investing, look at what you can cut. In the same way companies do cost-cutting first before thinking of investing, expanding, or adding their sources of revenues, do your own cost-cutting measures first.

You'll be amazed how much cash is actually available just by taking small steps. Because a little goes a long, long way. And that's our topic for next week -- Principle #3: A little goes a long, long way.

The Money Diet

2004-06-16T09:54:00.000+08:00

Have you been on a diet? I have. A million times. And it never works. Well, it works for a while, then I go back to my old weight and then some.

Diets are a lot like budgets. It's hard to follow a budget. Why? Budgets, like diets, at least the way we do them, often restrict us. And usually, whatever's prohibitive, we do. We like eating fatty food and junk food in the same way we like eating out and watching movies. Or buying clothes. Or drinking a capuccino everyday. So once we deprive ourselves, we end up frustrated and then give up.

That's why I'd rather call a budget a "spending plan". You can say "a rose by any other name...", but you have to start thinking of a spending plan as a "plan for spending". Duh, right?

Think of it this way. We think of a budget as a restriction on what we cannot spend. But that never works. People find it hard to process negative things. But once restated in a positive way, then it can work. So if you start thinking of what you can spend on, not what you can't spend on, then there's a greater chance of succeeding.

It's the same with diets. Diets that focus on what you can eat and what you can do to lose weight tend to work better than those that tell you what you cannot eat.

For instance, we began an allowance system. My wife and I allocated a certain amount each week for our lunches and other daily expenses. That's all we have in our wallets. Instead of withdrawing anytime from the ATM machine, we live with our allowance. And our focus becomes: With this much, I can eat this and that...

The other thing is that a spending plan must be realistic. Too often, budgets are so out of touch with reality that they're doomed to fail. No budget for clothes? Of course not. No budget for coffee? Impossible.

Of course, you need to cut back, but don't cut back entirely unless absolutely necessary. One trick is to cut a little across all expenses. A little of this, a little of that. Work on a plan you can live with. And don't wallow in self-loathing if you go over it. Just make certain adjustments, say skip the movie this week and rent a DVD, until everything balances out.

Replace bad habits with good habits, just like when dieting. It's a bit hard at first, until you get used to it. Instead of buying a book, maybe you can spend some time browsing at the bookstore. Instead of buying a new magazine, buy cheaper back issues. Or check the magazine's website. You can be as creative as you want -- there's much to enjoy in life without overspending. Once you get into the groove of things, you can go on auto-pilot without groaning or whining.

Always go back to your financial goals, if you need a boost in motivation. And remember, your spending plan is not cast in stone. Once your income increases, you can make adjustments. When you pay off your debt, then you can allocate more to savings.

Dude, Where's My Cash?

2004-06-10T09:48:00.000+08:00

How often does this happen? You withdrew cash from the ATM this morning. This afternoon, it's gone. Or you received your bonus (lucky you) yesterday. By the weekend, it's gone.

Time flies, and so does money. And you'd think, there's never enough to go around.

Last issue, you (hopefully) calculated your net worth. Now, you will come up with your cash flow statement. In short, how much cash comes in and how much cash goes out.

Before you draw up your strategy in achieving your financial goals, you need to know exactly where you stand in terms of cash flow. Net worth is important, but for some, cash flow is king.

Remember I wrote that net worth is the measure of financial wealth? Well, for some, it's not net worth, but cash flow. How rich are you really? You can look at it this way: If you stop working right now, how long will you able to sustain your lifestyle?

If your assets can support you for twenty years, then that's how rich you are. If you can live off your assets for five years, that's how rich you are. If it will take only three months before you run out of cash, then that's how rich you are. If you live paycheck to paycheck...you get my drift.

Some people are living on interest, or what people call "LOI". People who have inherited tons of money or have worked their way to wealth. But I'm getting ahead of myself. Before we all get depressed, we need to do a reality check and know exactly how we're doing in the cash flow department. Because this will determine what actions to take.

Again, I'm uploading a Personal Cash Flow Statement worksheet for your use. You can call it a personal income statement or spending record, whatever. The whole idea is, you need to know how much income goes in and how much expenses go out.

INCOME
On the Income side, list down all your sources of regular income. If you're employed, that includes your salary, allowance, commission, etc. That's "earned income".

If you're self-employed or own a business, put in the income you generate from the business that you use for personal expenses. That's "business income".

If you have investments or paper assets that generate dividends, interest, and the like, plug it in. That's "portfolio income".

If you have rental property or have equity in a limited partnership or business but not actively engaged in it, put it in. That's "passive income."

You can either plug in gross amounts then subtract taxes and other deductions to get the net amounts or you can just input net figures for simplicity.

If your income does not come regularly, such as commissions, you can add up what you earned last year and divide it by twelve months to get the average. It's tempting to include bonuses, but since you don't receive them on a monthly basis, take the conservative path and exclude them.

EXPENSES
Now, on the expenses side. Okay, this will be bloody. You need to know how much you spend every month. These are your regular monthly expenses, which includes household expenses like utilities, rent, or your mortgage. Then you have groceries, food, entertainment, and the like.

The best way to find out how much you spend and what you spend on is to track your expenses for a week, at least for this exercise. Then, adjust the amounts by tracking them for a month, and another month, and another, until you get a good idea of your average expenses per month.

Of course, you need to categorize these expenses. It's up to you what categories to use, but I suggest you keep the list short. Break down each category into more detailed accounts, such as Dining Out and Movies under Entertainment. Just make sure they're related.

That's not all. You just listed your "regular" expenses. Yes, you spend a lot more than you think. It's really the "irregular" expenses that can prove burdensome. These are expenses that you pay quarterly, every six months, or once a year, such as insurance, clothing (unless, of course, you make it a point to buy clothes every month), and annual fees. And those that you did not plan for, like emergency car repairs or dental work (ouch!).

You need to estimate how much you spend every year on these irregular expenses. And be realistic. Don't exclude clothing expenses just because the last piece of clothing you bought were those leather red pants three years ago.

For each of these irregular expenses, estimate how much you spend every year. Then divide by 12 months. That's how much you effectively spend every month.

NET INCOME
Now, subtract your total expenses from your total income and you get your net income. That is what's available for savings and investments. Well and good. Most likely though, you'll get a negative amount. That means, my friend, if you're a business entity, you're in the red.

Don't fret. At least now, you know where your cash is. It's in the pockets of your credit card company, your bank, your utility company, your cell phone company, your landlord, your friendly neighborhood mall, your local Starbucks, etc.

Next week, I'll show you how to make a spending plan that will free up cash to finance your goals.

How Much Are You Worth?

2004-06-03T09:46:00.000+08:00

When people refer to, say, Microsoft as a "$30 billion company", what exactly do they mean? Some would say it's in terms of total revenues, others total assets or market value.

But when they refer to Bill Gates as being "worth $100 billion", you know what it means -- net worth, i.e. assets minus liabilities.

When it comes to the definition of wealth for individuals, most agree it's net worth. Not their annual income. Nor their total assets. There's another definition I learned from a recent seminar that's even more to the point. But I'll share that next issue (yes, I am tricky!).

You now know where you want to go. This time, you need to know where you are. And the starting point is knowing how much you are worth (financially, that is...remember, your self-worth has nothing to do with your net worth).

For that, you need to come up with your personal balance sheet. I'm sure you know what it is. Some call it a statement of assets and liabilities. Elected government officials (mis) declare it.

So that's what you have to do right now: declare your assets (what you own) and liabilities (what you owe), and the difference is your net worth (what's left over).

Use a spreadsheet for this. Or just use pen and paper (a notebook that you can keep confidential). But since I'm really nice, I made a worksheet just for you (see Toolbox at the top left).

Assets
List all your "liquid" and "appreciating" assets. That means cash (or cash equivalent), investments, real estate, and business equity. Beside each, enter the amount.

For cash (cash on hand, savings deposits, checking accounts) and cash equivalents such as CDs (nope, not your Celine Dion Greatest Hits CD...I mean certificates of deposit) and other money market accounts (like time deposits and T-bills), check with your bank. If you have foreign currency deposits, get the equivalent peso value. If you own a whole life insurance policy or an endowment plan, find out what the accumulated cash value is.

For investments and real estate, find out the current market value. Log on the Internet or make the necessary calls for stock prices and net asset values (NAV). Your paper's business and classifieds section can also help (for prices of stocks, NAV of mutual funds, and average selling price of similar houses in your area or other real estate property you own).

You may want to include preneed plans you have, like an educational plan. They're not appreciating assets, rather they are prepaid expenses, which in business accounting counts as an asset until used. They are, after all, funds you saved for future use. If you own a business, include what your business is worth (or compute your equivalent share in the business).

Now, notice I didn't include most personal property like cars, furniture, electronics, clothing, and your Celion Dion CD collection. Why? These are "depreciating" assets, i.e. they go down in value. Sure, you can still sell them, but they represent an expense for you, not assets that go up in value (unless your Celion Dion CDs become rare collectibles 50 years from now).

A few personal finance experts would even exclude from your net worth calculation some appreciating items like jewelry and art work, and even your house. Mainly because they don't provide liquidity for you to live off them. So if you want to be conservative with your calculations, exclude them. But I recommend at least including the value of your house.

Liabilities
Next, list all your debt. This includes both secured (loans with collateral) and unsecured debt.

Secured debt includes the mortgage on your house (and other real estate investments), your home equity loan, and auto loans.

Unsecured debt includes your credit card balances, personal loans, salary loans, and SSS and PAGIBIG loans.

Net worth
Finally, deduct your total liabilities from your total assets and you have your net worth. Tada!

Do you feel rich? Maybe you just found out you're a millionaire, even if it's just on paper (especially if you listed your house as an asset). Congratulations! Or perhaps you discovered you're not worth much financially, even if you're a high income earner. Well, we'll get to that next week.

At least now, you know where you are in your financial life. Compare where you are (personal balance sheet) with where you want to go (financial goals).

Do you want to own a house in 10 years? An educational fund for your toddler? Money to travel to Europe by yearend? Retire at 50? A Range Rover next year? A home theater system this year?

Check your assets. Can your assets finance these goals? No? Not enough appreciating assets? Maybe your assets are not liquid enough. Maybe now realize you spent too much on depreciating assets. Or your debt is too high that it eats up part of your investments.

Most likely, you'll see a gap between what you have right now and what you want to have. Maybe a huge gap. Depressed? Go on, wallow in self-pity. When you recover (and I hope it should be right about now), remember you want to gain control over your financial life. And this is what's financial planning is all about.

Next issue, we'll do your personal income statement, or to be precise, your personal cash flow statement. This will be another eye-opener. Reality bites? You betcha.

Principle #2: It's Not How Much You Earn, It's How Much You Get to Keep

2004-05-26T09:45:00.000+08:00

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

2004-05-19T09:42:00.000+08:00

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

2004-05-12T22:59:00.001+08:00

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

2004-05-05T14:00:00.000+08:00

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.

Philam Gold Education Plan

2003-08-10T07:49:00.001+08:00

Recommended for: parents or newly married couples who want to prepay their children's education

Benefits:
1. Educational benefit
- receive either a lump sum payment at a discounted rate or every school year/semester
2. Increasing educational benefit
- starting on the second year, the educational benefit increases by 15% based on the previous year for a set number of years
3. Graduation gift
- receive 100% of the total cost of the plan upon completion of all benefit payments, making the education plan practically cost free
4. Scholastic achievement awards
- cash incentives for corresponding top honors
5. Insurance benefits
- term insurance, credit life insurance, total disability benefit, accidental death and dismemberment benefit
6. Short paying period
- only 5 years to pay

Eligibility:
1. 0-1 year old for elementary
2. 0-6 years old for high school
3. 0-10 years old for college

Factors to consider:
1. Age of child
2. Initial educational benefit

Plans:
1. Elementary School Program
2. High School Program
3. Four-Year College Program
4. Five-Year College Program

Executive GlobalCare Plan

2003-08-10T07:49:00.000+08:00

Recommended for: frequent travelers

Benefits:
1. Medical coverage anywhere in the world.
- reimbursement for expenses incurred overseas due to sickness or accident
- lump sum benefit for death or dismemberment due to accident
2. Access to medical services abroad
- entitled to non-emergency treatment in any of the registered medical facilities
3. Travel insurance
- coverage for loss of travel fare and/or accommodation expenses
- reimbursement for delay of flight for more than 12 hours
- coverage against legal liability for bodily injury or property damage to third parties due to negligence
- baggage protection
4. Free 24-hour worldwide travel assistance services by American International Assistance Services

Coverage within the country:
5. Open room and board
6. High coverage for dreaded diseases
7. More procedures for the annual physical exam

Option:
- Dental services

Eligibility:
1. Not more than 59 years old
2. Spouse not more than 59 years old and working
3. Single children not less than 6 months but not more than 20 years old

Factors to consider:
1. Age
2. Maximum sum for dread disease/ICU

Plans:
1. Executive GlobalCare Private
- private room
- no limit for ordinary illness
- P1 million limit per dread disease/ICU cases
2. Executive GlobalCare Suite
- suite
- no limit for ordinary illness
- P2 million limit per dread disease/ICU cases

Standard Comprehensive Plan

2003-08-09T07:47:00.000+08:00

Recommended for: people who do not have health coverage (freelancers, business owners) or who want to supplement their company's health plan

Benefits:
1. Free annual physical exam
2. Free preventive health care
- administration of vaccine
- consultations
3. Free out-patient services
- consultations
- first aid treatment
- emergency medicine
- diagnostic exams
- minor surgery
- pre-natal and post-natal consultations
4. Free in-patient hospitalization services
- services of physician or surgeon
- room and board
- general nursing services
- use of operating and recovery rooms
- anesthesia
- drugs and medication during hospitalization
- oxygen
- medical supplies
- diagnostic services
- blood transfusion
- dialysis
- ICU confinement
5. No deposit admission

Option:
- Dental services

Eligibility:
1. Not more than 59 years old
2. Spouse not more than 59 years old and working
3. Single children not less than 6 months but not more than 20 years old

Factors to consider:
1. Age
2. Maximum sum for dread disease/ICU

Plans:
1. Diamond
- private room
- room rate: P1,000
- no limit for ordinary illness
- up to P500,000 limit for dread disease/ICU (per illness per lifetime)
2. Emerald
- semi-private room
- room rate: P800
- no limit for ordinary illness
- up to P100,000 limit for dread disease/ICU (per illness per lifetime)

3. Pearl
- ward
- room rate: P600
- no limit for ordinary illness
- up to P90,000 limit for dread disease/ICU (per illness per lifetime)

Comprehensive General Liability Insurance

2003-08-08T07:42:00.000+08:00

Recommended for: people who want to be protected from possible financial and legal liability due to damage to another person's property or injury to another person arising from an accident due to negligence in connection with the conduct of their business

Benefits:
1. Bodily injury
- third party bodily injury and death
2. Property damage
- third party property damage
3. Premises-operations hazard
- liability arising out of the ownership, maintenance, or use of the premises and all operations which are necessary or incidental thereto
4. Elevator hazard
- liability arising out of the ownership, maintenance, or use of any elevator
5. Independent contractors hazard
- liability arising out of operations performed for the insured by independent contractors and omissions or those in connection with the supervisory acts of the insured
6. Products hazard
- liability arising out of the consumption, handling, or use of goods manufactured, sold, handled, or distributed by the insured after he has relinquished possession of them
7. Contractual hazard
- liability that may be assumed under agreement contracts, such as in the form of Held Harmless Clauses, which appear in leases, construction contracts, or other arrangements wherein the insured agrees to assume liability which ordinarily would fall upon someone else

Eligibility:
1. the named insured
2. partner
3. executive officer
4. director
5. stockholder

Philam Elite Home

2003-08-07T07:44:00.000+08:00

Philam Elite Home

Recommended for: homeowners who want a comprehensive home insurance, including contents

Benefits:
1. Building coverage
2. Household contents, personal effects, and valuables
3. Liability

Options:
1. personal accident
2. swimming pool cover
3. temporary removal or storage
4. temporary accommodation
5. replacement of locks and keys
6. accident death of a pedigree dog
7. loss or damage to servant's property
8. fire brigade and extinguishing expense

Eligibility:
1. single detached
2. duplex
3. townhouse

Factors to consider:
1. Sum insured
2. Type of house
3. Location
4. Type of construction
5. Occupancy
6. Property insured

Plans:
1. All risks
2. Broad named perils
3. Broad named perils excluding earthquake
4. Broad named perils excluding burglary and robbery
5. Broad named perils excluding earthquake and burglary and robbery

Residential Fire Insurance

2003-08-06T07:43:00.000+08:00

Recommended for: homeowners who want basic fire insurance

Benefit:
1. actual cash value of property

Options:
1. extended cover (smoke, aircraft, vehicle, and explosion)
2. earthquake
3. typhoon
4. flood and typhoon
5. burglary

Eligibility:
1. single detached
2. duplex
3. townhouse
4. apartments
5. condominiums

Factors to consider:
1. Sum insured
2. Type of house
3. Location
4. Type of construction
5. Property insured

Term Insurance

2003-08-05T07:41:00.000+08:00

Recommended for: people who just want pure protection

Benefits:
1. Coverage during the term
- insured is covered during the term
2. Choice between annual and 10-year term
- choose annual renewable or fixed 10-year period
3. Low premiums
- pay very low premiums compared to other plans

Option:
- All attachable life insurance riders

Eligibility:
1. 0-70 years old

Factors to consider:
1. Age
2. Face amount

Plans:
1. Annual
2. 10-Year

Ultima Life

2003-08-04T07:40:00.000+08:00

Recommended for: people who want guaranteed funds and assistance in arranging and administering the details of their or their loved ones' memorial service

Benefits:
1. Memorial service benefit
- receive a guaranteed fund for use in funeral services
2. Increasing benefit
- starting on the second year, there is 10% lifetime yearly increase
3. Professional administration of memorial services
- a Family Assistance Officer will arrange and pay for services acquired from an accredited servicing mortuary
4. Family assistance fund
- upon the planholder's death on or after his 75th birthday, the beneficiary will receive an additional amount equal to the initial memorial service benefit
5. Living benefit
- if the planholder is alive on the 15th plan anniversary, he is entitled to an amount equal to the pre-need price, making the plan cost-free
6. Assignability
- if the plan is already fully paid, it can be assigned to another person
7. Insurance benefits
- term insurance, credit life insurance, total disability benefit, accidental death and dismemberment benefit
8. Short paying period
- the paying period is only 5 years, payable on a monthly, quarterly, semi-annual, or annual basis

Factors to consider:
1. Age of planholder
2. Initial memorial service benefit

Future Fund

2003-08-03T07:39:00.000+08:00

Recommended for: people who are planning for their retirement

Benefits:
1. Maturity benefit
- receive a guaranteed payment at maturity date
2. Choice of settlement options
- receive payment based in a lump sum, an amount over a fixed period, a fixed amount at regular intervals, only the interest earned by the maturity benefit, or any mode of settlement arranged with the company
3. Pre-maturity benefit
- opt to avail of pre-maturity benefit once the plan is fully paid
4. Yearly cash benefit (for Future Prime Fund only)
- receive 15% of the maturity benefit annually starting on the 10th year prior to maturity date
5. Various choices for payment period and years to maturity
- opt for a shorter or longer payment period and number of years to mature
6. Insurance benefits
- term insurance, credit life insurance, total disability benefit, accidental death and dismemberment benefit

Factors to consider:
1. Paying period
2. Maturity period
3. Maturity benefit

Plans:
1. Future Fund
- credit life, total disability benefit, accidental death and dismemberment benefit
2. Future Fund Plus
- credit life, total disability benefit, accidental death and dismemberment benefit, term insurance
3. Future Fund Prime
- credit life, total disability benefit, accidental death and dismemberment benefit
- yearly cash benefit

Auto Insurance

2003-08-02T07:38:00.000+08:00

Recommended for: private car owners and fleet owners

Benefits:
1. Liability to the public
- third party bodily injury and death
2. No fault indemnity
- third party bodily injury and death
3. Own damage/theft
- fair market value of unit
4. Excess bodily injury
- third party bodily injury and death
5. Property damage
- third party property damage

Eligibility:
1. 22-65 years old
2. gainfully employed
3. fair market value at least P200,000

Factors to consider:
1. Year model
2. Make of car
3. Car model
4. Age of owner

AIG Assist Travel Insurance

2003-08-01T07:36:00.000+08:00

Recommended for: travelers

Benefits:

1. Personal accident benefit
- death and dismemberment caused by an accident during the trip
2. Accident medical reimbursement
- expenses incurred as a result of injury suffered while traveling
3. Evacuation and repatriation (international only)
- emergency medical evacuation expenses as a result of injury suffered while traveling
- expenses incurred to return the remains of the deceased insured to the place of residence
4. Baggage delay (international only)
- reimburses purchase of necessary clothing and toiletries
- checked-in baggage delayed for more than 12 hours
5. Baggage loss and damage (international only)
- pays for the actual cost of the baggage lost due to theft
- repairs and reinstates baggage while in the possession of the hotel staff and common carrier
6. Trip cancellation (international only)
- due to death, serious injury or sickness of insured person, spouse, child, parent, parent-in-law, grandparent, sibling, business partner or co-director
- strike, riot or civil commotion at the planned destination
- pays for loss of non-refundable travel fare
- pays for loss of non-refundable accommodation expenses
7. Trip termination (international only)
- due to death, serious injury or sickness of insured person, spouse, child, parent, parent-in-law, grandparent, sibling, business partner or co-director
- serious damage to the insured's principal residence
- pays for loss of non-refundable travel fare
- pays for loss of non-refundable accommodation expenses
- return to the Philippines after the commencement of the trip
8. Compassionate visit (international only)
- arranges and pays transportation and accommodation of an adult family member to accompany the insured during his or her stay in the hospital
9. Child guard (international only)
- arranges and pays transportation and accommodation of an adult family member to take care of minor children and to accompany them home
10. Flight delay (international only)
- reimburses expenses for flight delay more than 12 hours due to severe weather conditions, strike of airline personnel, or equipment failure of the aircraft
11. Loss of travel documents (international only)
- reimburses costs to replace lost passport, visa, or travel tickets, including hotel and travel expenses, due to robbery, burglary, or theft
12. Personal liability abroad (international only)
- legal liability due to negligence
- bodily injury or property damage to third parties
13. 24-hour emergency assistance service
- provided by SOS, International

Eligibility:

1. individual
2. family
3. corporate

Plans:
1. AIG Assist Domestic Travel
2. AIG Assist International Travel
3. AIG Annual Business Travel

Philam Strategic Growth Fund

2003-07-23T15:21:00.000+08:00

Philam Strategic Growth Fund is long-term investment vehicle that gives superior capital growth through a professionally-managed stock portfolio. It is an open-end, equity mutual fund invested in listed or soon to be listed issues at the Philippine Stock Exchange. Aside from locally listed securities, the fund may also invest 20% of its total assets in foreign securities. For defensive purposes, the fund may be invested in cash or fixed-income instruments including convertible instruments.

The average rate of return for the last five years is about 9.75%, one of the most consistent and best-performing stock funds in the market.

Recommended for: investors who want more aggressive capital appreciation for long-term investment purposes

Minimum investment: P10,000 only

Philam Dollar Bond Fund

2003-07-22T15:16:00.000+08:00

Philam Dollar Bond Fund is an open-end, fixed-income fund, denominated in U.S. dollars. The fund invests in Eurobonds and dollar-denominated government securities.

The average rate of return for the last five years is about 5.33%, certainly much higher than dollar bank deposits.

Recommended for: investors that an alternative and higher-earning investment vehicle for their dollars and protect against currency depreciation.

Minimum investment: $2,000 only

Philam Fund

2003-07-21T15:13:00.000+08:00

Philam Bond Fund is an open-end, balanced fund. The fund invests in both fixed-income instruments such as include treasury bills, notes, and bonds, or other evidences of indebtedness guaranteed by the Republic of the Philippines, high-grade commercial papers, and other fixed income instruments, as well as publicly-listed stocks with medium to large capitalization. The fund may also invest 20% of its total assets in foreign securities in order to take advantage of opportunities in other markets.

The average rate of return for the last five years is about 10.59%, easily beating other balanced funds in the market.

Recommended for: investors that want higher returns in the long-run but still maintaining a moderate level of risk compared to a pure stock fund.

Minimum investment: P10,000 only

Philam Bond Fund

2003-07-20T15:07:00.000+08:00

Philam Bond Fund is an open-end, fixed-income fund. The main investment inputs of the fund include treasury bills, notes, and bonds, or other evidences of indebtedness guaranteed by the Republic of the Philippines, high-grade commercial papers, and other fixed income instruments.

The average rate of return for the last five years is about 8.97%, beating other bond funds in the market.

Recommended for: investors that want capital appreciation with a high degree of safety.

Minimum investment: P5,000 only

Bankers Club preferred shares

2003-07-18T14:54:00.000+08:00

Bankers Club Preferred Shares

Why be just a bank depositor if you can be a bank shareholder? We offer preferred shares of First Country Bank, which promise guaranteed income and which are affordable, renewable, loanable, participating in the income of the bank over and above the guaranteed 12% income, and convertible to a time deposit, tax free!

Guaranteed income. You will receive guaranteed income of 12% every year.
Preferred as to dividends. If the board of directors declare dividends, you will receive dividends in excess of the 12% guaranteed income you have received.
Preferred as to assets. As a preferred stockholder, you will have priority after creditors on the assets of the Bank in case of dissolution.
Convertible. You can convert your preferred shares to a time deposit at the equivalent amount.
Renewable. After 5 years, you can renew the term for another 5 years, and so on.
Cumulative. Your dividends will accrue if the Bank does not issue them.
Loanable. You can borrow against your preferred shares.
Tax-free. Since it's a 5-year investment, it's not subject to withholding tax.
Approved by BSP, PDIC, and SEC. This offering is duly approved by all government regulatory agencies.

Download brochure.

Bankers Club Double Your Money in 5 Years

2003-07-17T14:51:00.000+08:00

Bankers Club 5-Years Double Your Money
Double your money in just 5 years, tax-free! Imagine this - start with just a P100,000, let it roll over for 20 years, and you will be a millionaire! That's the power of compounding. And the minimum investment is only P100,000. Definitely, whether it's for your retirement or as an inheritance for your family, the Bankers' Club 5-Years Double Your Money Time Deposit gives the best return on your investment.

Download brochure.

Bankers Club Pensionado Plan
This is a long term special savings account equivalent to "Double Your Money in 6 Years" that lets you immediately have your interest income credited to your regular or ATM savings account every month, tax free! Live off the interest on your investment and enjoy your dream retirement.

Download brochure.

Bankers Club Money Back Plus
If you can pay cash for your dream car in full, consider a better alternative: our Money Back Plus Time Deposit. Pay the required downpayment, get a car loan from another bank for the balance, and deposit the loan balance with us. In turn, we pay the monthly installments for the balance of your car loan. You will have absolute ownership of the car at the end of the fourth year, and at the end of the sixth year, we return your investment 100%, plus an additional 5% of your investment.

Download brochure.

Learn more.

First Country Bank deposit products

2003-07-16T14:48:00.000+08:00

Regular Savings Account
Our regular savings account requires only P500 to open and at least P1,000 to earn an interest rate of 3% p.a.

SURE ATM Savings Account
Now, with our tie-up with Asiatrust Bank, you can now have your own ATM card - the First Country Bank SURE Card - so you can make electronic banking transactions at any of the thousands of ATMs nationwide!

SURE Current Account
Enjoy the convenience of paying by check combined with a 3% interest on your balance. Earn a high 8% if you maintain at least a P100,000 balance.

Fiesta Savings Account
A one- or two-year special savings account that earns interest, and depending on your deposit amount, we will give you a free cell phone, or any other item, of your choice, for free!

Katuparan Savings Account
A choice of 30, 60 , 90, and 180 day special savings account with higher interest rates. The longer the term and the higher the deposit, the higher the interest you will earn.

Learn more.

Loans

2003-07-14T08:15:00.000+08:00

What they are

These are financial obligations you owe to finance a purchase or expense.

The common types of products are:

Credit Cards: These are unsecured credit lines that you use to purchase goods and services and are supposed to pay after a certain period of time.
Car Loans: You finance the purchase of a vehicle with these loans, with the obligation to pay every month with interest for a set number of years.
Housing Loans: Also called home mortgage, you borrow money to buy a lot, house, apartment, or condominium, or to construct a house or remodel a home. Usually long-term, 10 to 20 years, you pay regular (usually monthly) amortizations.
Home Equity Loans: These are loans using your existing home as collateral.
Personal Loans: These are usually unsecured loans that you take to pay for miscellaneous expenses.

What you get

You receive a certain amount to fund a purchase in exchange for a promise to return the amount plus interest.

What they cost

You pay interest over a certain period of time, and it's not unlikely that the total amount of interest you will pay is actually more than the cost of your purchase.
If you don't pay on time or in full, as with credit cards, you get charged with late payment fees and exorbitant interest. In the case of a housing or car loan, if you default on your payments, you will lose everything - the house or loan, and the payments you've already made.
You get charged also for a myriad of fees, such as application fees, annual fees, processing fees, and the like.

What's good

You get instant gratification. You don't have to wait for years to get that dream car or go to that dream vacation.
You use leverage. You don't need to have loads of cash to start owning your own home. You use other people's money to finance your purchase. And you can use leverage to earn a much higher return if you decide to turn your purchase, particularly appreciating assets like a house, into an investment.

What's bad

Instant gratification is a double-edge sword. You get what you want now, but it may end up fooling you into believing you can afford anything. And it may prevent you from developing a habit of saving and the discipline of delayed gratification.
If not managed well, debt can consume your life. You'll end up working practically for your creditors. And you risk getting blacklisted. That's not even counting the cost to your health, marriage, and happiness.

Where to get them

Banks and financing companies. Car and real estate companies also have in-house financing.

Is your Mastercard safe?
Debt
Mercury Drug-Citibank Card
Chinatrust Bash-Your-Balance Loan
Credit Card Trap Part Two
Credit Card Trap Part One
Credit Cards' past-due receivables surge

Pre-need

2003-07-13T08:12:00.000+08:00

What they are

These are savings vehicles that you fund in advance before the actual need arises.

The common types of products are:

Pension: You can a guaranteed amount of money to help fund your retirement.
Educational: A savings plan to pay for the education of your child.
Memorial: A contract that pays a fixed amount after a period of time, which you can then use to pay for the expenses related to burying a loved one.

What you earn

You receive a certain fixed amount at a fixed date.
Usually, you also get life insurance coverage for the same period, which will pay benefits to your beneficiary in case you die before the contract ends.

What they cost

You pay premiums once or a certain period of time.
You get taxed on your premiums.
The premium includes of course the cost of the pre-need company, to cover its operating expenses and the commission it pays the agent who sold the policy to you, and earn money at the same time.

What's good

They really are just savings plans, but somehow like endowment policies since they're also contracts that guarantee a fixed amount of money. You know exactly what you'll get, unlike other investments, which go up and down.
It's forced savings in a way, because you have an obligation to keep paying your premiums. The disincentive not to pay is huge - you get nothing.

What's bad

They can be expensive.
They don't earn as much if you otherwise just invested on your own. After all, if they’re guaranteeing the amount they'll pay you, they have to be more conservative in the rate of return they promise.
They'll pay a fixed amount, which is not a guarantee they will beat inflation. Some people think they can relax and take it easy after five years of paying for a pre-need plan. Fixed plans will not necessarily pay for your child's entire education or for all your burial-related expenses.
If your policy lapses because you fail to pay all your premiums, you get nothing.

Where to get them

Pre-need companies, of course.

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Insurance

2003-07-12T08:06:00.000+08:00

What they are

These are products that protect you and your property against financial disasters.

The common types of products are:

Life: This provides a benefit to your beneficiaries after your death.
Personal Accident: These provide you with protection if you get incapacitated because of an accident. More commonly called disability insurance, you get paid when you lose a part of your body.
Health: If you get sick and are hospitalized, this pays for the bill.
Auto: This covers the cost of damaging your or someone's car, someone's property, or injuring someone in a car accident. It also pays when stuff in your car or your car itself is stolen or damaged.
Homeowners: Typically, an insurance against fire or an earthquake destroying your house. But it can also cover for things stolen or damaged inside you house.
Liability: If you get sued for whatever reason, you get protection as this policy pays for the damages.
Travel: Covers you for losses like lost luggage, cancelled flights, and personal accidents.
Credit Life: This is life insurance required of you when you get a loan like a housing or car loan. If you die, the policy pays for the remaining balance of your loan.

What you earn

Primarily, you or your beneficiary receives a certain fixed amount when whatever is covered in your policy takes effect, such as if you have a car accident, if your house burns, or if you die.
Life insurance is also packaged frequently with a savings component, such that you earn a certain amount after a certain number of years.

What they cost

You pay premiums once or a certain period of time.
You get taxed on your premiums but insurance benefits are exempt from tax.
The premium includes of course the cost of the insurance company, to cover its operating expenses and the commission it pays the agent who sold the policy to you, and earn money at the same time.

What's good

They protect you from substantial financial loss because of a disaster. If you just rely on your savings and investments, they may not be enough. Insurance is really about investing against possible disaster.
It saves you some of the hassle, inconvenience, and anxiety that you otherwise would go through if you paid for all the trouble yourself. In many cases, your insurance company will just deal directly with the other party's insurance company. And your insurance company will take care with a lot of the paper work.

What's bad

They can be very expensive especially if you easily give in to pressure and don't do your homework.
Of course, if the disaster you’re insuring against doesn't happen, your premium is money down the drain. But then again, which would you rather happen?
Insurance policies have a lot of restrictions, exclusions, and confusing gobbledygook. You may think you're covered when you're actually not.
If your policy lapses because you fail to pay all your premiums, you get nothing.

Where to get them

Insurance companies, of course, and banks that have bancassurance departments, plus HMOs.

Related articles

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Investments

2003-07-11T07:59:00.000+08:00

What they are

These are products or instruments that allow you earn a return over what you have placed, which you can use later to fund your retirement, pay for big purchases, and spend for other long-term plans.

The common types of products are:

Government Securities: These are loans of the government, and as such are considered risk-free. You earn interest every quarter or semi-annually if you keep them for a fixed period of time, or you can sell them for a profit. The most common are Treasury bills (or T-bills), which are from 90 days to a year. Long-term government securities are called Treasury Bonds (T-bonds) or Treasury Notes (T-notes). Alternately, you can invest in Retail Treasury Bonds (RTBs), which require much smaller minimum investment amounts.
Bonds: Sometimes called commercial papers (CPs) if issued by private companies. These are loans of big companies that need to raise money for projects and such. You also earn interest on them or sell them for a profit. Of course bonds can be issued by the national and local government as well.
Stocks: These are shares of ownership in a publicly-listed company (although you can also buy into companies not listed in the stock exchange). You earn two ways: through dividends issued by the company or through capital gains, that is if the market price of the stock goes higher than the price you paid for it.
Unit Investment Trust Funds (UITFs): Replacing Common Trust Funds (CTFs), UITFs are an improved version, as market prices are updated daily. These are pools of money from various investors, which are then invested by a fund manager (usually a trust department of a bank) into government securities, bonds, and stocks). You buy units of participation. You earn money when the fund's net asset value increases.
Mutual Funds: Similar to UITFs but more regulated and transparent, mutual funds pool money from thousands of investors. You are basically a co-owner of the fund or investment company, so you buy shares. There are different types depending on your investment objectives, including money market funds, bond funds, stock funds, balanced funds, etc. You make money when the fund's net asset value increases.
Foreign Currency: You can exchange your local currency into U.S. dollars or other foreign currency, hoping that foreign currency's value increases or appreciates relative to the local currency.
Insurance Plans: Whole life insurance plans have a savings component. A variation is the variable (also called unit-linked) insurance plan, which gives you greater control on how your premiums are invested. You earn through what's called a cash-surrender value, which grows over the years, and which you can redeem if you terminate the policy before the end of the term. You can also earn cash benefits and dividends at certain points during the coverage.
Endowment Plans: These are insurance products but don't provide lifetime coverage. They are often positioned as investment products because the emphasis is on the savings component and the amount of money you'll earn. You get a guaranteed amount of money after a fixed number of years.
Annuities: These are contracts with insurance companies that promise you either a fixed or variable return after a certain number of years.
Pension Plans: These really are just savings plans offered by pre-need companies that guarantee an amount of money after a set number of years.
Retirement Plans: These are pension plans funded by your employer and given to you when you retire from the company. Typically, these are defined-benefit plans, i.e. it's already pre-determined how much you’ll be given when you retire, such as a full month's salary for every year of service. In the U.S., the more popular type is the defined-contribution plan, usually the 401(k) and also employee ownership and profit-sharing plans, where the benefits you get depend on the amount of contribution you give and how these are invested.
Derivatives: These investments derive their value from other investments, hence the word. The more common ones are options and futures contracts.
Real Estate: These are property such as lots, houses, condominiums, etc. that increase in value over the years. You make money by selling for a profit or by renting them out to tenants.

What you earn

If it's a fixed-income investment, like government securities and bonds, you earn a fixed interest, although you can sell the instrument itself for a profit.
If it's an equity investment, like stocks or mutual funds, where you own a share in the company, you earn through capital gains for selling when the price is higher than your cost (you can earn without selling, but that's just profit on paper, not profit in your hands). Of course, stocks sometimes pay dividends as well, which in a way is like interest.
Savings plans, in the form of insurance plans, endowment plans, and pension plans, promises a fixed and guaranteed amount of money after a certain number of years.
In the end, except for savings plans, investments are bought and sold in their own markets (bond, stock, foreign currency, or real estate market, and as such, you can make money when you buy low and sell high.

What they cost

You get taxed when you earn money after selling stocks and real estate. You get taxed when you interest. You get taxed when you pay insurance premiums. But mutual funds and retirement plans are exempt from tax.
You buy many of these products through a broker, dealer, or agent, whether it's a real estate broker, stock broker, foreign currency dealer, government securities dealer, mutual fund agent, or insurance agent. And naturally, they charge fees, get a commission, or both.
Investments that are actively managed like mutual funds charge a management fee every year.

What's good

They earn more than traditional bank products. In the case of stocks, mutual funds, and real estate, they can be the foundation for long-term wealth.
They appeal to all sorts of investors in terms of investment objectives and risk appetite. So if you want to earn as much as possible and are willing to take more risk, stocks and real estate are your choices. If you're a bit more conservative, you may want to stick to government securities. If you want to know exactly what you’ll get, there are bonds and pension plans. If you enjoy a roller-coaster ride, stocks are the way to go.

What's bad

They're not insured against loss. So it's possible you can lose everything.
They are riskier in general. However, they do have varying levels of risk, from practically risk-free (T-bills) to risky (derivatives).
Like bank products, watch out for fees, sometimes hidden or imputed, and check the fine print.
Some of them can be very complicated to understand. But that shouldn't stop you from learning.

Where to get them

For government securities, bonds, foreign currency, and UITFs, banks.
For stocks, stock brokers.
For mutual funds, investment companies and universal banks.
For insurance and endowment plans, insurance companies and universal banks.
For pension plans, pre-need companies.
For real estate, real estate brokers and banks.

Banking

2003-07-10T07:54:00.000+08:00

What they are

These are bank products that allow you to place your money for safekeeping, pay for goods and services, and earn interest.

The common types of products are:

Savings Account: This is where you place your money (or if you're employed, usually where your payroll is deposited) for temporary use. It's very liquid but it also usually pays low interest. You get a passbook or a statement of account, plus an ATM card.
Special Savings Account: Also referred to as premium savings account. There is a tiered structure such that you get higher interest the higher your balance. But there are withdrawal restrictions.
Current Account: Better known as a checking account. You get a checkbook which you used to write checks to pay for transactions. Usually you don't earn interest.
Negotiable Order of Withdrawal (NOW): A checking account that earns interest, but there are restrictions to the number of checks you issue per month.
Time Deposit: You get a certificate as proof of ownership. It's like a savings account except you can only withdraw the money when it matures, usually from 30 days to up to five years.
Certificate of Deposit (CD): It's like a time deposit, but negotiable, meaning you can sell it in the open market.

What you earn

You earn a fixed interest on bank products, except for some checking accounts.

What they cost

Usually, there's a minimum maintaining balance (called average daily balance or ADB), except for some savings accounts, below which the bank charges a fee.
You also pay if there's no movement in the savings or checking account for a long time (which is labeled dormant).
You pay if you close the account within one month of opening it.
If you use the ATM, you'll get slapped with fees for using another bank's machine or another ATM network.
If you have an ATM card, but you withdraw over the counter even if the network is not down or you withdraw less than the daily maximum limit, you pay a fee.
And if you issue a check and there's not enough money in your account, you'll be charged for insufficient funds, whether or not you were able to subsequently fund it.
If you issue a check, then issue a stop payment order (SPO), you pay.
If the account has restrictions on the number of withdrawals you can make, and you exceed them, there's a surcharge.
You also pay for new checkbooks and getting a print out of your statement of account.
Banks have devised a lot of other fees and charges other than those listed here. So check with your bank.
There's a 20% withholding tax on the interest you earn, except for deposit products that have a maturity of more than five years.

What's good

They're insured by the government through the Philippine Deposit Insurance Corporation up to P250,000 per person.
They're typically liquid, particularly for savings and current accounts, so if you need access to your money, this is one of the quickest ways to get it.
They're useful for everyday transactions like paying for goods or for bills, without having to carry a wad of paper bills in your wallet. That's why they're referred to as settlement accounts. You can use a check, your ATM card (which in some banks double up as debit cards, plus you can do transactions on the machine itself), or through Internet, phone, or mobile banking.

What's bad

They don't pay well, except for some long-term special savings products and CDs (which, on the other hand, are not as liquid anymore since you have to hold them till maturity). So you can't beat inflation. In the case of checking accounts, they don't pay anything at all.
The fees and surcharges can really hurt. If you don't balance your checkbook regularly or if you strike ATMs randomly, you're apt to ramp up charges.

Where to get them

Banks, of course. There are universal banks, commercial banks, savings or thrift banks, and rural banks.

Saving
Are long term negotiable certificates of deposit a good investment?
The 13th month dilemma
Citibank online savings acount
PDIC coverage up to P250,000
A little goes a long, long way

Websites

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The Internet has tons of resources on personal finance and links to financial services companies, and government agencies.

Personal Finance Websites
Blogs
Magazines
News
Software
Websites

Financial Services Companies
Banks
Brokerages
Investment Companies
Financing Companies
Insurance Companies
Health Maintenance Organizations
Pre-Need Companies

Government Agencies
Bangko Sentral ng Pilipinas
Bureau of Internal Revenue
Bureau of Treasury
Department of Finance
Department of Trade and Industry
Insurance Commission
Philippine Deposit Insurance Corporation
Securities and Exchange Commission
Social Security System

Newsletter Archives

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Read past issues of the Money Minute newsletter.

Saving
Giving
Debt
Spending
Our Responsibilities
God's Responsibilities
Money and the Bible
The 10-Minute Investment Checklist
Where to Invest P100,000
The 13th Month Dilemma
The Credit Card Trap (Part Two)
The Credit Card Trap (Part One)
Six Feet Under
Principle #10: The More You Give, The More You Get
Principle #9: Make a Life, Not Just a Living
Principle #8: Match the Right Instrument With the Right Requirement
Principle #7: There Are Two Things Certain in Life
Principle #6: You First, Then Others
You Do Need Insurance...
You Don't Need Insurance...
Putting It All Together
Principle #5: It May Not Happen, But It Can
Principle #4: Live Within Your Means, Then Increase Your Means
Principle #3: A Little Goes A Long, Long Way
The Money Diet
How Much Are You Worth?
Dude, Where's My Cash?
Principle #2: It's Not How Much You Earn, It's How Much You Get to Save
Make SMART Goals
Principle #1: You Won't Get Anywhere If You Don't Know Where You're Going
10 Principles for Managing Your Money