Proverbs 6:6-8 " Go to the ant, you sluggard! Consider its ways and be wise! It has no commander, no overseer or ruler, yet it stores its provisions in summer and gathers its food at harvest." The content of this blog covers from personal finance to investment related topic which, I believe will help us keep our Finance handling in Check and not be sluggish but be wise in handling our finances.
Cumulative Inflation Rate In Philippines From DEC 2006
From this illustration, at least 5 question we have to ask ourselves when assessing our cash flow.
If our cash inflow is based alone on salary and in reference to the day we start working, did our salary increases more than the rate of which the price of goods also increases?
From the day we decide to put our money in the bank, did it grow sufficient enough to compensate the cumulative increase also in price of basic goods?
In reference to the day we start investing, is it already earning more than the cumulative increase in price of goods from the day we start investing?
Did the net income of our other source of income such as business increases more than at least the rate of increase in price of basic goods?
What are the available investment vehicle today that can possibly outweigh inflation and compensate all other investment fees?
Perhaps, by asking these questions when assessing our cash flow planning, we can project somehow the needed earning or cash inflow in order to compensate one of the unavoidable economic factor "The Inflation". Of course, it's not enough to just realized this fact, I guess the hardest part when we realize something is actually whether we act upon that realization. Otherwise, it is as good as just a stored knowledge.
"An excerpt from my Blueprint to Financial Success"
In the illustration thereof, it would be best to manage our debt first before deciding to jump into investment. Otherwise, we will be in big trouble and might be very difficult for us to recover. We have to remember that compound interest is our worst enemy when it comes to unmanaged debt.
How to manage debt then?
Do a monitoring on your credit. It will make you aware how much minimum you really need to pay to constantly reduce your debt.
Consolidate it, avoid borrowing money from one person/banks to another.
Make sure to pay debt timely (we don’t want unnecessary late charges)
If possible, eliminate it.
Two Types of Debts:
Bad Debts
Good Debts
Sample of Bad Debts and Good Debts: Say for instance were qualified and get a personal loan maybe from a bank, SSS or GSIS, PAG-IBIG, etc
Bad Debt, if we used the loan amount to buy consumable or depreciative things which actually not needed or only for the purpose of gaining attention or in short to show off.
Good Debt, if we invest the loan amount to which it will possibly earn more. Just remember to manage it though, meaning we have to make sure that we regularly pay the loan amount sufficient enough to constantly reduce it.
As defined by Investopedia a personal cash flow statement measures your cash inflows and outflows in order to show you your net cash flow for a specific period of time. In mathematical terms it can be defined as:
Cash Inflows - Cash Outflows = +-Net Cashflows
Given this definition, positive net cash flow could mean savings. Take note though, in order to maintain a positive cashflow or beter yet increase it, one need to increase cash inflow and manage cash outflow. We cannot increase our cash inflow and also increase our cash outflow the same rate as how much our cash inflow increase. The latter are prerequisite to each other.
Most often than not, our worst enemy when it come to savings is non other but ourselves. If we used this formula in order to have savings, we will probably end up broke, perhaps, it's because our brain is wired to instantly gratify our wants - that is we desire to experience pleasure or fulfilment without delay or deferment, basically, it’s when we want it; and we want it now. Consider this, suppose just before we receive our next salary we still have 100 dollar left. But then, while roaming around we came across a 50% sale of our most desired shoes. The price before sale was $200 and now it dropped to $100 and we still have extra $100 in our pocket, some more last day of sale, will we miss it? Probably not.
That's why as Warren Buffet once advice "Don't save what is left after spending; spend what is left after saving". In this regard, we probably need to alternate the formula as per below:
I guess with this formula we are able to trick our brain to save effectively. Cash inflow could be our salary, cash generated by doing part time or overtime, whilst cash outflow could be our daily expenses.
It is recommended to save at least 20% of our savings and live by the remaining 70% of it. For the balance 10% more or less, it is advised to give out or share 10% more or less of our income or as we wish and able to those who are in needs and or to the poor. Learn to give it willingly and cheerfully. It is for us to recognise that we are all interconnected and interdependent. We cannot to create any amount of wealth just by our own efforts. Even an artist needs the raw materials for paint or to sculpture, and an author needs pen and paper. Giving and or sharing what we receive is a way of recognising that in the process of building wealth, we have an unseen partner (Our God) who is there to support us in achieving our goal. We certainly want a good relationship with our partner right? By sharing and giving part of what we receive, It pleases Him. And, at the same time, it will help us check constantly our attitude towards money, help us to be humble, check our pride, be generous along the way and it will remind us always not to give in to whatever temptation that may come along the way. It good to note that, the 10% serves as a guide only. We can start lower than that or higher than that, the idea is rather simple, the time will come when, say we start at 3% and this is the best we can give without affecting our personal obligation, if we are continually blessed, there will come a time that this 3% will be nothing to give. Should that time comes, it's best to increase it to such that we feel the sacrifice of giving without affecting our personal obligation and continue to increase it should that feeling of sacrifice vanishes again because, that feeling of struggle and or sacrifice to give will remind us always not to be complacent, that there is someone helping us and we don't own anything, that feeling of sacrifice will remind us always to be humble, check our pride and not give in to the temptation that may come along.
Also, should we ought ourselves to give some portion of what we receive, we should also be compelled to plan on how to spend the remaining balance. Should we oblige ourself to give but did not bother to plan how we spend the remaining balance, we might just end up in deficit meaning, we over spend and might end end up owing someone. For me, the joy of giving and the blessing that comes along with it will only really show if we simply learn to discipline ourself on how we allocate and spend the remaining balance of our resources after we give. God's blessings are not short term, by learning to discipline ourself on how we allocate and spend our resources effectively, we are in for a long term blessing that we can even pass down to our children's children.
So now the formula is as per below and as per my experience, whether you have and existing debt to pay or not, use this formula as soon as possible.
Now, I knew somehow following the formula strictly will not make sense. Like say, what if we have a debt to pay, would it be better to, instead of saving the 20%, use it first to pay off the debt since that debt will incur interest and then start saving after paying off debt. The reason why its better to try our best to stick to the formula whether we have debt or not is that, it will force us to think of ways how to increase our income to such that the 70% expense will include all bills including the amount needed to pay off debt. The earlier we start will also help us build that habit within us and get use to it rather than waiting up to until the debt has been payed off, its possible that by that time, we might be already lazy or not keen to follow the formula. Let's not procrastinate, if we have the enthusiasm now to follow the formula, let's do it! Think of that 20% saving as like an expense as if we are paying off a bill whereby every time we pay it, our brain automatically conditioned that it will not come back. Like say for me, I think of it as like I'm paying a tuition fee, I'm compelled to pay it and I don't feel regret every time I make payment and I knew that it will not come back. I treat the 20% saving the same way the tuition fee, the only difference is that it goes to the asset column instead of going the liability column. The earlier we apply the formula and by repeatedly doing it, it will become a system of habit. The 70% percent requires a close monitoring of how we spend it and that is through effective budgeting. It may sound simple, but it really is not easy in practice. It requires discipline and a system where you and the ones involve in it are comfortable to do. There are a lot of tips and how to do it instructions available online but I believe every individual have unique character and different needs. So, adapt tips and procedures that you think best suit and effective for you and the people involve in it.
Let me share to you a concept we called the X- Curve, this concept basically simplifies our personal financial planning.
Lets start with this line and call it our age line, the left side will be our younger years and right as our older years. Now, during our younger years which probably where we at now. This is the point in time where we usually have huge responsibility, and also the point in time where we usually work so hard for the money, our paycheck or income usually goes to these responsibilities and basic needs such as food, shelter, clothing. About this time also we start to build our own family, we get married have children and for that we oftentimes acquire Debt, Loans and mortgages. Education for our children is also part of that big responsibility, same as family health care of course.
The red curve line as shown is our responsibility line which should decrease the older we get. Ideally, our responsibility such as debt, mortgages, children education should have been fulfilled by this time to such that we have no more responsibility other than our basic needs. During our younger years, usually we have no savings because as I said, at this point in time we have big responsibility and that our income are often enough to cope up with this responsibilities. The green curve line as shown is our wealth or saving line, ideally, our wealth if we build it wisely and correctly should increase over time. And when we get older, we would want to have big savings. At this point in time, what we wanted is that money should already be working for us. Meaning, we live on interest, exceedingly enough to cover our basic needs such as food, shelter and clothing. Even more than enough to cover our retirement, healthcare and should already be debt free.
Going back to our younger years, at this time, we are less secure. As life is full of uncertainty, anything could happen along the way, we could lose our job or get sick. That is why we need to create an emergency fund that will serve as our contingency plan whenever those kind of situation occur. As recommended by most financial adviser, 3-6 months of our salary should be our emergency fund. And this fund should be easy to liquidate.
Another problem while in the process of building wealth are facing the so called two "if's" of life. What if, we die to soon? Most often than not, we are building our wealth not for us but for those who matters to us. And in that sense while we are building our wealth, if we don't get a protection not for ourselves but for them and something unfortunate happen to us, we might just end up defeating our own purpose . We should make sure then, that the life of those people who matter to us if something unfortunate happen should still continue as we intended it to be, after all, they are our strong emotional reason why we have strong desire to be truly rich. Unless of course, we intended to be rich for our sake alone, in that case, it's pointless to get an insurance because, though you are insured, who's going to benefit if we already perish ? Right? We came in to this world with nothing and surely, the only certain in this life is that we will also exit empty handed. No argument with that for sure.
Another "if" of life is what if we live to long? This time we should have prepared a long term investment. If we are to invest long term, it is important to consider economic factors such as Inflation and interest rate, because if we don't consider this factors especially inflation rate and invest with a return less than this rate, our investment intended for long term will depreciate overtime. Therefore, choose investment vehicle that will yield higher rate than inflation rate, and I'm pretty sure bank is not among of them.
Long term investment is intended for us to be secure and cover ourselves from our living expenses after our retirement exceedingly enough so that we don't disturb the financial planning of those people who matters around us. Lucky for us, if our children have more than enough to cover for our living expenses. But if they are struggling financially, we might end up in the home for the aged, telling others about our wits, exploits, experiences and profession during our younger years and yet, all but history and at the end of the day, we still can't cover our own expenses. We don't want that to happen, right?
Basically, the X-curve tells us to work hard now and relax later. It doesn't mean we deprived ourselves from enjoying sometime. But at least, keep track our expenses and know our priorities. One question though, do you think this is the reality now? Well, for some, Yes! Those were the wealthy people who realize early how to build wealth wisely and correctly over time. Most often than not, like what I said earlier, our senior citizen at the age where they are force to retire have no enough money to cover for their living expenses especially healthcare. Do you agree that if we live to long our health will eventually fade? Do you also agree that health care will be a very big chunk on our living expenses when we get old? Who do you want to pay for it? Do you want to depend on our children later on? Do you expect that your responsibility now to your children financially be returned later on as if your children owe you? For me, I will never view my responsibility to them as such and, I definitely don't want to disturb their personal financial planning just because I cannot cover my own expenses. It's definitely better for me to take care of myself financially later on. But, how Am I going to that?
This is where the IMG's 6 steps to financial security comes to play.
