Professional Documents
Culture Documents
Objectives
We will start with a framework to achieve financial stability. It is about goals in improving your
income and expenses, building your savings that will allow you to win your accumulation goals. The
accumulation goals is the sum total of your short, medium and long term financial goals and you
know that you have achieved them in terms of accumulating assets like a car, house or stocks
portfolio. While you are accumulating assets, you need to protect them by managing returns of
investment with accompanying risks, protecting yourself against illness and other conditions that will
bring about loss of income, etc.
You can achieve financial independence when you learn how: to practice the discipline of saving first
before spending, to live within your means (budgeting), to fight impulse shopping and consumerism
in your spending habits, and to improve your income continuously.
Your specific plans then should have some details on how to accomplish those goals like for
example, reducing unnecessary expenses, increasing one's employment income, or investing in a
business or in a real estate like a plot of land for your future house including cost figures and time
frames. The plan should be in writing and should be reviewed regularly so it can be adjusted
whenever there is a big change in one of the assumptions/projections you made like when you get a
big increase in income.
You make many decisions over the course of your lifetime. Many of the decisions you make are small
and are insignificant but some are very important and could have significant consequences. Life-defining
decisions such as
1) Choosing a career,
The good news is you can take steps to ensure a smoother journey and a more secure financial future.
This course will help you make wiser financial decisions by understanding the rules of the road so you
can avoid life's financial potholes and dead ends.
Let's start with some tips that you can use in your journey towards financial independence:
The first step to becoming financially independent, that is to gain control of your financial situation, starts
with recognizing where your money goes. Take a close look at your spending habits. Start by writing
down everything you spent money on during a one-week period in a pocket notebook. Be sure to write
down everything you buy and how much it costs. Include rent, jeepney or tricycle rides, cellphone prepaid
"load" payments, groceries, and even small purchases like "softdrinks" or snacks. Continue the habit of
writing down your daily expenses beyond the one-week exercise. Many people do this out of habit and
are in a better position to improve their spending habits than those who do not keep tab of their daily
expenses.
Now that you know exactly how you spend your money each week, notice the areas where small amounts
of money are disappearing. These spending leaks include buying soft drinks daily, renting at Internet café,
eating lunch out every day, and making impulse purchases. While it may not seem like you're spending
much at a time but these leaks can add up to quite a bit of money over a month or year.
Once you've identified your spending leaks, you can determine ways to plug them by making small
changes in your habits. For example, if you're taking soft drinks every lunch at the cafeteria every work
day, you probably spend at least P10 each time. That adds up to P50 a week, P200 a month, and P2,400 a
year. If you weren't spending this extra money on lunch and take water (not bottled water!) instead, you
could use it to help reach your financial goals, such as paying for that personal computer or that bicycle
which could in turn save you some more money compared to renting at Internet cafe or riding a tricycle
for those short trips.
Shop Smarter
Yes, you can stretch your money by shopping smarter. Here are some tips to help you stretch your money.
The best way to stretch your money is to plan ahead. Make a list of what you need to buy and
avoid impulse buys by sticking to the list. Just because an item is on sale doesn't necessarily mean
it is a good deal for your family. If you won't use it, don't buy it.
Try to keep a mental count of what you have in the house so you won't stack up on items you
should not stack up. You could use the money better on other necessities.
Buy items before you run out of them. Buy at clearance or sale price instead of regular price
when you must have the item. Buying from your nearby sari-sari store is more expensive than
from the grocery store.
Your emotions affect your shopping. Be careful of the "I deserve it" mentality and avoid the
expensive brands and the so-called lifestyle products.
Consumerism (the relentless effort of producers and advertising company to equate personal consumption
to happiness, thus more consumption means more happiness) is on the rise and some words should be
said about its most important tool - Advertising. Advertising companies have known for years that the
average consumer is like a zombie when it comes to buying products. They know what buttons to push to
create a mindless consumer. They are very good at taking your money or shaping your buying habits. The
idea is to get you to buy anything whether you need it or not. More sales create more profits.
Get into the habit of thinking of what the advertiser is trying to sell to you with the advertisements. Buy
the products or services because you need them and not for what the advertising company framed your
mind that you need it. Note that to sell a product at a higher price is to sell it as a part of a certain lifestyle,
or for services as experience. This technique works almost all of the time so be very wary about anything
sold as lifestyle or as experience. So take away the name brand, the catchy slogan and the showbiz
endorser, and ask yourself if you need that product.
Stop reading magazines covered with advertisements for things they want you to buy or articles about
shopping and the latest fashions, gadgets, cosmetics, etc. you should have. Or at least stop believing that
you really need these things or that they will make you happy. Realize that you probably already have all
that you need to live a happy life and if things need changing, shopping is not going to help in the long
term. When you do go shopping, take some time beforehand to make a list of what you want, then narrow
them to what you really need, then cross out the things you can do without for a while or can be borrowed
from a friend then go shopping - and stick to your list!
Lack of savings is the biggest reason why people are having financial troubles today. Make sure you
avoid this problem that has affected many people of your age and even many mature people as well. Save
first and then live within your means. A simple formula that best describes the virtue of financial
responsibility.
Saving money is not easy, but it's essential to achieving financial independence and to securing your
future. Every time you receive your salary, save at least 10% of that money before spending money on
anything else. You then learn to live on 90% of your income and you can start by working out a spending
plan based on the 90% salary.
You can start now by setting aside some money of your income and start building up for your short and
medium term goals. If you receive salary on an ATM account, you may choose to draw out only the 90%
of your salary and leave the 10% as your savings. In this way, the money never hits your pocket, so you
won't spend it. As you accumulate your monthly savings in your ATM, move the money to another bank
account that offers some interest.
You should think about the money you save as falling into three categories: money for an emergency
fund, money for short-term purchases, and money for long-term goals.
Saving for an Emergency. The first savings goal you should establish is setting aside enough money
to cover your basic living expenses for three to six months. This money should be kept in an easily
accessible savings account in a reputable bank with a branch close to where you live or work and not
in a long-term investment asset like real estate. Use this money only in the event of an emergency,
such as receiving unexpected medical bills or losing your job.
Once you've established an emergency fund, you can begin saving money to reach other goals, such
as buying a personal computer or other household appliance, acquiring your dream house or a new
car, getting married, funding your child's education, or establishing a retirement fund. To learn how
to set and achieve financial goals, move on to the next module: Setting Financial Goals.
Other ways to make saving money easier include putting away raises, bonuses, and tax refunds.
When you have money at hand, you have basically four choices on what to do with the money:
1). Save (for emergency fund and to finance your short, medium, and long term goals);
3). Donate (to your favorite charity that promotes the common good but start by helping your parents
and siblings first, especially to help them finish their studies);
Savings and investments can produce income from interest and dividend payments. These payments
become income and are tracked on a person's budget worksheet. The money is "working" and
earning income. The additional income allows the person to increase savings.
Wealth-creating assets grow in value as market prices rise. Until the asset is sold, the increased value
does not affect a person's income; thus, it does not impact the budget worksheet. However, the higher
value adds to a person's wealth by increasing the asset side of the balance sheet.
Manage Risk
The reward of interest or growth of value is accompanied by risk. Risk is the possibility that savings
or investments will lose value over time rather than gain value. There are four known risks related to
savings and investments: risk of default, risk of falling market price, risk of lost purchasing power,
and risk of liquidity.
Risk of default. If the institution or agency fails to repay the original amount of the investment,
the entire amount can be lost.
Risk of falling market price. When the asset is bought and sold in an open market, the price can
go up or down.
Risk of lost purchasing power. If savings do not grow more quickly than the rate of inflation, the
saver is harmed.
Risk of liquidity. The difficulty to be able to quickly or easily convert the investment to cash by
selling the asset.
Generally, the higher the risk of losing money, the higher the expected return. For less risk, an
investor will expect a smaller return.
Saving and Investing are the two ways that allow your saved money to grow over time.
Savings account is money deposited in a financial institution, like a bank, that earns interest. These
accounts are:
When these assets are purchased, risks are assumed in exchange for anticipated returns.
These assets must mature or be sold to realize returns or capital gains.
Remember, this is not investment in the economic sense. Typically, when an economist speaks of
investment, the term is specific and refers to the purchase of a capital resource by a producer, such as
machinery, not a purely financial transaction like the purchase of a stock or bond.
Interest: The time value of money
Compounding Interests. Banks give 0.5% pa on savings account (compounded quarterly) and
compare with Credit cards (3% per month, compounded monthly)
You have already read about financial goals earlier in this course and we now go into developing
one. You start with a list of things you want to get (goals). Maybe buying a personal computer, or a
used car perhaps. Whatever goals you want to achieve, you have to write them down as a list and
label each of them in three categories as short term, medium term, and long term.
Short-term goals might include buying a new computer, paying off a big debt of money
you owe someone, or to help send one of your siblings to school.
Long-term goals might be to buy a house and lot or retire with enough money to live
comfortably.
Most young people get into debts to buy gadgets, fashion accessories or expensive clothes and there
are all sorts of offers to get those items on a loan basis payable by monthly installments. These are
called consumer loans. Often these loans are unsecured and the credit company charges above-
average interest. Try to avoid this kind of loan and consider saving the needed amount first and then
buy the item in cash. Consumer debts with young people easily pile up and leave them with little
money left from their salary.
Consumer debts should be avoided because the items you have acquired won't increase in value over
time. These include balances you owe on credit cards and other personal loans. But there are other
types of debts like mortgages and student loans, which are considered more favorable than others.
That's because these loans potentially have long-term benefits, such as eventually owning a house or
working in a profession that requires a degree. Some consumer debt may be necessary, but too much
is bad to your financial future. As a rule of thumb, your total loan repayments should not exceed 20%
of your take home pay.
The list below can be used as warning signals that you are already carrying (or close to) too much
consumer loans. If you find several items from the list which describe your situation, then you really
have to try to reduce your debts:
You spend more than 20% of your paycheck to pay off car loans, credit cards, or other types
of consumer debt.
You're borrowing to pay off other debts.
You don't know how much money you owe.
You make only minimum payments on each bill.
You miss payments or you pay your bills late every month.
Creditors are calling you.
You're being refused an extended credit or additional credit.
You use credit cards to pay other monthly bills.
You write postdated checks.
You must take an extra job to pay your bills.
Debt Recovery
Always keep in mind how much debts you have and at what level of interest they are. As soon as you
realize that you are carrying too much consumer debt, move to stop the bleeding by making a get-
out-of-debt plan and stick to it as best as you can.
Focus first to pay off the loan with the highest interest faster and then move to the next loan.
Although every creditor must receive a payment each month, put any extra cash toward the debt with
the highest interest rate.
By combining financial planning with debt management techniques, you can reduce your debt with
the following:
Cut expenses. Try to identify a few things you could stop buying or buy less often. For ideas,
review Know Where Your Money Goes and Shop Smarter.
Assess your ability to pay bills as you develop your get-out-of-debt plan and then take the
appropriate action. For example, if you bought a motorcycle and are having trouble making
the payments, it may be better to sell the motorcycle and pay off the loan rather than let the
creditor repossess the motorcycle. Repossession will hurt your credit record.
Try to increase income. Is it possible to get a second job or get paid overtime and use the
money to reduce debt? If you have family responsibilities, first consider what effect could
your absence have on the well-being of your family.
When one debt is paid off, keep paying the same amount - just put it toward another
remaining debt.
If you are keeping several credit cards, keep only one credit card. Cut off the other cards and
call the credit card companies to cancel the accounts. Keep the remaining one at home (as
long as they won't be used by anyone else). You can also consider having the credit limits
lowered.
To use your credit cards wisely, keep in mind these tips:
If the balance begins to increase, quit using the card for a while.
If you still use the card and the balance continues to mount, call the credit card company and
request to have the credit limit lowered.
Use a low-interest-rate card, preferably with no annual fee. Take note that Purchase Orders
(P.O.) issued by department stores tend to charge the highest interest rates.
Be wary of cards that offer extremely low interest rates "for a limited time." Frequently,
when the "limited" time expires, a new interest rate is charged and it may be well above
average.
Often, it is convenient to have a clear idea of where one can get a loan for some specific needs that
have to be addressed immediately. A compilation of various loan sources is included here. Pay
attention to the interest rate and the period to full payment required. Different loan channels charge
varying amount of interest rate and varying basis for period. To properly compare the loan interest
rate, we will do an annualized percentage rate or "APR". The most expensive is "Bombay" and the
least expensive is the salary loan from SSS or Pag-ibig.
It is true that there are some young people who go straight to start a business right out from school
but the majority of them will have to find work first to earn a living and acquire experience and
maturity.
The necessary first step to get a job is to search for job opportunities that match your qualifications.
Don't stop looking as soon as you find the first offer. Actively look for more offers so you can
compare job offers. The more options you have, the better chance for you to get the best job. When
comparing job offers, don't just stop at comparing the salary between offers but look at the non-
monetary benefits as well.
In the professional lifecycle, you are following a spiral of increasing pay and professional expertise
and greater responsibilities. As professional, you will have to shift jobs as you go up the spiral of
growth. As students, you need not worry about getting your dream job at the beginning of your
career. Your goal at this transition (school to work) is to find a decent job that offers opportunities to
improve your skills and qualifications so you have a much better chance of getting future
promotions. So you don't just go for the best salary. Salary goes up with your promotions and
promotion is a result of demonstrated expertise in your job and greater sense of responsibility.
Education Pays
You may have to take a degree course or higher educational qualifications to get that promotion that
you desire. What you need is a job that offers you the opportunity to study in school.
A survey in the USA says that one needs to get a professional degree to find better employment
opportunities and to receive a better pay. Consider education as investment for greater financial
stability in the future.
You may have to take a degree course or higher educational qualifications to get that promotion that
you desire. What you need is a job that offers you the opportunity to study in school.
A survey in the USA says that one needs to get a professional degree to find better employment
opportunities and to receive a better pay. Consider education as investment for greater financial
stability in the future.
Life-defining Decision
Moving out from your parents' place as soon as you start to earn enough to live on your own is the
next major decision that you will have to make and let you put the last piece of the puzzle so you
could see the whole picture towards becoming a financially independent person. Your personal
spending plan will be your guide in this important step but first let us take a look at one more topic
that has important effect on your personal spending plan - inflation.
Moving out does not mean you are completely insulating yourself with the needs of your family. As
a good son or daughter, you should try to help out to provide for your parents when needed and even
help to send other siblings to school.
Inflation
Inflation has something to do with available currency versus available goods and services in a given
market. Its definition and calculation is very technical and we will not go into that. What is
interesting for us is the effect of inflation which is called "price inflation". Price inflation simply
means that things are getting more expensive over time. When the cost of goods and services
increases, the value of your peso is going to fall because you won't be able to purchase as much with
that same money as you previously could.
Many people mistakenly believe that prices rise because businesses are "greedy". This is not the case
in a free enterprise system. Because of competition the businesses that succeed are those that provide
the highest quality goods for the lowest price. So a business can't just arbitrarily raise its prices
anytime it wants to. If it does, before long all of its customers will be buying from someone else. But
if each peso is worth less, all businesses are forced to raise prices just to get the same value for their
products.
This is the main reason why you receive salary adjustments every year or some other convenient
period. This also means you need to review your income and expenses. And from there you should
check your spending plan, medium and long term goals and assess if they require adjustment.
Another reason you will need to review your income and expenses is when there is a big change in
the income part or when there are changes on the expenses side like when you move to another place
which bring about changes in board and lodging and also in transportation, meal arrangements, etc.
Drawing a Spending Map
Putting your financial goals in writing can make them seem more concrete and achievable. However,
it's easy to allow everyday purchases and obligations to get in the way of saving for the future. One
of the best ways to make sure your daily spending habits don't overwhelm your life goals is to create
a spending plan. A spending plan is not meant to be a strict budget. Instead, it's a guide that will help
you take control of your financial future and ultimately, reach your goals. To create your spending
plan, download the Spending Plan Worksheet and follow these four steps:
Step Two: Estimate your Periodic, Fixed, Controllable Expenses and calculate the monthly
portion.
After deciding to move out and to live separately from your parents, your next important life-
defining decision is when you start your own family. You should only consider marriage when you
are in a stable relationship, i.e., you are not forced by any party and both you and your partner are
emotionally and financially ready. Marriage and starting a family is a very important milestone in
everyone's life and should always be taken seriously by mature and responsible individuals.
The best preparation for marriage is when you are emotionally and financially ready for this
important stage in your life. And you are better prepared for this when you have already
demonstrated that you are capable of supporting yourself from your own earnings for some time now
and you have savings needed to get started. Living on your own not only makes you self-supporting
financially but also requires you to make lots of decisions on your own. Of course this does not mean
that you cannot ask for help, you have to if it is something you are not prepared to make a decision
but after consulting other people then you have to make a decision yourself, implement that decision
and to learn your lessons always from both bad and good outcomes. In this course we will only look
at the financial readiness of a person to enter into marriage.
NSO-FIES
To get an idea of the financial dimension of married life, we can use the National Statistics Office's
FIES. The Family Income and Expenditure survey (FIES) is a nationwide survey of households
undertaken every three years by the National Statistics Office (NSO) primarily to provide the
government with data in estimating the country's poverty threshold and incidence. The FIES also
provides data on family income and expenditures and includes, among others, levels of consumption
by item expenditures as well as income sources in cash and in kind. The last FIES was in 2006 and
the results were released in 2007. The FIES Filipino family consists of a father, mother, and three
children.
To quote a part of the 2006 FIES result: "For 2007, Filipino families consisting of five members
should be earning a combined monthly income of PhP 6,195 in order to meet their most basic food
and nonfood needs for this year. A sole breadwinner in a five-member family residing at the National
Capital Region (NCR) is expected to find a difficult task in bringing the entire family above the
poverty line if he/she only earns at most PhP 265 per day.
Let's take a closer look at the Percent Distribution of Family Expenditure table of 2006 FIES.
From http://www.census.gov.ph/data/sectordata/2006/ie0605.htm
Let's use our learnings from Unit 2, of plugging the spending leaks. Which items in the table above
can you completely remove or save by reducing the expenses? Let's try out this interactive calculator
to get a better appreciation of the spending patterns of a family in terms of real money.
Try using Ph265 as a daily wage and see what happens to your monthly budget. How much will be
your daily food budget? What is the rental budget?
How about trying to punch out numbers in the income so your food budget will be at P150/day, what
will be your desirable monthly salary?