Grow, protect your money in 5 no nonsense steps

MANILA, Philippines – When it comes to preparing for anticipated life events, only one out of 10 Filipinos plan to invest; only 2 out of 10 get insured; and 8 out of 10 would put their money in the bank. Such figures from the 2013 Sun Life of Canada’s annual study of lifestyles, attitudes and relationships (Solar) were quoted by Randell Tiongson, Registered Financial Planners Philippines director and renowned personal finance coach, in talk on Growing and Protecting your Money, held in October.

The Solar results also support Randell’s own conducted informal surveys revealing that there are still many who spend more than they should, borrow unnecessarily, save inadequately, and hardly prepare for the long term. As he also shares from his new book, No Nonsense Personal Finance: A Step by Step Guide, the key to grow and protect your money is following a process, matched with the right behavior and proper knowledge. As such, Randell shares the 5 steps to help you achieve financial peace:

1. Improve your cash flow

Invest in you: improving yourself is the best way for you to earn more, Randell believes. Invest in yourself by reading good, local and foreign books and references; attending conferences/seminars/trainings/workshops (the fees might be steep but Randell swears it will be beneficial for you in the long run, like how he became more confident and competent because of the lessons he gained from such learning investments); and finding a mentor. Also, be enterprising. Not everyone is cut out to be an entrepreneur but more Filipinos can become entrepreneurs and have the potential to make it big. Randell suggests trying basic buy and sell or commission selling first.

Spend less money. Promotions, opportunities, and even business profits do not always happen immediately. Thus, if you don’t have an income upgrade, spend less money. Budgeting is the best way to control your spending – always has and always will be. Prioritize spending on needs and try to control splurging on wants.

Follow the 70% – 30% rule. Randell suggests that for every 100% of your net income, spend 70% of it only and save the remaining 30% for ER or investing purposes. “If you do it over a long period of time, you’d gain; regardless how you spend the 70%, the 30% should be for savings and investing. The ratio varies as some tithe. Those who are single and has no dependent can do 60% – 40%,” Randell suggests.

2. Get out of debt

Zero debt is the new status symbol. There are some debts like home amortization or credit lines that are not as bad as the others but you should get out of them ASAP. Maximize your equity (down payment) so you can reduce your interest expense, Randell says. Avoid borrowing as much as possible, Randell stresses. The best way to deal with a credit problem is by not getting into it in the first place.

Apply the “snowball debt effect,” Randell suggests. First, have a debt inventory. Write the name of the creditor, amount due, when the loan was taken out, interest rate, due date, etc. Indicate which are current, past-due, and under legal action already. Then, identify which is your smallest debt and pay this first. Then pay the second to the smallest debt. When you start seeing your debts eliminated steadily, you will soon see that being debt-free is a legitimate reality and not a mere wishful thinking, Randell says.

3. Set up your emergency fund

Emergencies do happen. Having an emergency fund helps relieve you of stress and be less likely in debt, Randell states.

Start your emergency fund by knowing how much you actually spend in a month. The rule of thumb for emergency allocation is from 3 to 6 months of your monthly expenses. “Three months [of emergency fund] is good; 4 months is better; 5 months is great; and 6 months is excellent,” Randell states.

Do not invest your emergency funds. But Randell suggests putting them in time deposit, special deposit accounts or deal instruments so it will realize some earnings. A separate savings account is also recommended for your emergency fund especially if you can manage multiple accounts, Randell recommends.

Have some emergency funds in cash good for one to two weeks as you might have difficulty accessing your bank, for instance, during calamities. Randell reminds though that the cash allocated for emergency should not be touched unless it is really an emergency.

4. Get protected from life’s risks

Randell again stresses that the greatest asset you can ever have is yourself. Your untimely demise is the biggest risk that you face. And for protection, a life insurance is needed.

Determine if you actually need a life insurance. If there are people depending on you, then yes you need one. If you are single and have no dependent, you might want to defer buying life insurance until such a need arises, Randell suggests.

Know how much life insurance you need. Randell suggests doing the following: divide a sheet of paper into two vertical parts. On the left side, call it “Needs” and the right, “Sources.” The “Needs” section covers the “immediate needs” (expenses that need to be paid in case of an untimely death like hospital bills, burial costs, any outstanding obligations, and three months’ worth of expenses tagged as miscellaneous). “Educational needs” are for your school-aged children, which amount is calculated by multiplying the estimated yearly expenses and the remaining number of years before they graduate. The “cost of living needs” covers the annual expenses of your loved ones. The “Sources” section should cover all the sources you have that can generate funds such as investments, real estate, and life insurance proceeds. Do not include your home as a source because your family will have to keep it, Randell cautions.

Know the type of insurance you need. Generally there are two types of life insurance: term-life insurance provides coverage for a certain period of time, has no cash value, and is recommended for those who want to maximize insurance protection while minimizing cost. Permanent life insurance does not expire and combines the death benefits with a savings component. Examples include whole life permanent life insurance (insurance policy that matures at age 100 and which premium does not go up); endowment life insurance (like whole life policies but with shorter maturities and values); and variable universal life insurance or unit-linked insurance (per the policy owner’s discretion, the underlying values can be invested in many sub-accounts such as equity, fixed income, and balanced account options). Other insurance that you might need include medical insurance or HMOs (health maintenance organizations) for your health and non-life property and casualty insurance for your assets.

5. Invest for your future

Know your investment objective. Knowing what your objectives are will help you choose the appropriate investment for you. For instance, some buy real estate properties either for capital appreciation or income purposes. Investing in the stock market is done mainly for growth, either for capital appreciation or income through dividends. Fixed income securities like treasuries or bonds are for income purposes as it provides steady flow of interest payments.

Know your risk tolerance. The level of risk you are willing to undertake is your risk tolerance. “Better safe than sorry” is the prevailing attitude among conservative investors, who will not allow capital loss on their investment. “Buy low, sell high” is the mantra of aggressive investors, as they understand that to enable their money to work well, they need to take a lot of risks. Moderate investors are those staying somewhere in the middle, allowing them to earn better than inflation hurdles.

Returns will always be the results of the risks you are willing to take. “The higher the potential yields are, the higher the risks. The lower the risks are, the lower the yields will be as well,” Randell stresses. He says that pooled funds or managed assets like Unit Investment Trust Funds is always a good start to invest and if you are young, ideally start with equity or growth funds which are pooled funds invested primarily in equities via the stock market. You can start at P5,000.00 and add minimum of P1,000.00 monthly through an auto-debit arrangement with your bank, Randell says.

“Invest early, invest wisely, invest regularly,” Randell says. There is no such thing as “best investment.” But allocate and diversify them. As he quotes the Biblical verse from Ecclesiastes 11:2, “but divide your investments among many places, for you do not know what risks might lie ahead,” Randell ends. – Rappler.com