3 ways to wreck your finances

Most people find it difficult to financially get ahead. Why is that?

Let us count the ways how you are wreaking havoc on your finances.

1. Always paying yourself first

Financial advisors have always been harping about the importance of paying yourself first. “Take 20% off your net income and just live on the 80%.”

However, this conventional thinking does not work all of the time. This works best only if you do not carry any huge consumer debt because chances are, the gains you receive from your deposit or investment is paltry compared to the interest the bank charges you.

The bank pays you only less than 1% per annum for savings deposit. Another 2% or 3% if it is in time deposit. Then they lend you the same money you lend them, and they charge you a whopping 42% a year on your balance excluding all the other fees. It is really a no contest!

You are making yourself poorer while making others richer. It should be the other way around. Appropriate more for debt repayment and after you wiped off your balance, or at least bring it to a manageable level, then you can start paying yourself already.

Being disciplined in saving is your cornerstone for financial success. You have been working hard and you deserve to be rewarded once somebody pays you for it.

2. You think enough is really enough

Sadly, most of the time, enough is not really enough. Baby boomers who are now starting to retire find themselves in a conundrum. The meager pension benefits from the government and the retirement benefits from the company they worked for can only last them for so long. All too often, retirees outlive their retirement benefits. Reality has a nasty way of showing us we are wrong – when it is all too late.

And this is kind of thinking that gets us into a whole lot of trouble. Life insurance is in the same footing. Most people believe they are adequately insured. But here is an interesting exercise: sum up the face amount of all your life insurance policies; then remove the last 4 digits of your answer. Assuming the total amount is P2 million, remove 4 zeroes and you are left with P200.

Here is the tough question: Can your family subsist on P200 a day? P200 is less than half of the minimum wage in Metro Manila, and this is the interest income your family will receive when they put that in a time deposit earning a meager 4% a year.

So, do not just settle for enough. Overshoot your target so that even if you come up short, at least you have “enough.”   

3. You work harder than your money; and not the other way around

All of us work hard to earn money. Some even have to work harder. And some of the richest men today work the hardest.

That is why there is absolutely no reason why your money should slack off and take it easy. Your money should work twice as hard, or at the very least, work as hard as you do.

We all wish we could turn back time, and rectify our mistakes. Things do not work that way though. We live with the memories of our blunders; but these mistakes, however painful, allow us to become savvier and better in managing our finances.

If you are actively increasing your income by 10% to 20% a year, then your money should be earning the same or even greater than that. Anything less than that is unacceptable. In fact, it is considered lazy!

So, make money work harder than you. This is the key in attaining financial freedom. – Rappler.com

Kendrick Chua is a registered financial planner of RFP Philippines. He writes regularly about personal finance. He is also a Chinese language instructor, TV host, free runner, and violinist. To learn more about RFP, you may email info@rfp.ph.