5 Things to Have Before Investing

I know I told you in a last post that I'm going to teach you on how to invest; but before you do that, let's talk about the prerequisites of investing first.

1) Healthcare and Life Insurance - basically, this is for security purposes in case something happens to you. Know that this is not for you but for your family. You invested and suddenly died, your investment becomes funds for your funeral, paying off estate taxes, any existing debts, and other expenses that your family will face. If you have insurance as back up, your investment can be passed on to your family without them worrying about the high estate tax to get your investment. You get sick or hospitalized, your healthcare will come running for you to help.

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"Thanks healthcare and life insurance"

"No problem, bud. Just pay on time or will give you a fee if you don't."

And we know how expensive hospital bills are, especially if you live in a country where there is no free healthcare (at least the taxes aren't really high in the Philippines unlike some country with 50 States).

2) Emergency Funds - I have mentioned Emergency Funds in my previous post here and here. You probably get the idea based only on its name. If you don't, I'll give you a hint: It's for EMERGENCIES.

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Mind Blown!

Save up to 3-6 months worth of your monthly salary. In case emergencies do happen, you already have the money to pay and not use your investment as collateral. It just simply avoids put and take and your investment can enjoy the power of compounding interest.

3) A Goal - if you are one of many people that'll say "I'm going to invest because my money grows" then I'll ask you this question: "Your growing money for what?"

http://www.ytv.com/blog/mr-krabs-eyeballs

"To grow even more money, me boy!"

A goal might sound obvious but there is amazingly a lot of people who invest that don't have a goal in mind. They just invest so their money can grow and think about their goals later on. The goal post is there, try and hit it.

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"I'm just here for decoration."

This also helps to avoid redeeming your money from anything that you just come up on a whim that you'd like to buy.

4) Zero Debt - if you have any existing debts my advice to you is simple: DON'T INVEST, YET! Better eliminate all of your debts first because if you have debts that gain interest over time, it will be a problem for you to pay it off and you'll have no choice but to take your investment out. "What if I have debts that have no interest?" Eliminate that also. You usually get that from friends or a 0% interest promo from some company or government agency like SSS's Calamity Loan. But of course, those with interest rate should be prioritized first. And I'm going to be biblical here: Romans 13:8 Let no debt remain outstanding, except the continuing debt to love one another, for he who loves his fellowman has fulfilled the law.

5) A Saver's Mindset - probably should have put this in the number one list, but I didn't really specify that this is in the order of importance, but, you know, this is really important than the others since it's going to involve your thoughts and emotions that lurks in the inner dwellings of your mind.

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The inner machinations of your mind are an enigma.

Internally, your emotions will be the one that you have to look out for, because all logic and reason disappear when that starts infecting your brain. And do not correct my choice of words. Your emotions can trigger bad habits that'll leave you emptying your pockets like shopping when your depressed as an example. Practice frugality and thriftiness. Make a point that after getting your salary, commission, royalty, or blood money you go save 20% of it.

I hope this helps! :)

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Why Your Savings Account is not Safe for Your Long Term Goals

I'll ask you this: Do you have dreams in the future? Like a car, a house, proper education for your kids in college, travel around the world, or a helicopter equipped with laser cannons and gatling guns.

Now, unless you won your dreams in a contest or someone really generous gave it to you, you will never get it instantly. You'll probably have to wait for years before you get the amount of money for your dreams. A lot of people would actually save that money in a savings account because it's "safer" than putting it in investments. I would agree that it is safe to put your money in a savings account ONLY if it's for your short-term goals (like a year or less). Now for long-term (5 years and more) and medium-term goals (3-5 years), and (I can't emphasize this enough) YOU WILL LOSE MONEY!

But why?

Well, subheader. I will tell you two enemies that will stand and hinder your finances.

First Enemy: Taxation

If you have a savings account, you are well aware of the 20% withholding tax looming in your bank account. If you don't have a savings account, seriously? You don't have one? Go get one now!

Of course, your savings account has interest (depends on the bank but it's usually around 1% or less) but that interest is deducted by that 20%. I'll show you an illustration which will involve me doing what I'm allergic in doing: MATH.

For example, you have Php 100,000 for your son's college tuition who's still in grade 6 and you put in a savings account with 1% interest per annum (for examples sake).

Php 100,000 x .01 = 1000

You have earned 1,000 pesos. Now let's tax it.
Php 1000 x .20 = 200
Php 1000 - 200 = 800
Php 100,000 + 800 = 100,800
That's what you've earned. Next comes the worst enemy of all.

Second Enemy: Inflation

Inflation (if you forgot about your Taxation class in college and Economics class in high school) is the increase of prices of goods and services in a given economy for a period of time. Basically the one responsible for the increase of prices in your favorite restaurant, why rice gets expensive over the years, and why a liter of coke 5 years ago was just 22 pesos but now it's 27.

How does this affect me?
Well, sub-header, if you must insist. I have to do MATH again.

Let's use Php 100,000 again, but this time with the inflation rate of 6% a year (based on the estimate of the Philippine's inflation rate for the last 10 years).

Php 100,000 x .06 = 6,000
Php 100,000 + 6,000 = 106,000
Now let's pair it with your money in your bank account.
Money in the bank after a year = Php 100,800
Money value of 100,000 after a year = Php 106,000

There is a large amount of discrepancy between the two in just a year. Your money's purchasing power (the value of a sum of money) lowers, and whatever you can buy with your 100,000 last year cannot be purchased this year.

If for example you want to buy a car but your money isn't enough yet so you save it for five years in the bank. What would happen in five years? (I have to do MATH again... sheesh.)

I'll just simplify the equation for this one so I won't include the deduction of tax.

1%-6%= -5%

Php 100,000 x -5% = -5,000
Php 100,000 - 5000 = 95,000 Purchasing power of your money in the first year.

Php 95,000 x -5% = -4,750
Php 95,000 - 4750 = 90,250 Purchasing power of your money in the second year.

Php 90,250 x -5% = -4,511
Php 90,250 - 4513 = 85,737 Purchasing power of your money in the third year

Php 85,737 x -5% = -4,287
Php 85,737 - 4,287 = 81,450 Purchasing power of your money in the fourth year

Php 81,450 x -5% =  -4,073
Php 81,450 - 4,073 = 77,377 Purchasing power of your money in the fifth year

Your money's purchasing power is deducted and won't be of no use for that new car that you really want, your kid's college education, your dream house, or that helicopter with laser cannons and gatling guns.

But what should I do?

Don't worry sub-header. There's a way. It's called INVESTMENT. On my next post I'll tell you about how to invest.

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5 Tips on Lessening Your Expenses

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1. Make a List before shopping - this will help you discipline yourself in buying stuff especially in groceries. Imagine yourself shopping: You stare at that large pack of potato chips and you know you want it. You could imagine it in your mouth. You're about to grab it--until you remembered you have a list. You scanned your list for potato chips and none appeared. Then you shout at the top of your lungs: "Stay away from me you delicious demon!" And you averted buying what's not on your list whilst everyone is staring at you uncomfortably. (Seriously, though, don't shout. You'll find yourself one less supermarket to go to. Trust me.)

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2. Use LED bulbs instead - LED bulbs might be expensive but they'll lower your electricity bill greatly especially if you have rooms in your house that you spend and use most of the lights on like the bedroom... where it's creepy and scary while dark.

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3. Walk as much as possible - walking is a great form of exercise and surely makes you fit (if you don't eat a lot of food after doing it, of course). If you're in IT Park and going to JY, you better walk (Just google map it if you're not familiar with places in Cebu). It's not really that far. I have walked from Gen. Maxilom Ave. to USC main without any problems (save for the part where I'm thinking about that cute girl that I saw while walking, which can be dangerous when you're crossing the road). You get exercise and you save on money. Win-win.

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4. Minimize eating out - I don't really need to tell you how expensive food is in a restaurant. Of course, there are some times that you will eat out. It's okay. As long as you don't do it ten times a month. Once or twice is okay. Or even better, don't eat out. If you have friends that pressure you to eat out all the time, find some new friends... or tell them that they've gone fat. That usually stops them... I think.

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5. Read books more, watch TV and play video games less - I'm not telling you to stop watching your favorite soap opera or stop playing online games, but try opening a book for a change. Books contain lots of useful knowledge. It'll also help you lessen your electricity bill since they don't run on electricity. You get to also appreciate the art of literature. And no, reading Twilight is not appreciating the art of literature. 

I'll give 5 more tips in the near future. I hope this helps.

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How Faith Helps You In Achieving What You Want

FAITH is the "external elixir" which gives life, power and action to the impulse of thought!

FAITH is the starting point of all accumulation of riches!

FAITH is the basis of all "miracles" and mysteries that cannot be analyzed by the rules of science!

FAITH is the only known antidote to FAILURE!

FAITH is the element, the "chemical" which, when mixed with prayer, gives one direct communication with Infinite Intelligence.

FAITH is the element that transforms the ordinary vibration of thought, created by finite mind of man, into the spiritual equivalent.

FAITH is the only agency through which the cosmic force of Infinite Intelligence can be  harnessed and used.

Source: p. 49-50 Think and Grow Rich by Napoleon Hill

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My Own Jar System

I actually came across the Jar System before I was even interested in finances... when I was in college... where my only financial problem was how to play DOTA in the internet cafe... where I was also flat out broke. College life without income to summarize it. What was I talking about? Oh yes, Jar System.

Jar system is a money management system that allocates your money on certain things. This was invented by T. Harv Eker and has been adopted by some local personalities like Miriam Quiambao and Bo Sanchez.

At first, the allocation of percentage seems to be off to me since it has a high percentage on the Wants and doesn't really include an Emergency Fund. So I decided to tweak it a bit that would emphasize more on attaining my financial freedom and also renamed it to The Seven Wealth Chest (because I love playing Role Playing Games and needed something that sounds cool and jars are just one sword swing away from breaking).

The Seven Wealth Chest

The Wealth Chest of Expenses (70% or less) - I actually just spend 50% or even less than my expenses in the house since I divide it with my sister (lucky me). The percentage will really depend on your lifestyle. If it exceeds 70%, I recommend to re-evaluate your expenses and live within or below your means. I'm not suggesting you live the lifestyle of a hobo but just take away what is unnecessary. Yes, softdrinks, eating in restaurants like 10 times a month, burning money are unnecessary. Lower some of your expenses like saving electricity for your electricity bill or take away your ice cream fund (do people have this or is it just me?)

The Wealth Chest of Financial Freedom (20%) - I recommend 20% (or more, if you can) since this will be allocated for your financial freedom which eliminates the burden of financial problems in the future and attaining your dreams like owning a mansion and a year supply of ice cream... or a mansion made out of a year's supply of ice cream. Better put these on Mutual Funds or in Stocks which the rate of return is high and you're also taking advantage of the power of compounding interest as years go by. You can also use this for a long term healthcare insurance which has an investment component for your healthcare needs when you retire.

The Wealth Chest of Emergency (5% or more)- this is allocated only for emergencies and in case you got fired from your work, you can pay off your expenses while unemployed and not worrying about praying for money to grow on trees. I recommend you save 3-6 months worth of your monthly salary. Put it in your savings account since it's quite liquid, meaning you can easily get it in case of emergencies.

The Wealth Chest of God (10% or more) - this is allocated for your tithes and charity (not your neighbor Charity...unless she really needs the help). Your tithes is a way of recognizing that whatever you have earned is because of God and you are just returning what belongs to Him. If you don't believe in any of it, then it's best you donate to some foundations, orphanages, or any humanitarian organization that you know of. It will make you feel really good inside. Like eating ice cream.

The Wealth Chest of Knowledge (5%) - this is allocated for your education to improve yourself and better equip you with knowledge usable for your everyday life. You can use this for books, seminars, getting a degree, or anything that provides you with the right education to what you want.

The Wealth Chest of Recreation (5%) - basically this is allocated for your enjoyment like watching movies, eating out with friends, go bowling, going to the beach, anything that your heart desires and relieves stress from work.

The Wealth Chest of Items and Travels (5%) -  this is especially allocated for the things you want. Like gadgets that you would want to buy like that new smartphone that you'll just probably use for playing Candy Crush, or a new sofa to sleep on in case you had a fight with your wife. You can also use this for the places you like to travel inside and outside the country.

You can set your own percentage or allocations for your money. The important thing here is that you are managing your money. I do recommend to strictly follow the percentage for the first four and lessen the percentage for the bottom three in case the needs dominate the wants. I hope this helps you.

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