The Rule of 72

Many know the name Albert Einstein.

Not Miley Cyrus.

Known as the father of modern physics, His contributions has greatly improved the field of science such as The Theory of Relativity and The Theory of Special Relativity. Could easily be one of the greatest man that ever lived.

But what does Albert Einstein got to do with finances?

It has something to do with his discovery of the rule of 72.

What is the rule of 72?

The rule of 72 lets us find out the time when our investment doubles given a fixed annual rate of return. It basically tells you how compounding interest works.

How does it work?

For example: Person A puts his 100K in a savings account which has 1% per annum. Person B puts his 100K in a mutual fund which has a 12% annual interest rate.

Person A
72/1=72 years before Person As money doubles to 200K

Person B
72/12= 6 years before Person Bs money doubles to 200K

It will really depend on which financial vehicle you will put your money. And no. If someone says to you that you will have 50% or 110% increase in just a month, that is just a scam.

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The X-Curve Concept of Wealth and Responsibility

As we go out of college and into the long queue that is the unemployment line and then the employment world, most of us don't really know the responsibility that we hold until, you know, you have a wife/husband, kids, retiring parents, electricity bills, water bills, healthcare for your own and family, life insurance, college for children, food, shelter, and other things that involves burning holes in your pockets.

http://www.dailygalaxy.com/my_weblog

It becomes this if you burn it way too much.

So, basically, you have a lot of financial responsibilities to handle in the early stages of your employment life. Unless, of course you're filthy stinking rich. But even if you are, let's assess your financial responsibilities and wealth.

The picture up there is what we call the X-Curve Concept of Wealth and Responsibility. The Concept theorizes that as time goes by, a person's responsibilities generally decreases and wealth generally increases. And I'm sorry for boring and reminding you of your thesis by using the word "theorizes".

As we escaped the confines of college life (or a much earlier phase of your life if you didn't go to college) and into the unknown dwellings of unemployment, we don't really have the savings to counter our responsibilities. Yes, you have responsibilities even if you don't care or realize it. (Hint: Parent's retirement if they did not plan it because they don't have a clue about financially educating themselves, healthcare for your family, refer to the introduction above for more responsibilities)

Let's say for example your goal is 5 million pesos for your retirement in the future.

At Stage 1: You don't have any savings and a lot of responsibilities. Savings=0 Responsibilities=5M

At Stage 2: You have savings and also lessened responsibilities. Savings=2M Responsibilities=3M

At Stage 3: Your savings is close to your goal and your responsibilities are close to nil. Savings=3M Responsibilities=2M

At Stage 4: This is where you should be at. A lot of savings and no responsibilities. Savings=5M Responsibilities=0

Now, evaluate yourself, which stage are you in now?

If you're not in Stage 4, what are you doing to reach your goals?

With what you are doing, do you think you can reach your goals?

Do you know want to know if you can reach your goals with what you're doing?

You can answer the little questionnaire found below:

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What Type of Life Insurance Should You Get?

Now I'm going to be frank here and just blurt out that I don't drink coffee, I am an introvert, I read a lot of books and I think about what life would be like without Nutella.

http://www.ceschini.com.br/2013/05/no-nutella-for-you/

 Horrible! That's what it is.

Also, I'm on the side of getting a term life insurance rather than getting those life insurances with investments in them (I'm looking at you VUL and Whole Life). I just basically told you that I'm biased towards term insurance. What am I talking about dare you ask? Read more.

Now, of course, everything in  this world has an end and death is inevitable.

http://globe-views.com/dreams/death.html

"What's that you say? You have dreams? Hahaha! How Naive."

You see, the importance of a life insurance is for you to be secured that your family will get the financial support in case you cease on breathing. And my suggestion is that, you only get a life insurance for life insurance purposes and not investment, savings, or any other purposes. Why you ask? Read more.

Let's learn first the types of life insurance:

1) Whole Life Insurance - as the name implies, it will cover you for the rest of your life. And by rest of your life it means 100 years and below in life insurance language. BUT this will only come with little amount of premium and it is very expensive to pay in a given amount of years (Usually 10 years or 20 years). How expensive? Let's say you're 30 years old. Most insurance would put their price in that age around Php 60,000 (Note: prices depends on your age and the insurance company). And that's just for a premium of Php 500,000. If you total that 60,000 in, let's say 20 years you'll be paying Php 1,200,000 all in all. More than that measly premium of Php 500,000. But, of course, you'll get that Php 500,000 in case you die at any point in your life providing of course you don't go over 100 years old. It does, however gain cash value as years go by so it's not necessarily Php 500,000 but it'll take years for your cash value to exceed the premium and payment.

2) Variable Universal Life Insurance (VUL) - is insurance with an investment component on the side. The variable part of the name indicates the part of it which you, the contractor, can decide where to invest (usually in equity, bonds, balance, money market etc.). The universal part is the flexibility of the payment. Unlike Whole Life Insurance, there is no fixed date in paying. You can pay whenever you want in a year. It's considered a permanent life insurance because you'll get payed whenever death comes swinging his mighty scythe as long as their is sufficient cash value to pay for the cost of insurance which also means that there is no maturity age.

3) Term Life Insurance - is an insurance that pays you the premium in case death of the insurance holder happens within the given number of years. If the policy holder dies beyond the covered year, the holder will not get any money. You have to renew your term for you to be covered again. Compared to Whole Life and VUL, term life insurance typically has much greater premium coverage and not a pain in the wallet. Definitely recommended for the DIME Method.

(Note: there are many classifications of types of Insurance. This is just According to its Nature. To learn more go here.)

So why Term Insurance?

Because I and most well-known financial advisers (like Suze Orman and Dave Ramsey) believe in something called Buy Term, Invest the Difference (BTID).

Say for example you're 30 years old. Let's take a look at the match-up:

Whole Life vs Term

Whole Life

• You pay Php 60,000 more or less in 20 years with the total of 1,200,000 to pay
• Insurance Coverage: 500,000
• Maturity Age: 100
• By age of 65 you'll probably get 2,500,000 more or less as added cash value if you didn't claim any benefits and bonuses and assuming it has a 4% dividend.

Term

• You pay 3,500 every year for 10 years with the total of 35,000 to pay. (Price often increases every time you aged but it's only for like around 100 pesos so it's not really that big but let's just say it's fixed)
• Insurance Coverage: 1,000,000
• Maturity Age: May vary but let's just say in 10 years.
• By the end of the 10th year, the insurance company will not cover you in case something happens.

So how does Buy Term Invest the Difference come into place?

If we subtract the amount to pay of the Whole life insurance and the term insurance, we get a difference of 56,500. Now, if you decided to get a term insurance and invest the difference in a Mutual Fund (specifically a Bond Fund) for 10 years, you'll probably get more money than you can with a Whole Life Insurance. Take a look at this example:

You invested that 56,500 every year for 10 years with 4% interest per annum, by the age of 65 you'll probably get around 4,200,000.

Let's do meth:

Whole Life: 2,500,000 (Cash Value at the age of 65) - 1,200,000 (Total Payment) = 1,300,000 (What you get)

Term: 4,200,000 (Mutual Fund Investment Value by the age of 65) - 35,000 (Total Payment) - 565,000 (Total Invested) = 3,600,000

3,600,000 (Term) - 1,300,000 (Whole Life) = 2,300,000 is the discrepancy if you decided to take a Whole Life insurance. That's a lot of money you just potentially missed. You see now why you should get a Term Insurance.

In this example, the type of Mutual Funds I presented here is a Bond Fund which typically has an interest rate of 4-8%. The other types are Balance Fund (12%-16% but medium risk) and Equity Fund (18% or more but with a high risk). So instead of investing it in a bond fund and decided to invest it in an Equity Fund you'll probably get around  104 million by the age of 65. Isn't life wonderful if you know how to invest the right financial vehicle?

I'm not honestly the most believable person since you just went to some unpopular blog (but soon to be awesome and earning money) written by some unknown author (except for the ones that are close to me), so I'm going to post videos of people that have proven themselves to be good advisers when it comes to finances:

Suze Orman is a licensed insurance sales agent in 49 States in the US and she really considers any insurance agent who sells VUL or Whole Life an enemy.

 

Here's also a video (which apparently I can't show because Youtube) Where Suze talks against VUL

Here

Here's Best Selling Author Dave Ramsey talking about why you should buy Term Insurance:

  
                                    

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The DIME Method

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I'll give you a scenario: Mr. A has two children not yet in their school years. To plan for his kids' college education, he has to earn Php 1,000,000 million pesos for each child which accumulates to Php 2,000,000. He just recently acquired a PAG-IBIG loan for the new house that he bought worth Php 1,000,000. He earns Php 300,000 a year. He also has an astonishing debt of Php 100,000 from his friendly neighborhood bombay. All in all, Mr. A's financial responsibility is to earn 7,100,000 to absolve all his financial problems.

Mr. A thought about the scenario of dying and leaving his family with having all these debts and responsibilities as a breadwinner. A friend of his who is an insurance agent offered him a Whole Life insurance with the premium of 7,500,000 in case he dies but he has to pay Php 300,000 a year in ten years. Mr. A didn't really had that much money so he opted to get the whole life insurance with a premium of Php 300,000 which he would pay 25,000 for ten years. Mr. A signed and got approved of his life insurance.

But after Mr. A went outside the insurance company office, a meteorite from outer space came out of nowhere and squashed his whole body leaving him dead (the universe hates Mr. A). The insurance company quickly gave Mr A's family, the beneficiaries, the Php 300,000 insurance premium that they would get because of his death. Now if we're going to deduct that to all his financial responsibilities we'll have the following equation: 7,100,000 - 300,000 = 6,800,000. Mr. A's family is left with an astonishing amount of money to pay which really puts them in hardship.

A lot of people actually just get a life insurance without even knowing what should be the right premium for them which could be a problem for the bereaved family. In order for us to find the right premium in life insurance, we have a method here called the DIME Method. DIME is an acronym for Debt, Income, Mortgage, and Education. So kids, let's learn about the alphabet.

D is for Debt - now we don't want to burden our family with debt in case the unexpected happens so why not include that in your life insurance. If you have any pre-existing debts like credit card debts, salary loan, etc. better consider it in your premium.

I is for Income - say for example you earn Php 200,000 per annum. Now consider this: how will your family survive for 10 years without that income? What you do is multiply your annual salary by ten. So that would be like 200,000 x 10 = 2,000,000.

M is for mortgage - this basically includes any loans for that house you bought in a subdivision and expenses for building your dream house. If you have any PAG-IBIG housing loans include it in your premium.

E is for Education - if you have any children or even if you don't and 100% sure that you will have children and won't die forever alone, you should start preparing those expenses in college for the future. You need 1,000,000 pesos per child as an assumption for all the college expenses (tuition, books, allowance, room and board, transportation and that project of theirs called DOTA). Hey, if you're feeling like you want the best education for your children and decide to go for those high-end universities, you can increase that 1 million if you want. It'll help your family avoid those troublesome costs when your kids are in college.

In Mr. A's scenario, he needed 7,100,000 to pay for everything. So he should get the premium of that exact amount or more than that.

Here's another problem that he didn't even bother thinking about: What type of life insurance should he get?

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