Plan your finances, plan your life

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By CARLA PARAS-SISON

Do you have dreams of owning a house, buying a car, or maybe going for a grand family vacation in Boracay or even Hong Kong Disneyland?

All these are possible if you believe they are within your reach.

Think rich

Larry Gamboa, who obtained a Doctor of Business Administration degree from the University of Michigan and who authored Think Rich, Pinoy!, says Filipinos must change their attitude if they are to fulfill their dreams.

“Poor people say, ‘I can’t afford it.’ Rich people say, ‘How can I afford it?’ By saying ‘I can’t afford it’, a person stops thinking. By asking ‘how can I afford it?’ a person is forced to think. That’s how riches are created.”

After learning to “think rich” as Gamboa suggests, you can now proceed to plan your personal finances on the way to realizing your dreams.

A financial plan is not simply a summary of your earnings and expenses. It includes what you need to do in case your expenses exceed your earnings, and what you plan to do with your savings in case your earnings exceed your expenses.

Sociologists Thomas J. Stanley and William D. Danko, authors of The Millionaire Next Door: The Surprising Secrets of American’s Wealthy, discuss being “prugal”: prudent and frugal. The millionaires they interviewed “lived well below their means”.

In other words, if your expenses exceed your earnings month in and month out, you ought to investigate and choose which expenses should be cut, until your income can catch up. Otherwise, you will get deep in debt and be unable to fund your dream home or dream vacation, except by taking on even more debt. Decide that the burden of debt is something you do not want to pass on to your children.

Spend wisely

Good spending habits are the foundation of a doable financial plan. Smart spending will allow you to have excess income for savings and investment.

Financial adviser and entrepreneur Francisco Colayco says it is a must for one to understand personal finance before entering into any business, financial venture or investment.

“If your problem is your inability to manage your earnings, no amount of earnings will solve your problem,” Colayco says in his bestseller Pera Mo, Palaguin Mo!

“The struggle for financial independence is private and individual: yours alone. You alone can chart the course of your financial future.”

Most Filipinos, Colayco observes, have “no real understanding of how to keep and manage money.”

A particularly common behavior is having “an automatic change in lifestyle as soon as they get their first big paycheck. Instant gratification is the culprit. With the way they were spending their money, it was as if the money was coming from a bottomless well that would never run dry.”

Colayco says this pattern of behavior “seems applicable to most employees, especially overseas Filipino workers”.

He adds that the behavior is also shown by the thousands of Filipino families who depend on the money sent home by a loved one working abroad.

“It is so familiar a picture in barangays all over the country where the family members of the OFW spend their time doing nothing while waiting for the remittance of the OFW. Come remittance day, the barangay goes into fiesta mode,” Colayco says in his book.

“The money that was sent for education or for investment in a business is diverted to unnecessary recreation, drinking sessions, gambling and good time. The poor OFW discovers all these only after he/she comes home. When the OFW returns home, everyone expects a pasalubong so that the hard-earned money quickly disappears.”

To avoid these negative consequences, a personal financial plan becomes most important.

Set your goals

The first step of financial planning is setting goals and objectives. It could be that you want to retire in 10 or 20 years. It could be that you want to send your children abroad for further studies. It could be that you yourself want to take courses to equip yourself to start a business in five years.

A financial plan makes you conscious of these future goals and guides your behavior. You know that by sticking to it, you are working to fulfill your dreams. This will reduce the temptation of spending all your income now while you can still enjoy it.

The second step is to decide how much of your monthly earnings should be set aside for these so-called dreams. Many Filipinos are unable to save, claiming that their earnings are unable to cover current expenses, much less fund future needs, like a retirement fund. However, it is a matter of prioritizing which expenses are necessary and which can wait. By developing the discipline to spend wisely and save consistently, you are laying the foundation for future wealth.

The last step is to evaluate your financial situation periodically to ensure your performance is on track. Sometimes, your goals may change, or you may find the need to change your strategy in order to speed up or slow down your pace of spending, saving, and investing.

Saving and investing

Saving is simply storing away your money in a safe place. It could be in a bank where it can earn some interest, or under your mattress where your money can be stolen or eaten by rats. Investing uses money to potentially create more money, but generally carries with it the risk of losing the money you invested.

According to the Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF), savers are generally more concerned with maintaining the amount they put into an account or their principal, rather than its potential for generating more income. Saving may be considered more suitable for meeting short-term savings goals such as laying away a fixed amount to cover for an expected childbirth.

Investors are generally more willing to risk their principal investment, for the potential of higher returns. Investments, such as stocks, bonds and mutual funds, will fluctuate in value. By spreading your money among different types of assets, such as equity and fixed-income investments, you can strive for a comfortable balance of risk and return potential that will meet your needs. Investing is commonly undertaken to meet long-term financial goals such as retirement.

“Rather than choosing one approach or the other, consider combining them. Then you can blend the relative stability of saving with the accumulation potential of investing, as your individual needs dictate,” says TIAA-CREF.

Below are common features of instruments available to small or beginning investors. Expected returns may be different depending on the particular bank or fund chosen.   For this, visit www.ofwngayon.com