10 Principles for Managing Your Money

Managing your money can be quite daunting. But financial planning really boils down to a few key ideas, some of which are so familiar they sound so cliche. Yet knowing is not the same as doing. Most personal finance experts and financial planners agree on these principles. They just differ on their strategies and financial vehicles. Here are "10 Principles for Managing your Money": Principle #1. You won't get anywhere if you don't know where you're going. A major mistake people make when it comes to their finances is they don't set their goals. Don't invest just for the sake of investing. Or buy insurance just to get the pesky insurance agent off your back. Link everything to what you want in life. Principle #2. It's not how much you earn, it's how much you get to keep. It's common for us to say: "If only I earn more money" or "If only I was born rich". But wealth is not the same as income. You can earn a lot but spend more than you earn. Or you can earn a modest income but save and invest aggressively. Principle #3. A little goes a long, long way. Oh, you hardly spend for anything, do you? So where did your money go? Small expenses here and there pile up. But it also works the other way around. Even if you just invest a small amount of money, but if you do it regularly and early enough, you can make millions in due time. Principle #4. Live within your means, then increase your means. Spending wisely to keep your expenses low is a good thing, but at a certain point, it can only do so much. You also have to find ways to increase your income if you want to improve your bottom line. Principle #5. It may not happen, but it can. You don't blink when you have to pay for car insurance. Yet, you put off buying insurance for your life and health. Doesn't compute. Principle #6. You first, then others. Who do you work for? It seems many of us work for others, and I don't mean our family. We pay the government, banks, credit card companies, utility companies, and others first before we set aside anything for savings and investments for our own future. It's time to start paying yourself first. Principle #7. There are two things certain in life -- death and taxes. We put off preparing for death because it seems so distant and, right now, unlikely. And we just accept paying taxes because, in most cases, we have no choice. Denial and acceptance. But we should, and can, do something about both. Principle #8. Match the right instrument with the right requirement. Before you invest, buy insurance, pay for a preneed plan, or get into any financial product, make it clear to yourself what exactly you want out of it. Then choose the right product based on what your need is.

Principle #9. Make a life, not a living. Managing and earning your money just to accumulate more money for the sake of it is a tragic way to live your life. Financial freedom is about enjoying the good things in life, such as enjoying your family, learning new things, and pursuing your life mission. Principle #10. The more you give, the more you get. Many wealthy and successful people believe not just in giving back, but in getting back what they give, and then some. In the succeeding weeks, I'll discuss each principle at length and show you step by step how to do your own financial plan.

Principle #1: You Won't Get Anywhere If You Don't Know Where You're Going
Ever get lost while driving? Remember how it feels like going round and round in circles? What about the time you were on vacation abroad and you spent the whole morning not knowing where to go or what to do? Frustrating, right? It's a lot like that when we don't have plans. And all plans start with goals. If you tried (operative word is "tried") to go on a diet without setting specific weight or waistline goals, most likely you would have lost ten pounds in a week and gained everything back (and then some) the next. Trust me, I should know. It's the same with our personal finances. Oftentimes, it feels like we're not getting anywhere. That's because we don't know where we're going in the first place. My mistake in the past was not setting goals for my financial life. So I started making investments in stocks and mutual funds without any specific goal than to save and invest. Then came sudden events that require a lump of cash that I didn't have (the market was down that time). If I had set clear goals and planned well, I would have avoided those stressful moments when I had to scrounge for funds. So the first step in financial planning is determining where we want to go. In other words: goal setting. Set goals. Goals give us direction. They're also an excellent way of getting us motivated and disciplined. So the next time you pass off that Frapuccino to save up for something, you won't feel too bad. Write them down. There's power in writing down your goals. It's one thing to day dream about what you want, it's another to cast it, well, on paper (or in Excel if you like). Tell people. There's even greater power in telling loved ones about your goals. It takes stronger commitment when others know about what you want to achieve. And it somehow makes you more accountable for your words. Now, how do you go about this exactly? Take a piece of paper and follow this

exercise. Better yet, open Excel or Word. Ready? Here you go: I want you to day dream. Go ahead. Close your eyes and think about your dream life. Imagine your ideal life in the future. What do you see? Be very specific. What kind of house do you have? What kind of cars? How many kids do you have? What is your spouse doing? What are you wearing? What do you see inside the house? Dream all you want. It's free. Sorry to interrupt your reverie. It's time to list down your goals. How do you start? Well, most of us have goals that fall under five categories. Ask yourself: 1. What do I want to be? This is about how you see yourself as a person: a father, spouse, son, citizen, etc. It's about your values and how you would want to live your life based on them. What kind of person do you want to be? 2. What do I want to do? This is about your career or vocation. What kind of job do you want? Or what kind of business or work do you want to pursue? 3. What do I want to have? This refers to the material things you want to acquire -- house, cars, gadgets, clothes, La-Z Boy chair. 4. Where do I want to go? This is all about your dream destinations. Where do you want to travel? 5. What do you want to give? This is about giving back -- to your church, a charity, people around you, and uhm, me (pushing my luck). Right now, just jot them down and have fun doing so. If you have a significant other, do this exercise with him or her. It's always nice to dream. Next week, we'll continue this exercise on goal setting. But it will be more detailed and organized.

Make SMART Goals

Last time, I wrote about the need to set goals as the starting point in devising your financial plan. So did you do your homework? Was it hard to do? I hope not. In any case, in this issue, I want to share with you how to set the right goals, or to be precise, set goals the right way. Remember I listed down the five common goals people set? Well, did you realize that most, if not all, require money? Obviously, you need money to acquire stuff, travel, and give away. Even goals for your career or work may require money. If you're going into business, certainly that requires capital or even just regular expenses (in case your business doesn't really require capital to start). Even if you're working for somebody else, sometimes it also requires money to improve your knowledge and skills. Sure, you don't need money to become your ideal self. But sometimes, you may have to spend for books and seminars on self-improvement.

So there. Almost all your goals require money. Therefore, it is imperative that you link your financial strategies to your goals. Again: Match your money strategy with your life goals. Now, go back to your list of goals. Anything wrong with them? Are those all your goals in life? If it's hard to think of everything you need and want in life, try this approach: Option 1: Sketch a timeline Draw a long line on a piece of paper. The beginning of the line represents your age now. The ending is an arbitrary age in the future, say 65. Cross the line with short, vertical lines, with intervals of 1, 2, 3, 5 years, it's up to you. Here's your life in a timeline. Jot down age intervals. Every 5 years for me is good enough. Now, think about the major milestones you expect and want in your life. Consider each of the five types of goals here. Maybe 5 years from now, you want your own house. Next year, you're planning to have a baby. Two years from now, you want to go to Europe. By age 40, you want to put up a business. After 12 years, your son will enter college. You want to retire by age 55. By age 60, you plan to put up your own foundation. And so on. Now, you have a big picture of your life goals, right? Not only that, the timeline gives you an idea which goals to prioritize. If you don't want to draw a timeline, try this other approach: Option 2: Make a classified list Here, on a piece of paper (or on Excel or Word) just make three headings: shortterm, medium-term, and long-term. Short is less than a year. Medium is one to three years. Long term is anything beyond three. Then, under each heading, list down your goals. Whichever approach you take, you'll get a more complete list and a better sense of priority. Note that the further in time you go, the harder it is to list goals. That's okay. The list is not meant to be exhaustive and final. The fun thing about it is you can always change, remove, and add goals as you go along. Finally, I want you to go back to each goal you wrote and refine each. How? Make SMART goals. You've probably heard about this before. To refresh your memory, SMART goals mean: Specific. A goal like "to travel abroad" or "to retire comfortably" is not useful. Where do you want to travel? How much would you need? When do you want to retire? What do you mean by comfortable? Be very specific, detailed, and well defined. Measurable. As I mentioned, most of your goals have a monetary value. You will know you can achieve your life goals if you attach money goals (which can be measured) to them. That way, you can track how near or far you are in achieving them. So instead of writing "to travel to Europe", find out how much it would cost to go on a European tour" and write "to travel to Europe on a 15-day package that costs $2,000". Ask "how much?" or "how many?" Attainable. Some say "A" stands for "Agreed Upon" or "Acceptable". If you're

sharing your goals with your partner, then it's important that you both agree to them. But it also stands for "Attainable", meaning you know your goals can be done. Realistic. Your goals may be attainable but if you've set plans that require more than you are able to do, then they're not realistic. For instance, becoming a millionaire is attainable, but if you're working from scratch, becoming one next week is not realistic. Time-specific. Set a specific date for each of your goals. Don't use words like "in the future", "some day", "when I'm old", "after I retire", "soon" and the like. Set a year, a month, or even a day. Don't write "buy a Honda Accord next year". Write "buy a brand new P1.2 million Honda Accord 2.0 VTi-LT on September 2005". So, there you go. When you're done with this exercise, I hope it has helped you have a clearer picture of what you want in life. It is just the first step in taking control of your finances, but it will be the glue that will keep everything together. Next week, I'll talk about Principle #2: "It's not how much you earn, it's how much you get to keep."

Principle #2: It's Not How Much You Earn, It's How Much You Get to Keep
If you went through the exercise of setting goals the last two issues, you would have by now set SMART goals which you've categorized by what you want to be, what you want to do, what you want to have, where you want to go, and what you want to give. And you would have prioritized your goals by drawing a timeline or listing them by short-, medium-, and long-term. Now that you know where you want to go, you need to have a clear understanding of where you are. Bear with me. The next few exercises will take a bit of work. And I have to warn you: it's all about the hard, bitter truth. Whether you earn 20 thousand, 50 thousand, or 100 thousand pesos a month, you will realize it is never enough (or perhaps, you already know this all along). If you're earning 20 thousand, you might think "If only I'm earning 50 thousand.". If you're earning 50 thousand, you might think "If only I'm earning 100 thousand." (If you have more than you need now and in the future, then good for you!) In the end, it's not really how much you earn that matters, it's how much you get to keep. That's Principle #2. Remember the book "The Millionaire Next Door"? It's not the people who earn millions but also spend millions that are really rich. It's those who may be earning only thousands but accumulate money that eventually turn into millions. In other words, it's not income that matters, it's net worth.

Of course, the other idea espoused by another best-selling book "Rich Dad, Poor Dad" is that it's cash flow that really matters. Well, whatever view you believe in, the next step after goal setting is to do your personal financial statements. Did I hear a collective gasp? Or a collective groan? Yes, unfortunately, this is something you have to do. Because the only way to find out what your net worth and your cash flow are right now is to compute them. It's crucial that you go through the exercises that will follow. I've gone through them before so I know how much I am worth financially and I know how much is going in and going out. This will be the foundation of your financial plan and it will also be the primary tool to measure your progress. Are you ready? Not yet? Good! Accept your fate this week and we'll do the dirty work next issue.

How Much Are You Worth?

When people refer to, say, Microsoft as a "$30 billion company", what exactly do they mean? Some would say it's in terms of total revenues, others total assets or market value. But when they refer to Bill Gates as being "worth $100 billion", you know what it means -- net worth, i.e. assets minus liabilities. When it comes to the definition of wealth for individuals, most agree it's net worth. Not their annual income. Nor their total assets. There's another definition I learned from a recent seminar that's even more to the point. But I'll share that next issue (yes, I am tricky!). You now know where you want to go. This time, you need to know where you are. And the starting point is knowing how much you are worth (financially, that is...remember, your self-worth has nothing to do with your net worth). For that, you need to come up with your personal balance sheet. I'm sure you know what it is. Some call it a statement of assets and liabilities. Elected government officials (mis) declare it. So that's what you have to do right now: declare your assets (what you own) and liabilities (what you owe), and the difference is your net worth (what's left over). Use a spreadsheet for this. Or just use pen and paper (a notebook that you can keep confidential). But since I'm really nice, I made a worksheet just for you (see Toolbox at the top left).

Assets List all your "liquid" and "appreciating" assets. That means cash (or cash equivalent), investments, real estate, and business equity. Beside each, enter the amount. For cash (cash on hand, savings deposits, checking accounts) and cash equivalents such as CDs (nope, not your Celine Dion Greatest Hits CD...I mean certificates of deposit) and other money market accounts (like time deposits and T-bills), check with your bank. If you have foreign currency deposits, get the equivalent peso value. If you own a whole life insurance policy or an endowment plan, find out what the accumulated cash value is. For investments and real estate, find out the current market value. Log on the Internet or make the necessary calls for stock prices and net asset values (NAV). Your paper's business and classifieds section can also help (for prices of stocks, NAV of mutual funds, and average selling price of similar houses in your area or other real estate property you own). You may want to include preneed plans you have, like an educational plan. They're not appreciating assets, rather they are prepaid expenses, which in business accounting counts as an asset until used. They are, after all, funds you saved for future use. If you own a business, include what your business is worth (or compute your equivalent share in the business). Now, notice I didn't include most personal property like cars, furniture, electronics, clothing, and your Celion Dion CD collection. Why? These are "depreciating" assets, i.e. they go down in value. Sure, you can still sell them, but they represent an expense for you, not assets that go up in value (unless your Celion Dion CDs become rare collectibles 50 years from now). A few personal finance experts would even exclude from your net worth calculation some appreciating items like jewelry and art work, and even your house. Mainly because they don't provide liquidity for you to live off them. So if you want to be conservative with your calculations, exclude them. But I recommend at least including the value of your house. Liabilities Next, list all your debt. This includes both secured (loans with collateral) and unsecured debt. Secured debt includes the mortgage on your house (and other real estate investments), your home equity loan, and auto loans. Unsecured debt includes your credit card balances, personal loans, salary loans, and SSS and PAGIBIG loans. Net worth Finally, deduct your total liabilities from your total assets and you have your net worth. Tada! Do you feel rich? Maybe you just found out you're a millionaire, even if it's just on paper (especially if you listed your house as an asset). Congratulations! Or perhaps you discovered you're not worth much financially, even if you're a high income earner. Well, we'll get to that next week.

At least now, you know where you are in your financial life. Compare where you are (personal balance sheet) with where you want to go (financial goals). Do you want to own a house in 10 years? An educational fund for your toddler? Money to travel to Europe by yearend? Retire at 50? A Range Rover next year? A home theater system this year? Check your assets. Can your assets finance these goals? No? Not enough appreciating assets? Maybe your assets are not liquid enough. Maybe now realize you spent too much on depreciating assets. Or your debt is too high that it eats up part of your investments. Most likely, you'll see a gap between what you have right now and what you want to have. Maybe a huge gap. Depressed? Go on, wallow in self-pity. When you recover (and I hope it should be right about now), remember you want to gain control over your financial life. And this is what's financial planning is all about. Next issue, we'll do your personal income statement, or to be precise, your personal cash flow statement. This will be another eye-opener. Reality bites? You betcha.

Dude, Where's My Cash?

How often does this happen? You withdrew cash from the ATM this morning. This afternoon, it's gone. Or you received your bonus (lucky you) yesterday. By the weekend, it's gone. Time flies, and so does money. And you'd think, there's never enough to go around. Last issue, you (hopefully) calculated your net worth. Now, you will come up with your cash flow statement. In short, how much cash comes in and how much cash goes out. Before you draw up your strategy in achieving your financial goals, you need to know exactly where you stand in terms of cash flow. Net worth is important, but for some, cash flow is king. Remember I wrote that net worth is the measure of financial wealth? Well, for some, it's not net worth, but cash flow. How rich are you really? You can look at it this way: If you stop working right now, how long will you able to sustain your lifestyle? If your assets can support you for twenty years, then that's how rich you are. If you can live off your assets for five years, that's how rich you are. If it will take only three months before you run out of cash, then that's how rich you are. If you live paycheck to paycheck...you get my drift. Some people are living on interest, or what people call "LOI". People who have inherited tons of money or have worked their way to wealth. But I'm getting ahead of myself. Before we all get depressed, we need to do a reality check and know exactly how we're doing in the cash flow department. Because this will determine

what actions to take. Again, I'm uploading a Personal Cash Flow Statement worksheet for your use. You can call it a personal income statement or spending record, whatever. The whole idea is, you need to know how much income goes in and how much expenses go out. INCOME On the Income side, list down all your sources of regular income. If you're employed, that includes your salary, allowance, commission, etc. That's "earned income". If you're self-employed or own a business, put in the income you generate from the business that you use for personal expenses. That's "business income". If you have investments or paper assets that generate dividends, interest, and the like, plug it in. That's "portfolio income". If you have rental property or have equity in a limited partnership or business but not actively engaged in it, put it in. That's "passive income." You can either plug in gross amounts then subtract taxes and other deductions to get the net amounts or you can just input net figures for simplicity. If your income does not come regularly, such as commissions, you can add up what you earned last year and divide it by twelve months to get the average. It's tempting to include bonuses, but since you don't receive them on a monthly basis, take the conservative path and exclude them. EXPENSES Now, on the expenses side. Okay, this will be bloody. You need to know how much you spend every month. These are your regular monthly expenses, which includes household expenses like utilities, rent, or your mortgage. Then you have groceries, food, entertainment, and the like. The best way to find out how much you spend and what you spend on is to track your expenses for a week, at least for this exercise. Then, adjust the amounts by tracking them for a month, and another month, and another, until you get a good idea of your average expenses per month. Of course, you need to categorize these expenses. It's up to you what categories to use, but I suggest you keep the list short. Break down each category into more detailed accounts, such as Dining Out and Movies under Entertainment. Just make sure they're related. That's not all. You just listed your "regular" expenses. Yes, you spend a lot more than you think. It's really the "irregular" expenses that can prove burdensome. These are expenses that you pay quarterly, every six months, or once a year, such as insurance, clothing (unless, of course, you make it a point to buy clothes every month), and annual fees. And those that you did not plan for, like emergency car repairs or dental work (ouch!). You need to estimate how much you spend every year on these irregular expenses. And be realistic. Don't exclude clothing expenses just because the last piece of clothing you bought were those leather red pants three years ago.

For each of these irregular expenses, estimate how much you spend every year. Then divide by 12 months. That's how much you effectively spend every month. NET INCOME Now, subtract your total expenses from your total income and you get your net income. That is what's available for savings and investments. Well and good. Most likely though, you'll get a negative amount. That means, my friend, if you're a business entity, you're in the red. Don't fret. At least now, you know where your cash is. It's in the pockets of your credit card company, your bank, your utility company, your cell phone company, your landlord, your friendly neighborhood mall, your local Starbucks, etc. Next week, I'll show you how to make a spending plan that will free up cash to finance your goals.

The Money Diet

Have you been on a diet? I have. A million times. And it never works. Well, it works for a while, then I go back to my old weight and then some. Diets are a lot like budgets. It's hard to follow a budget. Why? Budgets, like diets, at least the way we do them, often restrict us. And usually, whatever's prohibitive, we do. We like eating fatty food and junk food in the same way we like eating out and watching movies. Or buying clothes. Or drinking a capuccino everyday. So once we deprive ourselves, we end up frustrated and then give up. That's why I'd rather call a budget a "spending plan". You can say "a rose by any other name...", but you have to start thinking of a spending plan as a "plan for spending". Duh, right? Think of it this way. We think of a budget as a restriction on what we cannot spend. But that never works. People find it hard to process negative things. But once restated in a positive way, then it can work. So if you start thinking of what you can spend on, not what you can't spend on, then there's a greater chance of succeeding. It's the same with diets. Diets that focus on what you can eat and what you can do to lose weight tend to work better than those that tell you what you cannot eat. For instance, we began an allowance system. My wife and I allocated a certain amount each week for our lunches and other daily expenses. That's all we have in our wallets. Instead of withdrawing anytime from the ATM machine, we live with our allowance. And our focus becomes: With this much, I can eat this and that... The other thing is that a spending plan must be realistic. Too often, budgets are so out of touch with reality that they're doomed to fail. No budget for clothes? Of course not. No budget for coffee? Impossible. Of course, you need to cut back, but don't cut back entirely unless absolutely

necessary. One trick is to cut a little across all expenses. A little of this, a little of that. Work on a plan you can live with. And don't wallow in self-loathing if you go over it. Just make certain adjustments, say skip the movie this week and rent a DVD, until everything balances out. Replace bad habits with good habits, just like when dieting. It's a bit hard at first, until you get used to it. Instead of buying a book, maybe you can spend some time browsing at the bookstore. Instead of buying a new magazine, buy cheaper back issues. Or check the magazine's website. You can be as creative as you want -there's much to enjoy in life without overspending. Once you get into the groove of things, you can go on auto-pilot without groaning or whining. Always go back to your financial goals, if you need a boost in motivation. And remember, your spending plan is not cast in stone. Once your income increases, you can make adjustments. When you pay off your debt, then you can allocate more to savings.

Putting It All Together

Now what? Okay, we've gone through the basics of financial planning: setting financial goals calculating your net worth determining your cash flow preparing your spending plan

What's next? Well, by this time, you probably have realized you have a long way to go to meet all your financial goals. That's why we went through the exercise of prioritizing them, because for most of us, the way to achieve them is accomplish them one goal at a time. So, start with the most immediate goal. Knowing how much cash goes in and out, find out how how you can fund that goal. Good for you if you have enough. Better yet if you can finance more than one goal at the same time. However, if you're running a tight ship at the moment, then you have to look at several choices. Ask yourself how will you be able to achieve each of your financial goals. Just like a business, there are various ways you should consider: 1. increase your income find a higher-paying job - get yourself promoted - moonlight or freelance - get into networking - buy a franchise - put up a small business

2. decrease your expenses live within your means - cut unnecessary expenses - be a smarter buyer 3. increase your assets - increase your portfolio income by buying paper assets - invest in real estate for rental income 4. decrease your liabilities pay off your credit card debt - accelerate your loan payments - refinance your mortgage - extend the term of your loan As you can see, there are so many things you can do, and many of them at the same time. Of course, some are easier said than done. My suggestion: start with what's easier to do, such as cutting unnecessary expenses or paying off your credit cards, thus freeing up cash for financing your goals. In fact, even before you think about investing, look at what you can cut. In the same way companies do cost-cutting first before thinking of investing, expanding, or adding their sources of revenues, do your own cost-cutting measures first. You'll be amazed how much cash is actually available just by taking small steps. Because a little goes a long, long way. And that's our topic for next week -- Principle #3: A little goes a long, long way.

Principle #3: A Little Goes A Long, Long Way

Do you think you can't save another centavo anymore? We often feel we've done everything to cut costs. That's why we always think: If only I earn more, I can save money. Of course, we want to earn more. But don't you notice the more you earn, the more you spend? But even at our current income, we can find ways to save money. Remember the previous exercises on coming up with your Personal Cash Flow Statement and Spending Plan? Certainly you've seen where your money goes. But look deeper. If you track your expenses on a daily basis for a week or so, go through each expense item. Perhaps you ignore the "little" things. You know, coffee, cigarettes, dessert, movies, parking. Maybe you've lumped these under a single category such as "Daily Expenses". After all, you don't want to account for every peso that comes out of your pocket. But the little things count a lot. A penny saved is a penny earned. And as you will learn, it will earn a lot, lot more. David Bach, author of "The Automatic Millionaire", calls it "The Latte Factor".

If you drink latte from a fancy cafe every work day, calculate how much the "opportunity cost" is if you had invested the money in an investment such as a mutual fund. How much does a cup of latte cost here? Say 70 pesos. That's P350 a week or P1,400 a month. You can invest as little as P1,000 in a bond fund (after the initial investment of P10,000). So if you put in P1,400 in a bond fund that returns an average of just 8% a year, and you do this diligently for 5 years (or a total investment of P84,000), you'll end up with P100,810.25 by the end of the 5th year. On year 10, it's P148,123.33. On year 15, it's P217,641.76. On year 20, it's P319,787.15. That's almost P320,000 just for saving P1,400 a month! What if you set aside more each month? What if the fund or some other instrument averages 9% or 10%? If you save P5,000 a month for 5 years, by the 20th year, you'll have more than a million pesos. That's the power of compounding. When the gains from your investment (interest income, dividends, capital gains) revolve such that they too earn further gains, your money compounds. For example, for an investment that returns 10% on average per year, your P100,000 earns P10,000. That P10,000 then also earns 10%, or P1,000 in the second year, such that you now have P121,000 (i.e. P110,000 plus 10%.) And so on. So the earlier you invest, the more you put aside, the further you hold on to the investment, and the more regular and often you save, the more powerful compounding works. That puts your caffeine fix into perspective, right? I used to hang out at Starbucks or Figaro or some other cafe and drink brewed coffee, or a capuccino, with friends or by myself practically every afternoon. Imagine how much I could have earned if I set aside the cash for investments. I still drink coffee, but I stopped thinking I should get my fix at Starbucks or Seattle's Best. Like today, I had coffee at Mister Donut for a third of what it would cost me at Starbucks. And most days, I don't drink at all. Sometimes, it's all in the mind. Do I flog myself if I ocassionally find myself ordering a Frapuccino? No, since it has stopped becoming an expensive and unnecessary habit. Again, this is not about coffee-bashing. I love coffee. If a daily latte won't make much of a dent in my savings, then who really cares? But right now, it does. And there are a myriad of things you can save on. Go through your list of expenses. Paying too much for electricity? Cell phone bills? Eating out? Shoes? CDs? Movies? You can go on and on. All I'm saying is you can cut down a little across all these items without totally giving up on them or depriving yourself on some small luxuries. Gee, I'm not giving up going to the spa with my wife. But I don't have to do it every month. I mean, whatever. Just cut a little across a lot. Because, as you can see, a little goes a long, long way.

Principle #4: Live Within Your Means, Then Increase Your Means
Many personal finance experts emphasize managing debt and controlling costs, along with investing your savings, as the primary approach to increasing wealth. And certainly the old adage "Live within your means" is a very fundamental principle in personal finance. As I pointed out before, it's not how much you earn, it's how much you get to keep. However, I also subscribe to the idea that we ought to find ways all the time to increase our income, not just watch our expenses. That is, increase your means. To me, it includes getting a raise or increasing sales (if you own a business or work on a commission). But it's more than increasing your income from its current source. I believe in finding alternative sources of income. Robert Allen calls it "multiple sources of income". Whatever you think of the guy, the concept has its merits. It's the same thing for companies. Those that diversify their sources of income are better able to sail through rough times during the usual business boom-and-bust cycle. They diversify by selling various products and services, by selling to different market segments, and by acquiring other companies. You have to start thinking the same way. If you're dependent on a single source of income, say, a salary, what would happen if you get fired? Or get a cut? It happens all the time. If you own a restaurant, and some major crisis forces you to close down your restaurant, or stiff competition suddenly lowers your sales significantly, and your income comes solely from it, how would you cope? Do I suggest getting another job on the side? Another business? Well, it depends on your situation. If you're a full-time employee, consider getting a franchise that can later run on its own with minimal supervision. Or get into network marketing, or even, a part-time sales job, that you can do on weekends or evenings. If you're a freelancer or entrepreneur, consider another business. Or, simply expand your products or services. If you're doing PR, consider handling events. If you're selling pastries, maybe start selling coffee. Whatever. Or if you're generating substantial income, you can diversify by investing in incomeproducing assets. Put your money in stocks, bonds, mutual funds, rental properties,

etc. If possible, diversify without over-extending yourself or going into totally unchartered territory. That is, diversify without losing your focus. The point is, just like with investments, you don't want to put all your income eggs in one basket. Ideally, you receive regular, predictable income, plus commissions, fees, or royalties as well as interest and capital gains. In other words, multiple streams of income. So think about your own diversification strategy.

Principle #5: It May Not Happen, But It Can

When you're young, you don't think about old age or death. When you're healthy, you don't think about getting sick. When you're living a normal, quiet life, you don't think about getting into an accident. When you have a nice, cushy job, you don't think about financial catastrophes. You'd think "It couldn't happen to me." But the thing is, it can. Of course, the probabilty of you dying when you're healthy and twenty five is small. The likelihood of you being hospitalized when you're living a healthy, active lifestyle is low. But should you wait till you're sick, or disabled, or laid off, or dying? You can say the same thing about your properties like your house and cars. For forget about probability first. I want you to play a game called "What if?" It's simple. Just ask yourself: What What What What What What What What if if if if if if if if I get fired from my job? my business goes belly up? my house burns down to the ground? get into a car accident? I get disabled? I get cancer? I become diabetic? I die?

Does all these sound morbid? The thing is, we avoid thinking about these things because a.) they're unlikely to happen, b.) you have too many problems to even think about these things, c.) you just don't want to think about it. But instead of burying your head in the sand, be honest to yourself and ask these questions. You don't have to have the "right" answers. Just be honest. Say, if you lose your job, maybe your spouse's income can sustain your expenses for six months. Or maybe, you have enough cash stashed away for three months. If you get disabled, say you have rich parents who can and are willing to support you for life.

Or you discover you have a heart problem. Your company has a group health care plan that gives you coverage. If you die, well, maybe there's not much financial loss since you're single and just started working. On the other hand, say, your car gets carnapped. You only have the basic mandatory insurance. What do you do then? Or you get sued because a customer in your restaurant got food poisoning. What do you do? Maybe you travel a lot, but you're not insured at all. And your wife is a stay-at-home mom. What will happen to them if a plane crash happens? So, as you ask these "what if" questions, you get a clearer picture of the possible responses to what could happen. There are two other questions that you need to answer. And I'll discuss them in the next issue.

You Don't Need Insurance...

If you're not earning income. Remember that you're insuring against loss. For life insurance, it's loss of income upon death. For disability and accident insurance, it's loss of income upon being disabled due to an accident. Insurance is supposed to replace lost income. So if you're not earning income, you don't need to be insured, because there's nothing to replace. It doesn't make much sense to insure children because they don't earn income. No amount of money can replace the loss of a child, or any of your loved ones for that matter. But if can afford and willing to pay for insurance for your kids, knowing full well it's not really necessary, it's your choice. If you're retired and have accumulated enough wealth, such that, when you die, there's enough left to support your surviving spouse, then you don't need life insurance. (However, some advise using proceeds from life insurance, which are taxfree, to pay for estate taxes.) What about your children and grandchildren? Well, your kids are earning income, aren't they? Life insurance is meant to protect loved ones who are dependent on your income, not to provide for them for life. However, if you're a stay-at-home mom (or dad for that matter), even if you're not earning any income, you still have economic value. Because the services you do at home (cooking, cleaning, babysitting, etc.) represent actual expenses if done by somebody else. So you need to be insured. If you have no dependents. Even if you have income, but no one's depending on your income, then life insurance is not necessary. If you're single or living with your parents, and you're not supporting anyone, you don't have to be insured.

If you're newly married, and you're both working, perhaps you don't need life insurance yet, as the surviving spouse can support him/herself. But if it's going to be a financial strain, then do consider insurance. Remember, life insurance is designed to replace lost income that supports people who depend on you. It's not a windfall on your unfortunate death. However, in the case of accident and disability insurance, even if you don't have dependents, you might still need to be insured in case you're unable to work because of an accident or disabiity. In this case, you are supporting yourself. Who's going to pay for your expenses if you can't work? Of course, if your family can and is willing to support you, then you don't have to be insured. On the other hand, do you want to be a burden to your family? If there's no catastrophic loss. Please keep in mind you are insuring not just any loss, only catastrophic loss. This applies particularly on non-life insurance. Your P30,000 digital camera may be valuable to you, but will it be a financial disaster if you lost it? Well, maybe you'll kick yourself several times, but it's not going to be a catastrophe. But if your car gets stolen or crashed, that's a catastrophe. If your house or office burns to the ground, that's a catastrophe. If you get sued for millions, that's a catastrophe. If you get bedridden with a dreaded disease, that's a catastrophe. That's when you need insurance on your car, house, business, and against personal liability. So, ask yourself "Do you really need to be insured?".

You Do Need Insurance...

To protect your income. Whether or not you have dependents, you do need to eat, don't you? Or at least have the dignity not to fend off your parents' money (okay, maybe if you're in your early twenties, not earning much, and living with dad and mom, you're excused). In this case, what you need is disability and accident insurance. If you meet an accident and get disabled, this kind of insurance will compensate for physical loss (in case of disablement, like your feet or eyes....ouch) and, as an option, reimbursement for medical expenses. To protect your assets. That means major property like your house, office, and cars. You'll need fire insurance, homeowner's insurance, and car insurance. Some policies cover valuables inside your house. But you don't want to insure items that won't constitute a catastrophe if you lose them. To protect your dependents. If you have people dependent on your income, like your spouse, children, and even business partners, you need life insurance.

To protect your net worth. It's possible you can get sued for practising your profession or operating your business. You don't want to end up penniless, that's why consider personal liability insurance (or comprehensive general liability insurance). To comply with requirements. Sometimes you have no choice. Like when you get a housing loan, your bank will require you to get credit life insurance. So in case you die before you pay off your loan, they still get paid. How nice of them. So, yes, you do need insurance. The important thing is to know why and when you need them. That's why you have to ask yourself "Do I need insurance?" The next question is "How much do I need?" Now, we'll leave that one some other day. For next issue, we'll tackle Principle #6.

Principle #6: You First, Then Others

I know it goes against our culture. When it comes to family, our children come first. Sometimes, our parents come first. Even our siblings come first. It's very Asian for us to work endlessly to give our children a good education and a better life, sparing them from hardships and possibly not making them work another day of their lives. We were also brought up to think that our parents become our responsibility when they become old and unable to work. After all, they sacrificed so much to get us to where we are now. And in many cases, we also feel responsible for the welfare of our younger siblings, particularly if we have become relatively more successful. There is, of course, nothing wrong with taking care of our loved ones. But there are inherent problems with this kind of thinking. If you read "The Millionaire Next Door", you've learned that millionaires never spoiled their kids by giving them everything they want. If we give our kids a life of luxury and comfort by giving them everything to them, we're actually harming them than helping them. There's less motivation to work hard because they see you as their human ATM. There's also nothing wrong with taking care of our parents when they get old. But remember that the money you spend on their medicine, hospital bills, food, etc. means less money you can spend for your kids and yourself. Does that sound harsh? After all, they gave everything to you. It's your obligation to give a little something back. If that's your situation, then by all means provide financial support. If your parents have enough saved for their retirements, thank them for being

responsible parents. Then follow their example. Either way, you have to start with yourself so you don't repeat the cycle. Ask yourself: Do you want to be a financial burden to your children when you're old and grey? If you believe in giving everything to your kids, then perhaps you expect to be treated the same way later on. It's an unwritten social contract. However, if you want your grown-up kids in the future to be able to use their money for themselves and their own kids, then get serious about planning for retirement. Unfortunately, for many of us, our kids are our retirement plans. But this shouldn't be the case. If you do agree that funding your own retirement and long-term care is the right thing to do, then you have to accept the principle of putting yourself first before others. Sure, there may be things you would not compromise, like quality education for your kids. But between putting aside regular savings for your retirement versus buying the latest Honda Civic for your college boy, put yourself first. It's not being selfish. Because when you get old, you will not put the burden on junior. That's selfless.

Principle #7: There Are Two Things Certain in Life

Life is full of uncertainties. Certainly most areas of our financial lives are in the context of uncertainty debt, investments, insurance, income. What is certain, as the famous quote goes, is death and taxes. I know most of us don't think about death, not so much because it's an unpleasant subject but because it's so distant. Discuss with your loved ones. Maybe you haven't built a big enough estate to even think about estate planning. But have you ever thought about how you want to be buried? Do you want to be cremated? Do you want a short wake? Do you want a closed casket? There's nothing morbid about this if you share these things to a loved one. I think it's perfectly normal to talk about. Should you buy a memorial plan? Not necessarily. What's important is that someone you love knows what you want when you die. Consult an estate planner. Now, if you do have a substantial estate, it's not enough to make a will. Talk to a lawyer or a trust banker who can explain to you how wills, trusts, gifts, etc. work. Going through the process gives you a good idea how much you have, which beneficiaries should receive what, and how they can minimize the payment of estate tax. Otherwise, your loved ones will be left with a mess.

Someone I know experienced this problem recently. Her dad passed away and they were left with missing documents, unpaid obligations, angry employees and suppliers, and a huge tax burden. It took months to fix everything. That's not a good way to die. It was the estate tax that proved to be a major burden. Obviously, even in death, taxes will continue to haunt us. Plan to minimize taxes. For the living, taxes are certainly a burden. If you're an employer, you have to contend with income tax, value-added tax, withholding tax, and other business taxes. But at least, you have more flexibility when it comes to allowable deductions (at least until the government succeeds in shifting to gross income taxation). If you're employed, you know almost a quarter of your salary goes to the government. It's like you're working for the government one fourth of the time. As a consumer, you have to pay real estate tax. Your investments are hit by withholding tax. You pay higher for goods and services because taxes on businesses are passed to you. Unfortunately, unlike in the US, there's not much you can do if you're an employee. But tax planning is still an important area of personal finance. You may be helpless with withholding taxes on your compensation, but you still have choices when it comes to investments and estate planning that will minimize the taxes you pay. To sum up: death may be a distant likelihood, but it's something you should think about already. Taxes may be an inevitable occurrence that you have little control over, but it's still something you can plan for.

Principle #8: Match the Right Instrument With the Right Requirement
Okay, this principle doesn't sound so catchy. For sure, the familiar warning "If it's too good to be true, it probably is." plays better on the ear. But it doesn't quite capture what's most important when it comes to investments. When it comes to investing your money, the key principle to remember is "matching". This should guide you when making investment decisions. If you don't match your investments with your requirements, you'll end up making poor choices. When I started investing, all I knew was that stocks was the way to go. So I invested in stocks with no particular objective except to save and invest "for the future". But I should have taken into account my immediate needs, like wedding expenses and a mortgage. That way, I should have invested in bonds, government securities, and other fixed income instruments.

Matching investments with specific needs helps you determine how much you should expect and can take (risk and return), how much to invest (asset allocation), how long to be invested (time period), and what to avoid (speculation and scams). Risk and return Everyone has a different appetite for risk. Some are conservative investors who only keep their money in safe instruments like bank deposits and government securities. Others are risk takers, putting money into speculative stocks and even get-rich-quick schemes. Most of us are in between. But our risk attitude as investors and our expectations for returns should really take into account our goals. Example, if you were planning for retirement, then investing in equities, which has a higher risk, is an appropriate decision. Putting money in bank deposits is not a good idea because inflation will eat up your measly returns. There's no way you'll accumulate enough wealth for retirement purposes if you're too risk averse. In the same way, if you're saving for a downpayment for a car loan by next year, you shouldn't be investing in stocks. Don't expect double-digit returns in a short period of time if your goal is short term. Even if you have a high appetite for risk, you should be guided by your specific need. Asset allocation How much of your money should you put into stocks, bonds, real estate, money market accounts, government securities, and cash? It all depends on your goals. If your goal is something immediate and you don't want to risk losing your principal, then allocate money into short term and relative safe instruments. If it's long term, then allocate more into equities. Time period Now, how long should you keep your investments? Again, if you have no particular objective for your investments, and you're invested in stocks, you may be easily tempted to pull out when the market goes down. But if those investments are for the long term, then you can ride the ups and downs of the stock market. If you have short term needs but you invest in long term instruments, you may end up losing money if you're forced to sell your investments. If you have long term requirements but you just invest in short term instruments, you may risk not earning enough on the smaller returns. Speculation and scams Lastly, this principle should guide you in avoiding get-rich-quick schemes and investment scams. If your need is to protect your income, then you certainly shouldn't play with speculative investments, and worse, potential scams. If you have play money you don't care to lose (lucky you), then putting it in high risk investments is a gamble, as long as you know what you're getting into. Still, I don't encourage it. Wasting money, even play money, is still a waste. So, if you have money to invest, go back to the financial goals you set (remember the exercise we did before?). What is it you want to achieve first? When you

determine your need, you can now make the right choice on what type of investment can best meet.

Principle #9: Make a Life, Not Just a Living

Money is not the root of all evil. What the Bible says is "the love of money is the root of all evil." It's one thing to keep in mind when we deal with the subject of money. Money is a tool, a means to an end. If it becomes the end in itself, then we should ask ourselves about what really matters. Unfortunately, for some people, rich or poor (yes, even the poor), the pursuit of wealth for its sake has become their philosophy and lifestyle. And for many people, including you and me, making money has often stood in the way of enjoying our lives. It's quite ironic: we work hard to make money to pay for things that make us and our family happy. But we end up neglecting the important things in life, like quality time with our loved ones or simply enjoying the little things. Surely, many good things in life are free. And we should invest our time and effort in them. But there are also some good things in life that we spend for, and ought to invest in. Let's not just spend for material things that we accumulate or for necessary living expenses. Let's also spend for things that help us enjoy life more. There are three I recommend. Recreation Part of enjoying life is recreation. Is recreation part of our lifestyle? Or is the oneweek holiday abroad too much to handle when we're always worrying about the work we left back home? It's good to work to pay for a house, groceries, travel, cars, tuition, gadgets, clothes, and all those mundane things. But you should include recreation in the things you spend for. That includes sports and hobbies that you enjoy and enrich your life. Education Education is also part of enriching your life. That means continuing education classes, seminars, workshops, books, magazines, and traveling. Do you invest in your education? Learning continuously is a great way to live our lives. Avocation And then there's our avocation. Is there something you like to do off hours? There are things that we spend time, effort, and even money on, even if don't get anything concrete in return, just a sense of fulfilment. For me, Money Minute and promoting financial literacy is my avocation. I enjoy writing and teaching and learning. That's a reward in itself. There are also other things I want to pursue in the future. What's yours? Whatever it is, it's okay to spend for things that give you satisfaction. And the point is, it doesn't have to be (and should be) just material things. Recreation, education,

and avocation that enrich your life are often more long term or more deeply satisfying.

Principle #10: The More You Give, The More You Get
Some people hold on to their money too hard that they eventually lose it. It's like clutching sand in your hands. Others freely give and they never seem to run out of money. My sister-in-law has a generous heart and she's blessed financially. Give a little and get back a hundredfold. Many people attest to the power of giving. To me, there are three things we can all put into practise to make this principle work in our lives. Stewardship If you come to think about it, we're really just stewards of whatever we have. Of course, we think we own what we have because we worked to get them. But even our abilities are God-given. If we put that into perspective, we become better stewards of money. To be sure, that's easier said than done. But if we do think of ourselves as stewards, part of being good stewardship is growing our money and sharing it. TIthing Part of being stewards is tithing, which is giving ten percent of our income to the church. Tithing is an acknowledgment that everything belongs to God. It's also an act of faith, because it's hard to give ten percent when we can hardly pay the bills. But many people who diligently practise tithing testify that the promise of tithing is real. Charity Of course, the concepts of stewardship and tithing are Biblical concepts that you may not ascribe to. Whether or not you share these beliefs, there's a third way of applying this principle: charity. A lot of rich people like Bill Gates and Oprah Winfrey give back a lot to society. But you don't have to be rich. You don't even have to give cash. You can give your time and effort, which also have financial value, if you think about it.

Six Feet Under

It may sound morbid, but the topic of death, particularly the expenses related to burial, is quite fascinating. The costs can really kill you and the rituals can sometimes be ridiculous. Nowadays, you can have a fancy burial with photo and video coverage, a band, balloons, the works. A party when you're dead. But even the basics can be quite steep. A casket, for instance, sells for as low as P20,000, made in wood, and can go upwards of P850 thousand for solid brass. A cemetery lot can go for P45,000 to more than P800,000 while a mausoleum costs about a million and upwards of eight million. No wonder cremation is becoming a more popular and more practical alternative. The cremation cost about P9,000. A wooden urn goes for just P1,500, although brass ones cost P25,000 to P65,000. And if you want a bone or ash niche in a columbarium, it would cost P50,000 to P65,000. You can, of course, just keep it at home. You do get freebies from package deals. Otherwise, you have to consider other related expenses: Viewing room: P3,000-P5,000 per day Flowers: P500-P5,000 Garden: P1,500-P8,000 Hearse: P5,000 Police escort: P700-P1,200 per policeman Burial: P18,000-P25,000 Headstone/Marker: P700-P5,000 Grave diggers/Niche watchers: P500-P2,000 per person Sandwashing: P7,000-P15,000 Obituary space: P2,000-P50,000 As you can see, dying can cost you an arm and a leg. You can say the funeral services industry is making a killing. With these expenses, who wants to die? I know it's something you and your loved ones would rather avoid but part of a financial plan is anticipating for the cost of your or their funeral. Here are some things to remember: 1. Shop around. You won't have the luxury of comparing prices if a loved one suddenly dies, or worse, if you die. Not all funeral homes or cemeteries are the same. Compare prices if the likelihood of someone in your household dying soon becomes apparent, such as due to old age or serious illness. At the very least, ask around and be aware which ones are reputable and recommended. 2. Don't be pressured. Remember, it's not called the funeral industry for nothing. So don't think of funeral

directors as clergy. It's not that they're vultures but it's still a business for them. So don't buy products and services you don't need or want. 3. Avoid emotional overspending. You don't have to buy the most expensive casket or the biggest mausoleum you can (or can't) afford to honor a loved one or cure guilt pangs. Show your love when the person is alive. A simple, dignified memorial and funeral service is sufficient. 4. Plan ahead. If you can to buy a memorial lot or casket in advance, it would not only come cheap, it will give your loved ones peace of mind. But even if you don't purchase ahead, at the very least, talk to your family about your wishes (and solicit theirs if they're open about it). Why buy an imported solid brass casket when your loved one really just wants to be cremated and doesn't want any viewing? 5. Consider a pre-need plan. Memorial plans today are really just another form of investment. Pre-need companies sell packages that pay out an agreed-upon amount in a lump sum. They do offer value-added services like professional assistance. And memorial parks also offer plans that you can pay in advance.

The Credit Card Trap (Part One)

Plastic. For a growing number of Filipino consumers, credit cards have become the preferred mode of payment, from dining out in a restaurant to paying for the wide screen TV on installment. It's also becoming a major problem for regular people who find themselves tens of thousands of pesos in debt. In the first quarter of this year, credit card bills that were past due topped P13.8 billion. We talked to Fol Rana, Jr., Vice President for Sales & Marketing - Retail of Equitable Card, one of the major players in the industry, on how to manage our use of credit cards. It's just a tool. Rana stressed that credit cards are just an aid in your finances. "If you don't have cash, it allows you to purchase items." Combining the billing period and the grace period before you're charged interest is the equivalent of 30-45 days of free money (that is, if you pay the balance in full when it's due). But it's still a loan that you have to pay. Unfortunately, there's a certain detachment when we charge for purchases, as if there's no tomorrow. It's just not the same as when we grudgingly pull out cash from our wallet. Says Rana, "With cash, you see value. With a credit card, you see plastic." Have a good credit record. Keep this in mind when you miss a paymentagain. Your credit card payment history affects your credit record, which is a factor when you apply for other loans, like a mortgage or housing loan.

Although there's no credit bureau in the country, credit card companies have an arrangement to check balances of their customers. They also check the banking industry's negative file information system. So it is a good idea to use a credit card to establish your credit record when you're just starting out. "A person with a credit card history has a better chance than someone with none," Rana points out. Get rewarded. The other good thing about using credit cards is the payoff like free airline miles, rebates, discounts, and reward points, which you can use to claim items or waive your annual fee. If you're a good customer, you can get invited to special events and promos. However, these extra features should not be your top priority when choosing among credit cards, particularly if you're not the type who pays in full. Study your finances. Find out how much you're earning and spending every month to give you an idea how much you can afford and how much credit you really need. Rana explains, "If your card can cover your expenses, then don't ask for more cards." More cards and higher limits mean greater temptation to overspend. Track your expenses. The problem with credit cards is you'll only find out your bill once a month. Often, you get shocked by how much you charged. There's another way. Use the phone or the Internet to track transactions and balances, if your credit card company offers such facilities (perhaps this should be one of your criteria in choosing a credit card provider). Control your expenses. If you track them, you can better control them. Don't exhaust your credit limit. Rana says you can even request the card company to decrease your limit. He also suggests you just carry one or two cards instead of all. And if you really want to keep your credit card costs low, don't do cash advances, which charge you an interest the moment you get the money. Pay at least the minimum to avoid late payment charges. In fact, pay more than the minimum to lower interest charges. Better yet Pay in full. Rana explains there are two types of cardholders - revolvers, who pay the minimum amount due, and transactors, who pay in full. Card companies love revolvers more, because they earn from interest charges. They are also less likely to cancel, as they always have a balance to pay. If you're a revolver, don't worry about being seen as a bad customer. Paying just the minimum doesn't trigger concerns as long as your credit limit is commensurate to your capacity to pay. Just don't expect to get an automatic increase in your limit or an upgrade. But don't feel guilty if you're a transactor and want to help your friendly neighborhood credit card company. Card companies still make money off you through annual membership fees. But even if you manage to have this waived, they still earn from their member merchants. Pay on time. Even if you can afford to pay the minimum, pay it on time. Late payments trigger red flags if they happen regularly. There's no excuse for not

paying. Rana says, "Even if the bill arrives late, as a responsible cardholder, you have to keep track when to pay." Besides, he adds, there are many methods of paying, including auto debit, the ATM, phone banking, and online. Watch out for part two where I write about the fine print.

The Credit Card Trap (Part Two)

There's more to managing the way you handle credit cards than paying your bills in full and on time. To be a smart cardholder, you need to remember four words: read the fine print. Stick to two cards. One common denominator among delinquent cardholders is they're holding on to so many cards. The average person in the major cities has 2-3 cards. Rana recommends two cards, with one for backup (make sure at least one is an international card). For a lot of people, however, the number of cards is for bragging rights. Having high credit limits give a sense of pride as well. Even the color of the card is a status symbol. But Rana advises that cardholders review their total credit. "It's not advisable to have so many cards," he explains, "The annual fees on those alone [are prohibitive]." And if you receive yet another pre-approved card in the mail, don't activate it. Cut it up to prevent identity theft. If you're not using a card, cancel it. "If it has no usage or payment history, it doesn't serve any purpose," says Rana. Be wary of credit limits. Having a high credit limit or receiving a notification that your limit has been increased may give you a, well, high. But remember some aggressive card companies will very high credit limits, even if it doesn't match your capacity to pay, forcing you to revolve. In the same way, they offer introductory lower rates (which they then jack up), freebies, huge rebates, and attractive rewards points to get to switch. Don't be easily tempted. Before biting, remember to Read the fine print. You need to read the terms and conditions. If you don't understand some items, and I'll bet there'll be some, call the company to get a clarification. Figure out how interest is computed. One vague area that needs a clear explanation is the interest rate. Rana says Equitable Card charges 3.25% on your outstanding balance, based on simple interest computation (principal x rate x time). Other companies hide the total effective interest rate. They may charge 3.25% but based on your average daily balance, not your outstanding balance. They may also compute interest based on a shorter number of days, instead of a full 30 days. So, instead of looking at the nominal rate, check the annual percentage rate or APR.

Figure out how the balance is computed. If your balance is P10,000 and you manage to pay P9,000, you'd think you'd be charged an interest for your remaining outstanding balance of P1,000, right? Think again. Many card companies use your average daily balance or ADB as the basis for interest charges. So they take into account your beginning balance, new purchases, payments, and ending balance. Figure out when your payment is posted. Some companies post your check payment when it clears, not when you deposit it. Equitable Card considers your bill paid when you deposit it on the due date. Others will consider it late. Check the same when paying online. If you pay on the due date but after banking hours, some cards might post it the following day. Learn when to transfer balances. When should you transfer balances to another card? If the new card has better features and rates. In most cases, however, revolvers are the ones who like to transfer to take advantage of lower rates offered for transferred balances. Some card companies even waive the annual fee. Just make sure the interest on your succeeding regular purchases is competitive. It doesn't hurt to ask. If you're ordinarily a transactor and was late on a payment once, such that you get charged a late penalty fee, call your card company and ask for it to be waived. Most likely, they'll comply. Learn about billing cycles. Some cards don't charge a penalty even if you pay after the due date, as long as you do pay a few days before your statement date. Why? Because of the way their systems work. For instance, if your due date is on the 25th and your statement date is on the 5th, if you pay on the 30th, you won't get charged anything because the system will check your balance perhaps a few days before the 5th. It's an industry secret, but it doesn't apply to all credit card companies. Learn what causes red flags. Credit card companies track several parameters, such as usage, payments, and delinquencies. Don't get paranoid however if you're late with a payment or two, or if you just pay the minimum, or max out your credit limit. "The important thing," Rana says, "is paying it." What to do when you can't pay. However, if you're delinquent, a collection mechanism kicks in. A reminder is sent when you're 30 days past due. A telemarketer may call you to remind you of a missed payment. You'll get a stronger note if you're 60 days past due. And your account is automatically suspended. If you're 90 days past due, you'll receive a stronger letter and the card company sends out its collection agents. The worst scenario is when the card company files a suit to force you to pay. When your card is reported as a delinquent account, you take the risk that won't be given a loan facility like a car or housing loan when you apply. And this is not erased from your record. And as Rana points out, it will take a lot of convincing again before you can avail of a loan from a legitimate creditor. If you find yourself in this situation, try negotiating with your card company to come up with an acceptable restructured payment plan that will fix the numbers years you can pay off your balance, the minimum amount you're expected to pay every month,

and the interest rate you'll be charged. You may be asked to issue post-dated checks and a stop credit facility will be enforced, such that you can't charge new purchases to your card anymore. If you have a spending problem, cut all your cards altogether and pay cash for purchases.

The 13th Month Dilemma

It's the Christmas holidays and, indeed, 'tis the season to be jolly. This is the month we'll get our mandatory 13th month bonus. An entire month's pay for doing nothing! What a great concept! So what's the dilemma in that? For most of us, nothing. We don't think twice about spending everything for shopping. It's Christmas, for crying out loud! We need the extra dough to buy gifts. Who's going to pay for all the useless knick-knacks you'll exchange with your officemates? Who's paying for your kid's trip to Toy Kingdom? Who's paying for your trip to Toy Kingdom? Where will you get the money to buy your husband a new pair of socks? How will you pay for your weekend trip to Bangkok? Isn't that what your 13th month bonus for? Well, in a word, yes. But I have something to tell you that will spoil your fun (and mine). There are other, better ways to use your 13th month bonus on. For that matter, it's not just that. It's the other automatic bonuses you may have received just for showing up. It's the money you may have received from your parents (which I like to call "pity money"). It's the 100-peso bill you found in the street. Money for nothing. Free money. Found money. Manna from heaven. Whatever you call it. So, what do you do with extra cash that you have but did not earn? Okay, let me get back to the topic. What do you do with your 13th month cash bonanza? Let me count the ways (and compute your financial returns). Spend it. The obvious and common option. Why use your hard-earned savings on buying gifts when you can fund them with your 13th month pay? It makes sense, right? It does, really, when the other options are to use up your savings originally set aside for a more important financial goal or to rack up more debt with your credit card. But this reflects poor financial planning in the first place. Irregular, once-or-twice-ayear expenses like Christmas gifts should be planned ahead, and saved for. I know, it's easier said than done. But it's these occasional but expensive expenses that take a hit on our budget and our financial plans. Return: 0% Save it for now. I'm talking about delayed gratification. You'll still spend the money, but not now. Maybe you're thinking of buying a new digital camera. Instead of charging it to your card and pay part of it when your bill comes due and pay the rest say a month later (at a monthly interest rate of 3.5%), why not set it aside, save the balance of the cost of the camera, and buy it when you can pay off the

whole thing in cash (or time in during a sale). Sure, all you did was save a little on credit card interest. But congratulations! You're starting to form a good financial habit - waiting. Return: 3.5% Invest it. Talk about waiting. This time, you don't even spend your bonus until, well, years or even decades from now. What if you place your 13th month pay of, say P25,000, to a mutual fund, treasury bond, or other similar investment that returns an average of 10% net a year. In five years, your bonus has grown to P40,000; in ten years, P65,000; in twenty years, almost P170,000. All just by sitting on your butt. That's a 579% jump, or an effective rate of 29% a year. That's the power of compounding: you earn interest on your interest. Return: 29% Pay down debt. Okay, it only gets worse. What if I tell you that you can earn 42% in a year, but you won't receive a single centavo? How is that possible? If you carry credit card debt for a year, you're paying 42% a year or 3.5% a month. And that's conservative. Some credit card companies charge interest on your interest, reverse compounding so to speak. Paying off your debt, or even part of it, saves you a lot more. You won't get anything tangible in return but you can gain back greater control over your financial life. Return: 42% Donate it. Finally, you can give it away, to your church, a charity, or a family in need of help. If you think you won't get anything in return, think again. Many generous people testify to the fact that they get back what they've given a thousandfold. Maybe you'll get it back financially, maybe not. But the very act of sharing and helping others is, well, priceless. Return: 1,000%

The 10-Minute Investment Checklist

Now that you have an idea where you can invest P100,000, how do you decide then which is the right one for you? Before anything else, ask yourself two things:

What are you investing this for? (for retirement, for education, for travel, for a car) This is your investment objective or goal. When do you need to achieve your goal? (this year, next year, 5 years from now, when you're 60) This is your investment horizon or time frame.

This will guide you in making investing decisions. Once you know what you want and when you want it, you can start evaluating your options.

Here's a useful checklist. Run this through the investment options I listed last time and any other investment products you'll find in the market. It shouldn't take more than 10 minutes to figure out if the product matches your objectives. Rate of return. Obviously, this is probably the primary consideration we have when investing. So what rate should you look for? Here's a rule of thumb: Beat inflation. If your money grows less than the rate of inflation (the change in the prices of a basket of goods), then you're actually worse off. So, if inflation has averaged 6% a year, the returns on your investment should grow more than that. What's the big deal about inflation? Inflation eats up the value of your money. Your P100 now can buy a lot less stuff 5 years from now. We all know that. So, make sure your investment grows faster than inflation. Also, check if and how often returns are compounded. A fixed-rate Treasury bond (FXTN) gives you a fixed interest every quarter called a coupon. It doesn't compound, so it's straight interest. On the other hand, a time deposit or a bond fund generates interest which, along with your principal, earns interest. So, the interest earns interest. That's compound interest. And that's the secret of successful investing. Compounding becomes even more powerful the more frequent it is. If it compounds daily instead of monthly, then the faster the growth. Guarantee of return. If your investment returns 1,000%, is it guaranteed? That's why for "fixed income" investments like T-bills, time deposits, and bonds, returns are generally conservative because they are generally fixed. If you're promised returns of 4% a month, then start wondering. That's equivalent to 48% a year. Where do these guys invest or lend their money that allows them to guarantee you 48% a year? Here's another rule of thumb: If it's too good to be true, it probably is. But if an investment grows by 48% this year, 30% next year, 1% the next, -20% later, and then 15% thereafter, the the rate or return is obviously not guaranteed. Is that bad? Of course not. Investments like stocks, real estate, and commodities act this way. They are considered riskier because no one's promising you anything. But here's yet another rule of thumb: the higher the risk, the higher the return. So, when evaluating an investment instrument, check if the rate of return is guaranteed, in which case, expect a relatively conservative rate. If it's not, then demand a historically high average rate because you deserve a higher return for the extra risk you take. Safety. Are you willing to risk everything, including the original amount of your investment? Or do you want to make sure you keep your principal intact? Well, the bad news is anything can happen. There is all sorts of risk that affect investments. But generally, fixed-income instruments keep your principal intact, that is, if you keep them until they mature (they reach the end of their term). So, if you're a bit conservative, placing your money in T-bills, RTBs, or time deposits will give you some peace of mind. The government will sure to pay you no matter what. Even if it goes bankrupt, it can just print more money. Your bank, well, that's

another matter. But here's their guarantee: your investment is insured and safe up to P250,000. Now, if you're primary concern is to make sure you don't lose your principal, then stocks and mutual funds are not for you. On the other hand, you'll be sacrificing growth for safety. Not a good thing if you're investing for the long haul. But very much fine for short-term objectives. Liquidity. Once you place your money, how soon can you take it out? That's liquidity. Regular savings deposits are liquid because they're easy to get into and out of. You can withdraw them anytime. But for time deposits, you need to keep your money a bit longer, otherwise you won't earn as high an interest. Mutual funds and unit-investment trust funds are a bit less liquid, because they generally require a one-year holding period (although you can withdraw within a year for a fee). Stocks are relatively liquid in the sense that you can buy and sell anytime. However, if the price of your stock goes a lot lower than the price you bought it for, and you don't want to sell at a loss, then it's not very liquid, is it? Real estate investments are not liquid because it's harder and takes a longer time to sell them. So, how does this affect your investing decision? If you'll need the money quickly, you want to place it in liquid instruments. Affordability. There are investments out there that earn a lot. The catch: you need a million bucks to get access to them. The good news is, there are a good number of investment instruments that you and I can afford. Basically, all the ones I listed last time. You only need P5,000 to buy RTBs and P10,000 to invest in mutual bond funds. The lesson: even if you don't have a lot right now, don't let that stop you from investing. Because you can. So this is another factor to consider when investing: the initial minimum investment required. Diversification. You know this rule of thumb: Don't put all your eggs in one basket. That means spreading your money across different investment instruments and different institutions. So, ideally, you should have money in stocks, bonds, government securities, money market instruments, etc. This way, even if prices for stocks go down, you wouldn't be hit too hard if you have bonds, time deposits, etc. that offset your losses. Diversify across institutions also. So even if one bank or pre-need company closes down, your life's savings don't go down the drain. Most investments don't provide built-in diversification. You have to spread your money yourself. However, mutual funds promise instant diversification since they invest in a whole lot of stocks or bonds, spreading your risk. Fees. There's no such thing as a free lunch. You pay a broker's fee when you buy stocks and an entry load and an annual management fee when you invest in a mutual fund. Fees also come in the form of commission. When you get an endowment or pension plan, part of your premium goes to commissions.

Fees eat up your returns because instead of earning for you, the portion of your investment that could have generated a return instead when into the pocket of the broker or institution that sold the product to you. Is that bad? Well no. It's a product which has a price. The fee or commission is that price. What you need to watch out for is how much is the fee or commission. Even if it's small, it all adds up. Taxes. Most investments are taxed. The government taxes bank deposits, stock transactions, even government securities. Mutual funds are tax-free and so are investments that are long-term (at least 5 years). So, when comparing investments, compare the returns net of tax. But like fees, don't get obsessed about taxes. Even if the fee or tax is relatively high, but the returns are consistently higher than competing investments, then that should take precedence. Convenience. Do you want to actively manage your investments yourself by trading regularly? Or do you want to just dump your money and let it grow on its own? You can trade stocks or foreign currency yourself, but that means you have to be watching the market constantly. In contrast, you just leave your money to a mutual fund or UITF manager, a pro who's hired to think, plan, and implement for you (that's why there's a management fee). Do you want to put a lump sum every year or do you like putting a little aside every month? For example, there are so-called lump-sum endowment plans and there are plans that are 5 years to pay. The institution. Check what institution is issuing these investments. Is it the government? Then consider it practically risk-free (or at least low-risk). Is it a topnotch corporation like Ayala Corporation whose corporate bond is highly rated? Is it a bank? A mutual fund company? An insurance company? A pre-need company? Which one? How stable is the company? How has it performed in the past? Who are the directors and officers? Where does it invest or lend its money? This shouldn't preclude you from buying or investing from a new company of course. Even the big and old ones fail and close shop. The whole idea is to investigate. And then diversify.

Where to Invest P100,000

Okay, let's say you have a hundred grand to spare. You have no financial obligations like credit card debt or immediate financial needs like travel. Where do you invest P100,000? And I don't mean investing in yourself or in a business. I'm talking about financial

instruments. Regulated, legitimate investment vehicles from financial institutions. Well, here are some options: Special savings deposits. You can place the money in a special savings account that earns a much higher interest than a regular savings account. Most commercial, savings, and rural banks offer this. Shop around. Time deposits. The favorite instrument of Filipino savers. You can choose to place the money in 30-, 60-, and 90-day time deposits. Again, most banks have this. Stocks. You can buy shares of publicly-listed stocks and ride the current bull run. Just call up your friendly neighborhood broker. T-bills. If you want relative safety, place your money in short-term government securities like Treasury bills (T-bills). Dealers like commercial banks offer this. RTBs. You can also invest in longer-term government securities like Fixed Rate Treasury Notes (FXTNs). Alternately, you can invest in Retail Treasury Bonds (RTBs), which require much smaller amounts. UITFs. Replacing Common Trust Funds (CTFs), Unit Investment Trust (UITFs) are an improved version, as market prices are updated daily. A lot of commercial banks with trust departments offer this. Mutual funds. Similar to UITFs but more regulated, mutual funds pool money from thousands of investors. There are different types depending on your investment objectives. Only a few investment companies offer this. Foreign currency. You can exchange your P100,000 into dollars. Now that the peso is appreciating, and the dollar is relatively cheap, it's a good time to buy. Alternately, check out the euro since it's going stronger than the dollar. Banks and forex brokers let you do this. Insurance plans. Whole life insurance plans have a savings component. A variation is the variable (also called unit-linked) insurance plan, which gives you greated control on how your premiums are invested. A few life insurance companies offer this. Endowment plans. These are insurance products but don't provide lifetime coverage. They are often positioned as investment products because the emphasis is on the returns. A lot of life insurance companies offer this. Pension plans. You can buy a pre-need pension plan, that is, if you're undeterred by the negative news on certain pre-need companies. These are just some options for you. Now, which is best? Well, it depends. On what? Your objective, your risk appetite, your time frame. Beyond that, each has its pros and cons. Next issue, we'll talk about the factors to consider when investing.

Is your MasterCard safe?

You've probably heard the news: last week, over 40 million million credit card accounts of MasterCard International were compromised by a security breach in the U.S. In the Philippines, there are around 3.5 million MasterCard users. MasterCard Philippines said about 2,000 of those were affected, or 0.03% of the total. Owners of the accounts have already been informed and their cards will be replaced. The hacking incident happened at a third-party processor of payment card data. It's shocking, to say the least. But research shows that credit card fraud, at least in the U.S., is actually declining. Unbelievable? Also, in incidents such as this security breach, only 2% of affected accounts experience fraudulent activity. Still, you can't just brush it off. To make doubly sure your account is safe (whether it's MasterCard, Visa, or American Express, since the latter two have been affected as well), follow this advice: Check your balance and recent transactions. You can do this online (if your issuing bank Internet facility allows you to view your credit card account) or through the phone (most banks have 24/7 phone-banking services). Monitor your credit card statements thoroughly, not just now but always.

Remember, this is only one way wherein your credit card account could be stolen. Identity thieves have so many tools and schemes, including phising and hacker attacks. And don't forget good old physical theft, which happened to us. The worst part is that Citibank Philippines forced us to pay the fraudulent transactions because the stolen card was reported after the transactions were made, pointing that this is part of their terms and conditions. We tried our best to contest it but they won't back down. In the U.S., the cardholder is liable only to the first $50. Here, you get screwed not just once (some thief use your card), but twice (your credit card company will force you to pay). There should be new legislation to protect consumers.

Are long-term negotiable certificates of deposit a good investment?

Well, for one, that's quite a mouthful. If you haven't seen the newspaper ads yet, these are investment instruments being offered by Banco de Oro (the first in the country) and Citibank. What is a long-term negotiable certificate of deposit (LTNCD) anyway? Let's break it down: Deposit: It's a bank deposit product. So it's insured by the PDIC (up to P250,000).

Certificate of Deposit: Better known as a CD. So it earns interest. And it's debt instrument offered by a bank. But CDs, as we commonly think of, are short-term and non-negotiable. This is a new animal. Negotiable: That means you can sell them before the maturity date at the current market price. Long-term: In this case, we're talking about 5 years and 1 day, making the interest income exempt from withholding tax, if it's kept that long.

So it's like a deposit in that a bank issues it and it is covered by the PDIC. Yet, it's also like a bond because it's negotiable and long-term and pays interest every quarter. In other words, it's a hybrid product. And it's marketed as a better alternative to government Treasury bills (T-bills) and to an ordinary bank deposit like a time deposit or a regular CD. Well, is it? Let's take a look: LTNCD vs. T-bills 1. Safety. T-bills, by nature, are safer because they are issued by the government. LTNCDs are issued by a bank, which is obviously not as safe as the government. However, they are covered by PDIC up to P250,000, so they are as safe at least up to that amount. And given the track record of the issuing banks, they are quite safe. 2. Affordability. It's not exactly true you need at least P200,000 to buy T-bills while you only need P100,000 to buy LTNCD. You can buy T-bills directly for P100,000. But you don't need that much to buy government securities. Retail Treasury Bond (RTBs) are available for as little as P5,000 (although some banks require at least P100,000). Alternatively, you can invest in fixed-income mutual funds (bond funds) for P10,000 or so, which invest in all types of government securities and corporate bonds (however, they are not insured). 3. Income. Indeed, LTNCDs have a premium over the 91-day T-bill. But look, we're comparing apples to avocados. LTNCDs are 5-year instruments; 91-day T-bills are, well, 91-day instruments. Wouldn't a long-term Treasury Bond be a better benchmark? Keeping LTNCDs for 5 years at a small premium over a 91-day T-bill doesn't sound like a great investment. 4. Liquidity. Okay, you can sell them before the maturity date. But you can do the same with government securities. 5. Taxes. Probably the only real advantage of LTNCDs is that, if you keep them for the entire period, your interest won't be subject to withholding tax. T-bills are subject to 20% withholding tax. However, if you sell your LTNCD before that, it's subject to the same 20% tax. LTNCD vs. Time Deposit 1. Safety. Both time deposits and LTNCDs are issued by a bank, and are covered by PDIC up to P250,000. No advantage there. 2. Affordability. You need just P1,000 to put money in a 90-day time deposit. 3. Income. The rate for a 91-day T-bill is about 5-6%, add a premium and you get a rough idea what to earn from an LTNCD. Here, they are superior to a time deposit of a typical commercial bank, which offers about 4-5% for a 364-day time deposit at P100,000. But some banks, particularly savings and rural banks (disclosure: we have a rural bank), offer higher yields, such as double your money in 5 or so years time deposit products (about 15% compounding). 4. Liquidity. You're stuck with a time deposit to earn the full interest. But if you choose a short-term time deposit, as little as a month, it's practically liquid.

5. Taxes. If you place money in a long-term time deposit (5 years and 1 day), just like the LTNCD, the interest is tax-free. For short-term time deposits, it's subject to 20% withholding tax, so the net interest may actually be comparable to a short-term time deposit. The verdict? If you're not keeping LTNCDs for 5 years, government securities like T-bills and RTBs are still safer and better investments (as LTNCDs won't be tax-free). If you're holding on to them for the entire maturity period, compare the interest rate that you will earn from the LTNCDs not with the rate of a 91-day T-bill but with a comparable 5-year Treasury Bond or Fixed Rate Treasury Note. Even if they're subject to the 20% withholding tax, the net interest rate would be higher. So, LTNCDs still lose against government securities. Compared to time deposits, LTNCDs may just have a comparable rate on a net basis to short-term time deposits, since they'll also be subject to withholding tax. And if you're looking at 5-year investments, you can find long-term time deposits (5 years) that offer much higher rates. So, are LTNCDs a bad idea? Well, I don't see distinct advantages. As a comparable substitute and for diversification purposes, maybe. But as a superior alternative, I think not.

10-year Treasury bonds at 12.75%

I heard 3-year T-bonds are fetching 11.4% and 5-year T-bonds at 12.14%. Not bad, right? Just to give a brief background, Treasury bills, better known as T-bills, are certificates of indebtedness issued by the government. IOUs, in other words. They're called T-bills if they're less than a year to maturity. But if they're more than one year, they're called Treasury bonds, or T-bonds. There are different kinds, such as Fixed Rate Treasury Notes or FXTN, and Retail Treasury Bonds or RTBs, which are available to retail investors like you and me. What's attractive about government bonds is that they're practically risk-free. Why? Because the government is committed to pay of its obligation. In fact, it can print money if it has to. That's why T-bills are used as a benchmark for other investments. I bought RTBs a few years ago with some four years into maturity. The rate was 14.25%. Very, very good. Between putting your money into time deposits and T-bills, you're better off with Tbills. And contrary to what most people think (including myself before), government bonds are liquid. You're not stuck with a 5-year FXTN for 5 years. You can liquidate it through the bank or securities dealer who sold it to you.

Now, are T-bills or T-bonds better than mutual funds? I did some number-crunching. Say 12% fixed rate for a government bond and an 8% average return for a bond mutual fund. In the mid term, 6 or 7 years, you'll make more in government bonds. In the long run, you'll earn more in a bond fund. The disparity increases the longer you hold on to the fund. So, if you put in P100,000 in a 5-year 12% FXTN, you'll receive an interest of P12,000 a year (you'll get the interest every quarter). By year 5, you have earned P60,000 on your P100,000 investment, or 12% a year. Well, actually, you'll receive less than that, as there's a 20% withholding tax, so effectively you'll earn only 9.6%. But let's keep it simple. Now, if you placed P100,000 in a bond fund, which averages 8% a year, by year 5, you would have earned some P54,000. Not bad. The difference is it's tax free. But there's a sales load for most mutual funds, usually 1.5%-2% on your investment, although that has a minor effect on your returns. But if it were a 10-year investment, say, investing in a 10-year FXTN or in another 5year FXTN versus holding on to the bond fund for 10 years, then you would have earned P120,000 on the FXTN but P136,000 on the bond fund, a P16,000 difference. Not much, but another 5 years and the difference balloons to P84,000! Now, if we use the 9.6% effective return, in just 3 years, you're better off with a bond fund. So why is that? Well, government bonds pay you straight interest. Bond funds compound, that is, the fund's earnings also make money. You make interest on the interest, to make it sound simple. So, the longer you hold on to your investment, the bigger the returns. That's the power of compounding. Are government bonds then not a good investment. Not exactly. If you want guaranteed income, this is a good way to go. But if you're building wealth, you're better off with a bond fund.

More on Treasury bonds

Consider this: P37 billion raised by the government on its first sale of retail treasury bonds. These are attractive to small investors as they're available for as little as P5,000, they have better yields than bank deposits, plus they're practically risk-free. The offering ended yesterday. You can imagine the appetite for government bonds, which raise debt yields. It was trying to raise just P10 billion on three- and five-year bonds, at a coupon rate of 11% and 11.75%, respectively, but ending up selling more than thrice its target. P37 billion has just been drained out of the system, which is now in the hands of the government for its own use. That means a less liquid market. Less cash supply means less money available for lending and therefore higher interest rates. At the secondary market, both debt papers rose 11.2289% and 12.0423% respectively.

So, yes, we're looking at higher interest rates for loans, but also higher returns for fixed income investments.

CAP expecting equity infusion

Troubled pre-need education market leader College Assurance Plan Philippines, Inc. (CAP) announced it's expecting a $100 million equity infusion from foreign investors by month end. CAP had a P17 billion variance in its trust assets last year. It only had P8 billion in trust assets managed by trustee banks versus an actuarial reserve liability (ARL) of P25 billion. That means CAP doesn't enough money set aside to service future needs of its planholders, such that when it's time their plans mature, the company won't have enough to pay the proceeds for the tuition fees of all the plans. How did that happen? Well, CAP didn't do as good a job in projecting the growth in tuition costs, interest rates, and inflation. The other reason is the company got overexposed in poor real estate investments. The SEC has approved CAP's asset-building program. And it's to our best interest -the pre-need industry and the general public -- that CAP recovers. Now, you know why pre-need companies now sell non-traditional educational plans. Before, they sold plans that paid the schools directly, such that you as a planholder is guaranteed your kid's tuition gets paid, no matter how much it is. There are restrictions of course as you had to make sure your child gets accepted in the school picked in the plan. Nowadays, pre-need companies will pay you the planholder directly the proceeds from the plan. The good thing is that there are practically no restrictions. It doesn't matter which school your child attends. In fact, when the plan matures, and you decide to use the proceeds for something else, you're free to do so. On the downside, you have to project the tuition costs fairly accurately, or you end up having to cough up more money when it's time to enroll. Remember, you're not guaranteed full coverage of the actual tuition, unlike before. In other words, educational plans today are just savings programs packaged as educational plans. So, are these educational plans still a good investment? Personally, I think so. Although I did a computation that showed you'll be slightly ahead with a mutual fund, there are advantages to a pre-need plan. It's forced savings. It's like paying a bill. Can you diligently set aside funds by yourself? Doubtful. If you do have that discipline, you can consider that route. It's guaranteed. That is, you'll get what you paid for. If you come up with your own savings program, the returns are not guaranteed. Plus, many educational plans have insurance attachments, such that whatever happens to you during the paying period, the proceeds will get paid. However, if you already have sufficient insurance coverage, this may not matter as much.

What's my problem with educational plans? They're expensive, particularly if you're paying for grade school plans. Why? Because they attach extras like graduation gifts and insurance riders. However, you can use the lumpsum graduation gift to pay for either the entire high school or the entire college tuition costs. Whatever you decide, the CAP situation only stresses the fact that it's important which company you entrust your money to. Of course, who would have thought it can happen to CAP.

iSilver, away!
International Exchange Bank (iBank), recently launched iFund Silver, a pesodenominated unit fixed-income investment trust fund. These funds, also known as common trust funds (CTFs), are just like mutual funds -pooled funds from various investors that are then placed in various fixed-income instruments such as government bonds and commercial papers, or stocks, or a combination, depending on the investment objective of the fund. Investors also buy and sell at the net asset value (NAV) per unit for the day. The difference is, they buy units in the fund. In a mutual fund, which is a stand-alone company, investors buy shares in the company. Another difference is a mutual fund is regulated by the SEC and is required to submit quarterly and annual reports to the SEC and to its investors. CTFs are under the trust department of a bank, which is regulated by the Central Bank. One key difference is that CTFs are subject to the reserve requirements imposed by the BSP, so not all your money can be invested. Just by that, expect lower returns compared to similar mutual funds. iFund Silver requires a minimum initial investment amount of P100,000, with a minimum holding period of 90 days. Not bad. Mutual funds usually require a oneyear holding period if you want to avoid the 1% exit fee. Would I recommend CTFs over mutual funds? Well, I see more advantages for a mutual fund. Besides, there's greater transparency. Just check out Business World for the NAV/unit and average returns, and you'll see at a glance how your mutual fund performed against competitors. For a CTF, you have to call the bank to find out (and call other banks to compare returns). But don't let this stop you from considering CTFs. There are more CTFs available in the market than mutual funds. You might want to consider them as an alternative to 90-day time deposits as they'll likely yield higher returns. So if you have short-term goals or if you're building a 6-month emergency fund, this may be a good place to park your money. Ask your bank about them.

Pending finance bills and how they affect you

The Arroyo government is reviving several bills on the capital markets which were not passed by the previous Congress because the morons were busy with politics. Here are some you need to know about: The Pre-need Plan Code of the Philippines. You know what happened to CAP and other pre-need companies. This bill provides protection for pre-need investors and planholders. The PERA bill. This is like the 401(k) in the US, the main retirement vehicle among Americans. It's a savings and retirement plan for employees, which allows them to invest in bonds and equities in a tax-deferred program. The Lending Investors bill. This will regulate activities of lending investors, to provide protection to borrowers who can be victimized with very high rates. The Revised Investment Company Bill. This will help the further development of the local mutual fund industry by lifting certain restrictions on the operations of investment companies. Hopefully, this will spur the creation of more mutual funds to give Filipino investors more options. These are important to you and me. Right now, we only have few alternatives when it comes to investing our money. We don't have the tax advantages of a 401(k). Many companies still administer costly traditional defined benefit plans. And a more developed mutual fund industry means more competition, which may lead to lower or even zero sales charges and management fees. Plus, we need protection from financial services companies, including those that sell pre-need plans, loans, credit cards, and insurance. E-mail or fax your Congressman and our senators.

Home Guaranty Corp. to issue zero-coupon bonds

State-run Home Guaranty Corp. (HGC) is planning to issue zero coupon bonds to raise P10 billion later this year. Zero coupon bonds do not pay periodic interest. Instead, you buy the bonds at a deep discount and you receive the face value at maturity. It's another investment alternative to look at. Another piece of good news. HGC is intent on helping develop a secondary mortgage market in the country. That means new investment instruments like mortgagebacked securities can be introduced, giving more options to investors.

Mutual fund laggard

It's not surprising that the Philippines lags behind other Asian countries when it comes to the mutual fund industry. According to the AIM study, our assets under management (AUM) as of end of 2003 is a mere $792 million (as of end of March 2004, it has gone up to $1 billion), compared to Indonesia, which has $8 billion, already considered one of the smallest. Worse, China's mutual fund industry, just 6 years old, has $20 billion AUM. To think we started in the 1950s (though it only took off in the early nineties). Here's how we fare: 1. 2. 3. 4. 5. 6. 7. 8. 9. Japan - $349 billion with 2,617 funds South Korea - $250 billion with 6,736 funds Hong Kong - $250 billion with 963 funds Taiwan - $76 billion with 401 funds China - $20 billion with 110 funds Malaysia - $18 billion with 217 funds Thailand - $11 billion with 333 funds Indonesia - $8 billion with 186 funds Philippines - $792 million with 21 funds

Why are we such laggards? Well, for one, the requirements to put up an investment company are quite prohibitive (at least P50 million in capital), opening the business to just a few players. There's not much public education on and promotion of mutual funds. And, frankly, Filipinos have a very low savings rate. That's a pity as mutual funds offer better rates than most savings and time deposits offered by commercial banks. [Disclosure: I'm a registered mutual fund agent, but the facts speak for themselves.] You can check the rates of returns of available mutual funds and find bond funds that return more than 8% and equity funds that return more than 10%. So, seriously consider mutual funds as part of your investment portfolio. It's the primary investment vehicle for many regular folks in the U.S. and other countries. And it is where we put most of our long-term savings.

How to kill the non-life insurance industry

Many have criticized the SEC for somehow partly causing the current woes of CAP and Pacific Plans after changing the ARL rules for the pre-need industry (of course, these companies are also at fault). Now, the Insurance Commission released a proposed circular that requires non-life insurance companies to triple their minimum paid-up capital from P50 million to P150 million by yearend (!!!), then double to P300 million by the end of 2006 (!!). An industry association, aghast over the announcement, noted that some 86 of the 96 non-life insurance companies are in danger of folding up as only 10 are capitalized over P300 million. Another 8 are capitalized over P150 million. But almost

half have only some P50 million in capital. Of course, the idea is to strengthen the industry, but such a drastic measure will only weaken it. Having to triple capital by P100 million in about six months is close to impossible. Mergers and acquisitions take time. The best way is to do the transition incrementally at a gradual pace. Otherwise, it will certainly cause policyholders to panic and lose faith in the system. So, if you're a holder of a non-life insurance policy, such as fire, car, residential, etc., you better check how your insurance company is holding up. The advantage in this case is that unlike life insurance policies and pre-need plans, you're not tied up for years. Non-life insurance is usually renewed every year, so if you feel your insurance company might be in trouble if this circular becomes effective (it's still a proposal so don't panic), don't cancel your policy yet. But do start to shop around particularly with the better-capitalized companies so you can transfer your business before your current policy expires.

Mercury Drug-Citibank Card

Here's another co-branded card: the Mercury Drug-Citibank Card. As you know, cobranded cards are another twist in the credit card business. Credit card companies partner with certain institutions, throw in some special features, and promote the card to a more niche market segment. Equitable Card has done that with MTV. UnionBank has done that with Slimmers World and The Pan Pacific. HSBC has done that with Philippine Airlines. And, of course, Citibank has done that with Shell and Cathay Pacific. Now, the latest co-branded product is with Mercury Drug, which makes a lot of sense. And from the looks of it, it seems like a compelling offer: you get a 2% rebate (as a credit on your card bill) on all Mercury Drug purchases and 0.5% for all else (with a cap of P5,000 for the latter) you get special discounts from the likes of Healthway (free annual physical exams plus generous discounts, not bad if you don't have an existing health card), Lifeline Arrows (free emergency quick response service), Medical City (10% off on in-patient bills), Fitness First (waived joining fee and 25% off on monthly dues), and Asian Eye Institute (25% off on LASIK surgery) you get the usual Citibank features like PayLite installment plan, One Bill, worldwide acceptance, etc. first year annual fee waived (for new Citibank cardholders)

Okay, that's the good part. Here's what you need to consider: if you have an existing Mercury Drug "Suki" card, which gives you a 0.5% rebate, getting the co-branded Citibank card gives you just an extra 1.5% (the 0.5% is already included in the total 2%)

rebates make sense if you make a lot of purchases at the partner institution, in this case Mercury Drug, such that your total rebates are much more than what you'll spend on the annual fee (the first year fee is waived if you haven't had a Citibank card for the last 6 months, in which case, you're already ahead) there's typically no reward program for co-branded cards with rebates (the rebate program is already your reward program) Citibank is quite notorious for high fees (3.5% monthly interest rate) and aggressiveness (in pushing their cards, approving applications, and collecting) we have a bad experience with Citibank on disputed fraudulent transactions due to a stolen card (unfortunately, Citibank won't budge; it's a pity it treats long-time loyal customers in this manner) if you have an existing health card with an HMO through your employer or one that you bought for yourself, the Healthway and Medical City promos lose their relevance, though I admit the other give-aways and discounts are appealing

Now, before you think about applying, remember, if you already have 2-3 cards, resist the temptation. Cancel one if you really want this card. And make sure you do need it, i.e. the special features add real value to you. Otherwise, if you don't spend too much at Mercury Drug, have an HMO card already, have emergency services via your car insurance or motoring club, have gym membership, want a rewards program more, want a lower interest rate, or otherwise don't see enough value, then ignore this product altogether.

Chinatrust Bash Your Balance Loan

You've probably seen Chinatrust's promo on newspapers called "Bash Your Balance Loan". It's an interesting and relevant twist on the usual personal loan. The concept is to sell this loan to employees burdened with huge credit card debt. The idea is Chinatrust will lend from P30,000 to as much as P1 million, which will be paid off in 24 months for a much lower rate. The bank will even pay half of the first month's amortization. The promo is only until June 30, 2005. It sounds like a good idea. Except: isn't there such a thing as a balance transfer? Most credit card companies offer this. If you're burdened with huge credit card debt with Card Company A, you can transfer the balance to transfer to Card Company B, which will lend you the money to pay off the debt. In turn, you will have to pay off your transferred balance at a fixed period for a much lower rate. Sounds familiar? The thing is, Chinatrust's add-on rate is 1.59% a month. Sure, it is lower than the regular add-on rate of 2.75% to 3.25% that credit card companies charge. But the same credit card companies have balance transfer offers of as little as 0.99% for an 12-month period, as in the case of HSBC. Some even offer 0% interest (but with a 5%-7.5% processing fee) for a 3- to 6-month period, like Equitable Card. Okay, we're not exactly comparing apples to apples. Chinatrust's fixed period is 24 months, which means, of course, a higher rate. But HSBC's 12 months, at 0.99%, is

still a lot lower. Its 18-month option takes the rate to 1.25%. If it has a 24-month option (which it doesn't), then they're probably on equal footing. In the case of Equitable, at 24 months, the rate goes up to 1.7%, making it more expensive than Chinatrust's 1.59%. But, check out Citibank's 24-month balance transfer add-on rate (click on the Statement of Certain Credit Card Fees and Charges link), which is just 1.5%. Not bad, eh? I'm not saying Chinatrust's promo is no good. It could be, particularly if you're carrying a huge debt and you need a much longer period (like Chinatrust's 24 months) to be able to afford the monthly amortization. Otherwise, it makes more sense to pay it off quickly and just get charged a much lower rate. But look also at alternatives, like balance transfer promos of credit card companies that charge even lower for a 24-month period. Consider also other possible hidden charges like processing fees. Make sure as well that you're comparing similarlydefined interest rates (add-on versus effective). Lastly, remember: shop around for rates and always ask, ask, ask!

Who needs pre-need?

The pre-need industry has taken a beating recently, with primarily giant education plan providers like CAP and Pacific Plans getting into trouble. With all that's happening, are pre-need products still a wise and safe investment? My answer: a qualified yes [full disclosure: I am connected with two pre-need companies, both not on the SEC watchlist by the way]. Keep in mind that pre-need products are really just savings plans. Pre-need companies make different variations of basically the same thing: you invest a fixed amount of money for a number of years, usually five, and after a determined number of years, you will get an amount over and above your total investment. What got some pre-need companies into trouble was the amount promised. I'm sure you all know what went wrong: traditional educational plans promised to pay whatever the tuition was when it was time your kid enters college. Before, tuition was regulated -- it cannot increase beyond 10%. Then, the industry became deregulated, and it became a free for all. The obvious result: pre-need companies, particularly those selling traditional educational plans, could not keep up. So, should you stay away from pre-need products? Not necessarily. Remember: other pre-need products such as pension and memorial are not affected, because they promise a fixed, pre-determined amount, not an open-ended one. But what about those selling educational plans? Businessworld has this excellent article that enumerates what you need to watch out for. You can also read the Money Minute primer on pre-need products. 1. Make sure the company is really authorized to sell pre-need plans.

"...the initial step for a prospective client is to ask the Securities and Exchange Commission (SEC) whether or not the company has a dealer's license." That's easy enough. You can go to the SEC website and check the directory of preneed companies. 2. Check if the company is financially healthy, if its directors and officers are wellqualified, and if it has a good track record. "You have to look at the financial statement of the company." Specifically, look at profitability, capitalization, and liquidity. The pre-need company should be able to provide you with its financial statements. And your trusty old accounting textbook will help you with the formulas for financial ratios. 3. Compute the ratio of its trust fund to actuarial reserve liability (ARL). "Ideally, the ratio of trust fund to ARL should be 1:1. This indicates a pre-need's ability to pay the benefits expected by each and every plan holder." The trust fund, which is actually managed by a third-party trust department of a commercial bank, is invested in various instruments that will allow it to increase in value in order to cover the pre-need company's future obligations to its planholders. The ARL represents the company's obligations. The trust fund, then, should be more than 1, meaning it should be able to more that cover the ARL. But it's also important to check where the trust fund is invested. How much is invested in equities? In real estate? In fixed-income securities? Now, back to my answer: a qualified yes. Why qualified? I have some reservations about educational plans. They are quite expensive for one thing, especially if it's for grade school and high school, because those plans need a shorter period of time for your investment to grow. I think the cost of open-ended college plans, on the other hand, are more reasonable. So you may want to go with a college pre-need plan but consider other ways to fund your kid's early education. On the other hand, you may also want to rethink paying for college through an educational plan. While the cost is significantly lower compared to plans for grade school and high school, I am a bit skeptical nevertheless. That's because you can set aside a much smaller amount to come up with the guaranteed annual payouts that these plans offer. What makes them more expensive (in this case relative to a do-it-yourself savings plan) is that they promise a hefty graduation gift at the end of the plan. You pay for that gift. It's not a freebie generously promised by the pre-need company. They're also expensive because they include commissions to the agent who sold the plan to you and a portion that will help pay for the company's overhead expenses, and then some. Sure, you pay commissions or fees for other investments, but commissions for pre-need plans are much more generous.

But they're not all that bad. What's good about these plans is that they force you to save. The disincentive to miss a payment is strong (you don't get anything). So if you have trouble setting aside savings diligently, this is one way to go.

They may not be able to pay for all the future costs of a college education (the plan you chose may not be worth as much when you see the actual tuition bill, plus there are other expenses like dorm fees, textbooks, supplies, and junior's weekly allowance to pay for), but at least, a guaranteed payout assures you that you'll get something (I know, you might be too cynical to believe you will get anything at all, but that's where doing your homework instead of relying on an agent's rosy promises comes in).

So, you don't have to rule out educational plans altogether. It might be a good idea to augment one with a do-it-yourself savings plan. But if you're very disciplined with savings, and you invest them wisely, it's very possible you will end up earning more just by doing your own thing. One of these days, I'll come up with actual numbers to demostrate this (and hopefully prove my point more convincingly). In the meantime, think about it. The days when securing your child's future meant paying off a traditional educational plan are over.

10 ways to save on gas

One of the things that worries me nowadays is the ever-increasing cost of gas. With spiralling world crude prices and the impending effect of the expanded VAT, we'll be spending a bigger chunk of our budget on gas. Already, our gas consumption has practically doubled. My P500 used to go a long way, now it just buys me about half the mileage. So if you're a motorist like me, what can you do to save on gas? Here are 10 ways experts say can cut your gas consumption and stretch your money farther: 1. Don't be idle. I admit, I often let the engine run, with the airconditioning on, while waiting for my wife to get down from her office. Well, that's bad. It's actually more wasteful than restarting the engine. So, if you have to wait more than a minute, open the car windows and turn the engine off. In the same way, make your warm-ups short. Half a minute is long enough, so drive off. 2. Don't be fast and furious. Don't rev up your engine, even if you think you're Vin Diesel. And be gentle. However, with the kind of traffic -- and crazy bus, jeepney, and cab drivers -- we have, we end up slamming the brakes and accelerating too fast to catch up for lost time. But hard stops and fast starts waste fuel. So keep enough distance and don't tailgate, and keep your cool. Think of your gas and brake pedals like you're stepping on eggs -- accelerate and brake gently. Drive at a steady speed, fast enough but not too fast (I'm sure you can sense if you're working your engine too hard). But don't drive too slow either. And if you're driving an automatic, switch to overdrive when driving fast. If you're driving a manual shift car, switch to high gear when driving fast. And place the gear on neutral when at a stand still (instead of just stepping on your brake pedal). Driving right can improve fuel consumption by 5 to 10 percent. 3. Gas up properly.

For one, be more conscious which gas station to patronize. The difference maybe just a few centavos per liter, but it adds up. I like Petron because pump prices are usually a bit lower than the Shell and Caltex. And this is new to me: buy gas at cooler hours, like early morning or at night, to reduce gas evaporation. Also, avoid buying higher octane gas than necessary. And try to fill 'er up to avoid water condensation (though some advise against this, as it adds to the weight). But don't overfill the tank to prevent evaporation. 4. Don't be a drag. If you're like me, your car can sometimes look like a trailer, with all sorts of stuff dumped in the backseat or trunk. Take out stuff you don't need. Every extra 100 pounds of excess weight reduces fuel economy by 1 to 2 percent. A joke: lose weight. 5. Use the A/C wisely. If you're driving in the countryside or the highway, you're not saving gas by shutting down the air condition and rolling down the windows for fresh air (if you're in Tagaytay, not EDSA). You're actually using up as much as 10 percent more gas due to air drag. But if traffic is stop-and-go, you can do that to save money. On second thought, you don't want to die from pollution or heat stroke. But early morning or at night, when it's cooler, and if traffic is light, you can switch it off and roll down your windows just a bit to let outside air in, without causing too much drag. Consider switching it off also when you're quite near your destination. And when you park, find a shaded area or get a windshield shade. That way, you don't have to turn the A/C at full blast. And if it's too hot inside, a greater amount of evaporative emissions take place. 6. Take care of your tires. Make sure your tires are properly inflated, otherwise it will take your engine more effort and energy to run. It's costly too, adding six percent to fuel consumption for every pound the tire is underinflated. And make sure they're properly aligned. When you have to replace your tires, consider steel-belted tires radial tires, which can increase gas mileage up to 10%. 7. Tune up. Get a regular tune-up (especially if your car is not exactly spanking brand new), as recommended by your car manufacturer (check the manual). That includes changing your oil and filters regularly, to keep the engine running smoothly. Poorly tuned engines increase fuel consumption by 10 to 20 percent. 8. Plan your trips. It's obvious, but you have to start planning your trips and your routes better. The less often you have to drive and the shorter the distance, the better. If you can join a car pool, do so. If the distance is just short, try walking. And if you can, avoid rush hour traffic by leaving earlier or later. You save gas, you save time, and it will keep you from going insane. And if your work allows you to telecommute a few days a week, that would be perfect. 9. Consider a more fuel-efficient car next time. If you're buying a new car, remember that automatic transmissions burn more fuel than manual ones. SUVs are obviously gas-guzzlers. Larger enginesburn more gas. 10. Reconsider buying energy-saving devices.

You've probably been tempted like me to buy energy-saving devices you've seen or read about, like the Khaos Super Turbo Charger. But do a little more research or ask from people who've bought devices like this. This blog entry makes a convincing case against it. Keeping these tips in mind should go a long way in saving you money and cutting your gas consumption.