Choosing the best financial product

Different financial products are readily available in the market and since there are so many options, it made difficulties for us to choose the best one to a point that we become paralyzed by it and end up relying on the sales agent’s recommendation which might not always be suitable for us.

People who have bought these recommendations then ask other people who bought the same product to affirm them which may be good at some point but in reality, the financial product they’ve bought are not what they really needed.

To avoid this, we must carefully asses ourselves so that we can match the best product available in the market to our specific needs.

Choosing the best financial product could be daunting but actually it is really simple.

Let me share you the principle that I use on how to choose the best financial product.

The Principle of Suitability

The reason why Personal Finance is called personal finance is because it is ‘PERSONAL‘ meaning it is unique. All of us are unique and that’s why financial products should match that uniqueness within us.

The key will be self awareness, knowing one’s self is the key to filter what products we should choose that would best benefit our interests.

Let me give you an example

Juan and Pedro are both single. They have the same job, the same salary and they live on the same house. They earn 20,000 pesos every month and they share their expenses at home. Both of them manages to save 5000 pesos per month and they put it in each of their own piggy bank so that they could buy themselves something they want in the future.

One day a banker met with them and offered them to invest and grow their money. The banker offered them two options:

Option 1 : Invest 5000 pesos per month at an interest rate of 15% compounded annually and can be withdrawn anytime.

Option 2 : Invest 5000 pesos per month at an interest rate of 10% compounded annually and can only be withdrawn after 10 years.

Both Juan and Pedro thought about it very carefully.

Pedro chose option 1 while Juan chose option 2.

Now my question is, who do you think chose the best financial product? Is it Juan or is it Pedro? Who ended up having more money?

If we based our answer mathematically the clear winner would be Pedro. It is very obvious that option 1 is better than the other. With 15% interest rate and no liquidity issue Pedro would end up having more money.

But let me continue my story.

Juan and Pedro are both spenders. When they see a big amount of money they are always tempted to spend it.

They save 5000 pesos per month and when it reaches a big amount, they will use it all by buying something or using it to travel somewhere.

Every year they both check their investments and when Pedro checked his investments on the first year, it grew by 15% just like what the banker has told him. Same with Juan, his investments grew by 10% in the first year.

When they knew that their investments grew, they wanted to use it. Pedro withdrawn his investments so that he could travel while Juan can’t because he can only withdraw after 10 years.

Pedro went on a travel while poor Juan wasn’t able to withdraw.

Every year this happens, Pedro enjoys his money after every year while poor Juan can’t withdraw until the 10th year.

When the 10th year came. Both of them checked their investments and  as usual Pedro is very happy and excited to withdraw his money while Juan was shocked with what he saw. His money grew to a million pesos while Pedro only have 69000 pesos on that year.

The total money of Pedro for ten years was 690,000 pesos because he withdraws and travels every year while Juan, at the end of the 10th year have grown his investments to 1,051,870 pesos.

So who ended up with more money? Clearly Juan did but who is more happy? We cannot tell because both of them are really happy.

Pedro….

Pedro chose option 1 because he wants to explore the world and travel, that was his dream. That is why every year he withdraws his money and use it as a travel fund. He was very happy because the investment vehicle made his dreams come true. He didn’t regret of having less money in the end because he know that no amount of money could exchange with his satisfaction on realizing his dreams of travelling.

Juan….

Juan chose option 2 because he knows that he is a spender like Pedro but travelling is not that of a big deal to him. What he really wanted is to buy a house and option 2 made him stick with that goal.

If he chose option 1 then it will be faster for him to buy a house but he could have ended up travelling with Pedro every year and might not be able to stick with his main goal.

He withdrawn all of his money after the 10th year and bought his dream house. Smart Juan!

Wrap Up

When choosing the best financial product your best metric is your knowledge on how much you know of who you truly are and what you want in life. Often times people look only at the monetary value of what the financial product could give without looking at the whole picture.

The principle of suitability tells us that everyone of us is unique and the financial product that we will buy should suit well with our uniqueness.

Know how unique you are in your finances, analyze your spending habits, financial behaviors, goals in life, and what really makes you happy and secured.

The more you know of yourself the easier for you to choose the best suited financial product for you that you wouldn’t regret. (ever!)

 

After all, money is meaningless if we aren’t happy and full of regrets in life.


Photo Credits : Jeremy Brooks

 

Calculate how much you need to save and invest for you to achieve your goals

Do you know how much you need to save and invest for your dream travel? What about for your dream car? A dream house? For your future child’s education? or even for your retirement. Let me share to you this simple calculator of mine and see the numbers.

Below is a simple calculator (in excel format) I made to show you how much can a 1000 peso monthly saving and investing grow in years. As you can see at the 20th year, by just saving and investing 1000 pesos monthly on an investment instrument that has an average annual rate of 12% your money have grown from 240,000 pesos (total money invested) to 968,385 pesos(ending balance).

(If you’re viewing this on your mobile, the embedded calculator might not show properly. You can view it better on a bigger screen.)

Now it’s your turn to use the calculator above. Let me just walk you through on how to use it (personally).

You can only change the values of the colored numbers, do not change the numbers that are not colored because it is the calculated data. (if you do, just reload the browser).

Starting Amount of savings = this is the amount you will save monthly

Startup Fund = if you have let say 10,000 pesos to start as an initial investment then put an amount in this cell

Annual return on investments = this is the rate you will use depending on where you will invest your savings. Just put your desired rate

  • Equity Fund (mutual fund/UITF) – In the last 10 years of the PSE index, the average returns is around 12-13%.
  • Bonds – If you want to invest in bonds, the average annual returns is around 5%
  • Time Deposits/Money market fund – this is around 1.25%

Example : For the first 10 years you want to put the money on equity then just assume a 12% rate and put it for year 1-5 and year 6-10. Then on the 11th year you transferred it to bonds, so now change the rate to 5% on the year 11-15 and so on

Annual Increase in Savings = this is the rate of increasing your savings. For example you wanted to save 1,000 pesos monthly if you put 50% in this. On the 2nd year, you will now save 1,500 pesos monthly then 2,250 pesos monthly on the 3rd and so on.

Now let’s apply it in your goals.

Let say you wanted to get married 5 years from now, and you wanted a nice wedding. Upon researching, you came up with and an estimated amount of 500,000 pesos for that wedding. By using the calculator you need to come up with a 500,000 pesos ending balance on the 5th year.

So how do you do that? Change the values on the colored numbers depending on your capability to follow it.

 

I’ll tell you how I can achieve that.(try to put the values in the calculator above)

  • Since this wedding would be in five years, it will be more risky to invest on equity funds, so I choose to invest in bonds and change the annual return on investments to 5%.
  • I happen to have 20,000 pesos extra so I used it as my starter fund in the investment.
  • I can save 6,000 pesos monthly for it, and increase it annually by 10%.
  • After changing the values, the 5th year ending balance is 530,879 pesos with an actual return of 71,312 pesos.
  • This means that if I do this, to save and invest for the next 5 years with these values, there is a very high chance that I would have 500,000 pesos for my wedding. Thus achieving a financial goal in my life.

Wrap Up

I hope that I have explained it clearly and precise on how to use this calculator of mine. The heart of this tool is to give a clear and realistic approach on what to do in achieving our financial goals.

When I used it in my financial plan, it helped me on how to divide my savings for my financial goals (short term and long term).

I hope that this will help you too. If you want the excel file itself, just go to my contact page and drop me a message.

If you have any questions, clarifications or suggestions, please do comment below this post. Please do subscribe as well to my blog by entering you email below this post. You can also find me on Facebook @thefrugalworker (don’t forget to like! thanks)

Alright see you on the next post 🙂

P.S. : There is a retirement fund calculator that you can play with as well in the excel file I embedded


 

Photo Credits : lincolnblues

 

Why paying yourself first will make you rich

If you have been reading personal finance books or blogs then this principle of paying yourself first might not be that new to you. For those who might have heard this the first time then let me tell you what it really means to pay yourself first. Paying yourself first is very simple, it means that when you receive your income, you save a portion of it first before any spending will happen.

It’s quite funny how some people misinterpret this principle. Like for example, I received my income today and because of that I am so happy and would pay myself first by eating out in my favorite pizza parlor Shakey’s. In my example, I didn’t pay myself first, I paid Shakey’s first! Remember that rewarding ourselves is different from paying ourselves.

How to do it?

Well the principle is quite easy but doing it will be hard, it would definitely require us a bit of sacrifice and as a young professional, I would recommend atleast  20% of our income should be paid to ourselves first. If that is too big for you then pay yourself first atleast 10%. of your income.

There are two ways of making this work it’s either we increase our income or cut some of our spending. If you would ask me I would do both!

Increasing our income

If you are good in something like photography, playing an instrument, design, film editing, autocad, web design etc. then consider some freelancing. There are lots of websites out there where you can offer your services and earn a good amount of extra income.

Your sacrifice here will be your time. More work means more of your time, but why bother? You are still young, you are investing on mastering your craft/skill, besides you wont be good in something if you don’t like to do it, much as well earn from it right?

Cutting some spending

I guess this is the more crucial one, this requires more sacrifice but it doesn’t mean that we have to deprive ourselves too much by not eating well, or cutting cost on everything. It only means that we should live our life with balance. We should live below our means but within our needs. Consider cutting some cost first on vices or hobbies like smoking, drinking, coffee-ing, gambling, unnecessary shopping, playing sports that costs money or any unnecessary spending.

overspender

What to do with the money?

Well, first of all I’ve forgot to say that when paying yourself first, I do recommend  that you put it in a savings account, preferably a passbook account without an ATM card so you can’t easily be tempted to use it. You can read here on how to do it effectively.

Okay so you have been developing your behavior and have the habit already of paying yourself first. Now what would you do with the money you’ve been saving?

Only use the money if there is a true emergency(A 70% discount sale is not an emergency) and use the money on opportunities that will grow your money, either a business or an investment instrument.

Why you have to pay yourself first?

We have to pay ourselves first because it will be the start of our journey in becoming rich. I like what the financial guru Dave Ramsey said

Winning at money is 80% behavior and 20% head knowledge

Paying ourselves first will develop our behavior towards money, it will create a habit in us to consistently save for our future. Once the habit has been created it will soon be our character which will be the roots of becoming rich.

I’ve have always believed that becoming rich starts with our values towards money, yes it would be hard to become rich but if  we have a good foundation in our values towards money then it would be easier to win at money.

I hope that you will start paying yourself first as soon as possible. As a young professional we have the advantage of time and as early as now, start developing that behavior so that you will more likely win at money in the future.

I hope that this article have helped you in some way, if it did please do subscribe to my blog by entering your email address below to get free updates on personal finance and investing.

You can also find me on facebook  @thefrugalworker

see you on the next post!


Photo Credits :401(K) 2012, Rex

 

The Frugal Worker : On budgeting effectively

It is so nice to have a good amount of money in my bank account. Most of the time, it is only on payday. The feeling when payday comes? Fantastic! because I got paid for what I’ve worked for and the immediate response to that is to reward myself. I don’t fancy stuffs but I really like eating out.

There is nothing wrong with rewarding myself (but it is so easy to be enticed by that idea that it could affect the way I think). Since I’ve always been telling myself that “there is nothing wrong with rewarding myself because I worked hard for it”, I haven’t notice that I’ve rewarded myself too much and because of that I have to wait again for those special dates of the month for me to receive my salary and then continues with the cycle.

If this cycle is familiar to you then this is a clear example on poor budgeting or should we say no budgeting at all. This was a problem for me before when I just started working. I was enjoying my income too much that I forgot to save money for that cutoff and promised to save double the next time(still didn’t happen). I still saved money but without a goal in mind and not on a regular basis. That was my lifestyle until someone from church asked me about my retirement, and it became a turning point for me. You can read why my finances changed in two years in Fitz Villafuerte’s blog, Ready to be Rich.

Budget

As young professionals we get paid once or twice a month, some get it weekly, and for freelancers and business people it is more dependent on clients.

The more frequent we receive our income, the more manageable it will be. Why? because it is easier to budget for only 15 days than for 30 days. Though it was an obvious answer, I want to point out what hinders us in saving and budgeting money effectively. They are called emotions.

The longer the time you will hold your money, the more vulnerable you will be to spending. I’ve experienced this when I just started working. I receive my income twice a month and I have to wait 15 days before the next cutoff. When payday came, I was spending like crazy and a week after cutoff, my wallet was already empty. I thought I still have money and I just realized that it is so hard to make my income last for 15 days. The reason was, I am always tempted to eat out and to try new restaurants.

It came to a point where I realized it shouldn’t be that way because there are things called emergencies and I learned it the hard way, I did get sick and I have nothing to spend on checkups and medicines. That is the reason I decided to deal with it and be proactive about it.

young professional

Here’s a practical tip I have learned and how to do budgeting effectively

Give your money specific purposes

Money has a purpose and that is to serve us, not us serving money. When I learned this, It was the time I have to be the boss of my own money. As a regular employee I already have an idea of the fixed amount of money that I will receive on payday. Knowing this gives me the advantage to make a budget plan.

I learned about the 10-20-70 principle on budgeting, the principle tells us that we should always allot for savings first before expenses. It was a great idea but it didn’t workout for me at first because my income was not that big. So, I have adapted it to my income and have a budget of 10-10-80. 10% to tithes, 10% savings, and 80% for expenses.

Telling our money where to go means that we are in control of our financial lives, we should know what amount comes in and what comes out, and  make sure that what comes in is greater than what comes out.

It limits us from overspending and help us avoid sudden debts. You can start doing a budget plan on excel and it may look like this.

Date Amount Tithe Savings Budget left Food Utilities Laundry and Toiletries Allowance Extra for Wants and other stuffs, if not used put to savings and investments
November 09, 2013 10000 1000 1000 8000 2000 500 300 2500 2700
November 25, 2013 11200 1120 1120 8960 2000 500 300 2500 3660
December 10, 2013 10000 1000 1000 8000 2000 500 300 2500 2700
December 25, 2013 12000 1200 1200 9600 2000 500 300 2500 4300
January 10, 2014 10000 1000 1000 8000 2000 500 300 2500 2700
January 25, 2014 10900 1090 1090 8720 2000 500 300 2500 2420

For more insights on the allowance part you may want to read this.

Have an accountability partner

Accountability Partner

To effectively follow this, have an accountability partner. Have someone that will also know what you do with your money, I know it’s a bit personal but it is really effective when you have to report to someone.

An accountability partner is a person who is close to you and have the courage to correct you(still give him/her permission to correct you) if you are not doing what is intended to be done.  Have an agreement with him.

Create the budget plan, show it to your partner and regularly check your cashflows(atleast monthly) so that you will always be on plan(Trust me, it is so hard to follow the budget plan alone!).

Just a reminder, this doesn’t mean that your partner would tell you what to do with your money(this might also be new to him!), he is just there to intervene you when you are tempted to not stick to your budget plan.

Preferably, your parents or your spouse should be that partner because they see you much often, they eat and drink with you, and they see how you spend your money.

“Don’t tell me where your priorities are. Show me where you spend your money and I’ll tell you what they are.” – James W. Frick

If you think that this was helpful to you in anyway please do subscribe to my blog by entering your email below so that you’ll get free updates like this on personal finance and investing.

You can also see me on facebook @thefrugalworker

See you on the next post! 🙂


Photo Credits : MC QuinnMoyan Brennmer chau

 

The price and prize of saving money for young professionals

Saving money comes with a price and it will depend on how we prioritize it in our financial lives. As young professionals without much of responsibilities in life, we have the advantage to save more but also the temptation to spend as well. So which has a stronger force in you?

It is a simple mathematical equation, income = savings + expenses. If you want to save more then you have to spend less and if you want to spend less then you have to save more.

So which comes first? Saving or Spending?

For me, saving should be a priority. We have to automate our savings first before spending. If you agree with me on that, there is a catch though.

The Price

Saving money for young professionals  has a price and that price might be costly for most of us.

Why? Because we love hanging out with friends and eating out, we like to watch the movies, we want the fun gigs, we want to travel a lot, we like to have stuffs, have the latest gadgets, have branded clothing, branded shoes and all of those stuffs you have in mind.

Saving will cost you to miss out some of those things. Saving money will always come with a price tag of missing out some of the night outs, the eating outs, the movie dates, the travels, your upgrade to a new iphone, the pairs of shoes you are really wanting, the starbucks coffee you drink everyday, and etc.

As a young professional, will that be ok with you? Think about it.

Saving money

If you really want to save money then the price you have to pay is to spend properly.

The Prize

I would like to encourage you that the prize of prioritizing saving is really great.

If you count the cost then you will be greatly rewarded. Saving money as a priority might have a price tag of missing out things in your life as a young professional but I can say that it’s worth it.

I experienced a life in lack in terms of finances and that taught me to have a kind of pleasure in saving as much as I do in spending. You might want to read my story in Fitz Villafuerte’s blog ready to be rich on why my finances changed in 2 years.

As a common 23 year old professional, I can only say that it was hard missing out the things I want but I counted the cost and it taught me to be grateful for what I have.

By prioritizing saving, I have completed a 6 months worth of emergency fund plus extras, I don’t have debts and most of my money are into investments. Yes I don’t have much of fancy stuffs, but I can say it’s worth it. I enjoy a comfortable sleep at night  because I don’t have any creditors that would chase me, I don’t have the feeling of anxiety, and I enjoy being a blessing to my family.

For the record, I’m not saying that we need to totally miss out the things I’ve said above but there should always be a balance of things.

Wrap Up

I want to emphasize the value of saving, especially for young professionals alike because this is a stage in our lives that our decisions will be very critical for our future self.

We can’t afford to live a life of “what ifs” or regrets.

What if I have saved money when my friend shared me his great business idea?

What if I have saved when that stock was really cheap?

What if I have saved money when our house was being foreclosed by the bank?

What if i have saved enough when I wanted to get married?

What if i have saved enough when I was starting a family?

What if I have saved enough money when Mom got sick?

What if I have saved when I needed to get back home in the Philippines?

There are a lot of what ifs and regrets in life that we could avoid simply by saving and I think that it is one of the best prizes of saving.

I hope that this article have encouraged you to count the cost of saving and inspired you with the prize of it. Please do share this to your friends and families who might have need it.

If you think that this article was helpful then subscribe to my blog by entering your email below to get more updates on personal finance for young professionals.

You can also see me on facebook @thefrugalworker.

How to know the price tag of your emergency fund

Emergency fund is a very important fund in your financial life, it serves as a buffer fund when unexpected events happen in your life; whether you lose your job, someone got sick, failed investments, unwanted expenses and the likes. But what are the components of an emergency fund? In this article I will tell you how to know the price tag of your emergency fund and how to compute it. Continue reading How to know the price tag of your emergency fund

Pasalubong : An overlooked expense

Do you often buy treats or ‘pasalubong’ ?  The ‘pasalubong industry’ is good for the Filipinos because it is a norm to give treats for our families after a hard day’s work or after travelling somewhere. Filipinos love to buy pasalubong and often times it is an overlooked expense because emotions drives this spending. Sometimes we buy pasalubong out of our budget because we don’t want to get tantrums from people but is it really necessary for us to buy pasalubong? Let me share you what i think of it. 

“Pasalubong ha…”

Familiar? Often times lalo na kapag may pupuntahan tayong malayo sa bahay, our family members request pasalubong before we leave and even if nandon na tayo sa pupuntahan natin, they will constantly remind us to bring something for them back home pagbalik natin. Minsan pa nga pinapaalalahanan pa nila tayo kahit pauwe na tayo galing sa pinuntahan natin eh

pasalubong

Scenario 1  : Buying Pasalubong after travelling

When i left the Philippines last year for the UK, it was not a job but a time to study. I went to the UK not to earn pounds but to earn knowledge for my career. When people started to know that i was flying out, some of them prayed for me, some congratulated me, and many asked for pasalubong. I mean who wouldn’t? Even me would ask for pasalubong from people i am close with if i knew that they would be going somewhere foreign to me.

But is it really necessary to buy?

My answer would be a yes and a no.

Yes because it is a kind of investment, it is an opportunity of investing in your relationships. Sabi nga “it’s the thought that counts”. It is an opportunity of giving and blessing people. It will also make you and the recipient happy. Pasalubong doesn’t need to be costly, what’s important is that you remembered them.

Yes again because it is a foreign country, para may remembrance ako. Even if locally lang buying souvenirs won’t cost that much. It’s bringing something foreign i can share when i get back home.

No when it is eating up your budget. It is ok for me to spend on pasalubong but if it will affect my finances then it is a big ‘NO’. I considered pasalubong as a WANT and i have my ‘wants fund’ for it, if i would spend more than that then i would be sorry for myself.

I went to the UK not to earn pounds but to study so i have no additional income and everything is pricey because my currency is in Philippine peso. That time the pound costs me roughly 75 pesos not considering exchange rate fees. Since people are expecting pasalubong from me and i wanted to at least give treats when i come back , i had no choice but to find pasalubong that should suit my budget.

In the end, i did spend around 5000 pesos worth of chocolates, ref magnets, t-shirts, jackets, candies, tea’s , mugs, postcards, key chains etc. Having a ‘wants fund’ really did the job because i spend on these pasalubong without any guilt and stress.


pasalubong
Scenario 2 : Buying pasalubong frequently

Ok so here’s another scenario of buying pasalubong. I only see my girlfriend once a week, sometimes twice a month but every weekend she comes home from Manila to spend time with her family and every time she comes home she brings pasalubong. I kid you not but she spends a lot when bringing treats for her family. She’s the only child and she just wanted to give smiles and happy tummies to her family on a regular basis. She spends 500-700 pesos a week to buy Kimori or J.co donuts or Krispy Kreme or CPK salad(her Mom’s favorite) or any food na wala sa province. Though she spends like that, her relationships with her family is really tight which is a great thing.

But here’s my two cents, 500-700 pesos a week would cost 2000-2800 pesos a month and 24000-33600 a year!

The 2000 pesos a month invested in a 10% annual growth rate kind of investments would give her 11.7million pesos when she turns 65.  Crazy right? Anyway it’s just my two cents after all. Money is only a tool for us to be a blessing to people i believe that her money spent is worth because close family ties are priceless (though she could still cut costs for pasalubong haha).

After all i still remind her everytime to stay on her budget and save consistently.

If you also spend on pasalubong like my girlfriend, i hope you also consider my two cents 🙂

Here are 3 take aways i could share about pasalubong

1. Pasalubong are relationship investments

Sabi nga ‘It’s the thought that counts’ and pasalubong shouldn’t be costly. When buying pasalubong just make sure that you would bring smiles to your love ones and let them feel that you care for them. It is a kind of investment that doesn’t gain money but love.

2. Pasalubong is a want

It is a want meaning it is not really necessary but buying it has its value. If you like bringing home treats for your family and love ones you should have a budget/fund for this like what i suggests, you have to save for a wants fund so that you’ll be guilt free from spending on these because you won’t hi-jack money from a different budget.

3. Pasalubong should be budgeted

Pasalubong costs little amounts of money but if we buy frequently then these little amounts add up to a big chunk of money where it can ba a significant one. Monitoring your spending on these wants should be done so that you would stay within your budget. After all it is  not really necessary for you to buy every time.

Bottomline is..

If you love buying pasalubong just make sure it won’t affect your finances in a negative way. There should always be a balance. Sometimes emotions drive us to overlook our spending on these because we don’t want to get tantrums from the people we love. Don’t be shy to tell people who’s asking  you for a pasalubong that you are on a budget, remember that your family and your true friends would still love you with or without pasalubong.

I hope you like this article regarding pasalubong.

If you do, please do like The Frugal Worker’s FB page as well and share this post

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See you in the next post!


Photo Credits :Holiday Kisses, Union Station Souvenirs

 

3 things you need to save for while in your 20s

There are lots of reasons why we need to save money, and today i would want to share to you my list of the top 3 things you need to start saving for while you are still in your 20s.

Being in our 20s is the best time to save because of the lack of responsibilities that we have, especially if we are still living with our parents who provides for us. Continue reading 3 things you need to save for while in your 20s