I have lately been getting quite a number of queries on how to make both ends meet. It seems to me that there is a growing desire among the general population to now take hold of their financial lives. This probably has to do with the credit card collection pressures that a good number of income earners are now being subjected to.

There is really no magical solution to this but to accept the reality of your present cash flow. And that simply means reducing your expenses and increasing your income. Easier said than done. And the first step is to budget one’s lifestyle.

Budgeting is always a topic that needs to be revisited. Nobody likes to have to think of a budget. It’s just wonderful to be able to just spend without having to look at the price tag. Fortunately, I have been programmed by what I have been teaching to look at the value for money of anything I buy.

When we were newly married, my wife did not even want to bring me along to do any marketing or shopping because she was afraid I would not know if the price item was too high compared to other stores. She was right, actually. Assessing the value of the prices of goods is really very dependent on practice. If you are not the one who regularly shops for certain types or products, chances are that you will not get the best price. That’s one tip for the family. Each member should be assigned to purchase certain types of products to make sure that the price is right.

Until you are wealthy enough not to have to look at the price tag, you need to have a budget. Let’s review the process of making a budget. Remember that it should always be written down.

You need to make your Personal Financial Plan before anything else. This means that you have a financial goal and you can only have goals if you know where you are starting. You need to know what you own (assets) and what you owe (loans or payables). There are formulas to compute how you can reach your goals. These are in my books or explained in the seminars we give or in our website.

After knowing your goals, you need a clear idea of your income. You need to know what your take-home pay is so you know exactly what you have to spend. Understand all the deductions made from your income whether you are an employee or self-employed. Even in your own business, you should pay yourself a salary and pay the necessary taxes and Social Security, Pag-ibig, Philhealth etc. Understand what kind of benefits you get from each deduction. Taxes are expenses that we all have to pay to run our country. The benefits are the roads, security and similar services that we get. Understand what benefits you get from Social Security, Philhealth and Pag-ibig because these are some kind of insurance or options for loans with reduced interest or even retirement.

Remember the principle: INCOME MINUS SAVINGS EQUALS EXPENSES. You already know your income as we discussed in the last article. Now make a simple list of your expenses.

Divide your expenses into those that are the same every month such as rent or loan amortization. Then, the others are those that change every month such as electricity, food. It becomes very clear that for the fixed expenses, you cannot easily reduce without doing something drastic. For example, you may need to move to another house if you want to reduce your rent or sell your house to remove your housing loan.

For the expenses that can change every month, you will find it much easier if you know in detail how much you spend for each category. For example, “food” is a general category but it could include junk that you really don’t need. Have a pocket “spending notebook” and just jot down every amount that you pay out including payment for a bottle of water, a bag of peanuts, a piece of candy, bus ride etc. When you go to the grocery, you should have a specific list of what you can buy.

If you are trying to understand your food (or any other category) budget for the first time, you can do this. Spread all the items you bought on the table and think carefully whether each item is a “need” or a “want”. Remember that a need becomes only a want if there are options to “downgrade” to a less expensive brand or type for the same item. For example, fresh foods are usually cheaper than processed foods.

Involve your family in making your budget and assign each to be the “authority” in prices of items that you regularly buy. The person in charge should keep himself always aware of the changes in the prices and where to best buy them. Remember though to input the cost of transportation when you find that a certain item is cheaper in a place far from your home.

There is no right or wrong in making a budget. Each person or family has different priorities. One prefers to always eat the better food and just stay at home and one would rather have fun outside and hardly eat. You need to plan together, understand and respect each other’s needs.

While you are finding ways to decrease spending, find ways to increase your income. Sometimes people are bogged down by their mindset on what they can or cannot do. This is especially true in the Filipino culture where those who took up a college degree feel that they should only be in a white-collar job. Our system of having house help readily available helps in developing the mindset from a very young age. In western countries and more developed countries, every person has to do his share in the housework from childhood. Therefore, everyone doesn’t think twice of doing any kind of work.

Given an open mindset and humility to doing any kind of work, surely you can find a sideline to add to your income. For example, doing simple home repairs, cooking meals or landscaping for others can be good options especially for those who are looking for people they can trust. If you are too proud, you can start as a hobby and slowly charge a fee as you gain a good reputation. There are other talents you can use like teaching a musical instrument, writing, tutoring etc. In the beginning, this will surely not earn much but do the best job you can even if it pays for only a meal at the start. It can develop into a full-time business in the future. There is so much that can be done but in the final analysis, reputation will carry you through success.

To summarize your budgeting effort:

1. Keep a record of your daily spending. Have a small notebook and pencil always with you and jot down any expense immediately.

2. Understand your real cash-flow income and expenses at least a month ahead of time. If you have a partner or family, make sure you all agree with how you are going to spend the money.

3. Reduce spending in a very studied method. Be creative with the ways you can cut expenses each week and practice until you get the hang of it.

4. Keep track of your budget weekly and monthly so you can make adjustments. There will always be unplanned situations. Life is really like that. For example, when you are on a road that suddenly gets blocked, you will find a way to go around the block. It is the same with your budget. Be ready with options.

Join our seminars. Check out www.colaycofoundation.com or call 6373731 or 6373741.

Almost all entrepreneurial books talk about three “must haves” in establishing and sustaining a profitable enterprise. Business history has shown that the personal passion and vision of the entrepreneur-founder generally leads to create the business (company) that produces (technology) services and/or products that fill a continuing need of a sufficiently large consuming public (market). Yes, it seems to be incontrovertible that passion, technology and market must go together if a business is to succeed. The more interesting question though, is, which among the three must your starting point be? Or, could any one of these three “must haves” in fact, be a starting point in establishing a business?

Passion or Personal “Genius” as your starting point

Going into business is a very personal matter. Your first choice of a business could be something that you are personally passionate about. You choose it because you have clear reasons in your mind why you personally like to engage in that business activity. It’s also possible to study and learn about any business with clearly good potential. It may not necessarily mean though that you are suited for that business to actually run it well, much less enjoy being operationally involved in it. Without real involvement, it may be difficult to sustain your business with the same quality that you started with.

The better first step is to think of what you do best...what is your unique genius? What is your real passion? What is it that you really love doing? Develop the mindset that it is your responsibility to widen your skills and knowledge base. Look around your own environment and see what is it there that could be made into a kind of income earning activity? You might just discover that what you particularly like to do is something your community actually needs! When this happens, find out if the market is large enough, and, whether or not you can consistently deliver the products with consistent quality and at stable prices. If you are able to reasonably to confirm these, by all means, proceed with your business plan.

On the other hand, you may love to do something but you are not confident about your skills yet. But can you find ways to develop those skills quickly? Can you take a partner who will provide the skills you do not have and vice-versa? This is one way you can create our own opportunity to make money.

Make your imagination work! Dream! Hand in hand with your personal capabilities, check out the market for your product or service. Location is key. You need to make your place accessible to your target market.

Try not to be a “me too” though unless your neighborhood really needs more of the same service. Too often, many imitate the business of others in the community and they all end up failing because of the limited market. Look at the “hot pandesal” phenomenon of many years back and even the “sari-sari” store to this present date. The original stores make money and suddenly everyone follows and almost, if not all, lose money.

After having decided on the business that is best for you, make a proper business financial plan complete with projections of at least monthly cash flows for the next two-three years. Be sure you have enough money as capital. You can only continue your business if it will bring in money before you run out of the capital you start with.

Your objective is to create a business for the long-term. You need to be able to sustain the quality of your product and/or services. Even if you believe that you can only stay in the business for a few years for personal reasons, you want to be able to sell your business and get some profit for it.


Colayco Foundation August Seminar Schedule:
1) August 14 Saturday, 2-5PM PISOBILITIES: Managing Your Personal Finances
2) August 21 Saturday, 2-5PM DEBTS/LOANS: Friend or Foe?
CALL 6373731, 5779698, 6373741 or 5774590 for more information and to reserve your slot.

I received a question some time back on a matter that applies even today.

Would it be wise to borrow to grow our catering business?

Ten years ago, my husband and I took over his mother's catering business. Although the business has been around for 50 years and has built a solid reputation for quality food and exceptional service, we soon realized it needed a lot of improvement. We had to spend most of our savings to build a new kitchen, get a new service vehicle, buy new equipment and utensils, design a new logo, etc. We also had to re-introduce the business to the market because most of its old customers were gone. In this kind of business, we always have to change outdated equipment and design to keep up with the changing trends and keep the competition at bay.

Most of our revenues go into these improvements. However, since we only rely on our sales from the bookings that we get, we realize that it will take several more years before we can take our business to a whole new level.

We have contemplated on taking out a business loan, at least P1M but kept postponing it because we were too afraid of the monthly amortization. But I think it's about time we did this while we are still young, have the energy and enthusiasm, and while we're still bursting with ideas on how to run this business effectively. I can't wait for another 10 years while we see our competition take off.

My reply:

Based on the information you gave, it seems that you are in a perfect position to make your business dreams come true. You both have the passion for your food and catering business, a main ingredient in any business. You have started building up your productive assets to support your catering business and you need a process to validate your plan to borrow to grow your business. Borrowing is leverage and properly used, the most powerful tool to build capital and grow a business. Since both of you are still of prime age, you can still be more aggressive as clearly, you can still recover from any mistakes you might make.

Your immediate need is to make your actual Financial Statements for your business, that is, Cash Flow, Profit and Loss Statement and Balance Sheet as of the end of the latest month to understand the real condition and the true net worth of your business. I strongly advise that you seek professional assistance to make these financial statements for you. Any prospective lender will require the information from you anyway before they even start evaluating your loan application.

After you have established your true financial condition, think out your business plan in detail: what market you will sell to, what product and/or services you will sell and your best estimates as to how much it will cost you to produce and deliver these products and services. The most important projection is your Cash Flow, which provides the true and total amount of cash (capital and debt) required to sustain the profitability of your business. You need to make your monthly projections for the next few years. These must be based on your most realistic set of assumptions pertaining to all aspects of the business requiring cash (cash out) or producing cash (cash in).

Make as many projections as you want using different assumptions for each item. These include all the cash that you receive and all the amounts you need to spend for. For each item, use different assumptions. On one sheet, you can have optimistic assumptions. On another sheet, you can use the pessimistic assumptions. Then, choose what assumption in each item is the most realistic and come out with a working financial plan, which will be a combination of all the scenarios you make. Some items can change monthly and some can be the same all throughout. You have to put some thought to each amount you use.

The negative amounts in your Net monthly Cash Flow represent the Equity and/or temporary funding (loan) needed by your business during those months. If you see the need for a loan based on your initial projections, your inflows and outflow projections will change with the benefit of the improved operations from your loan and the cash flows related to the loan. Go back and forth with all these changes until you arrive at what in your best judgment truly represents the most likely and conservative outcome. This will determine whether or not you can afford to take out a loan; how much; what payment terms and the interest rate you can absorb.

In taking out a loan, the most critical ingredient is your source of repayment and the cost or interest rate of the loan. Note that a loan is a definite and firm obligation for you to repay specific amounts at specific dates in the future. You must pay this obligation whether or not you achieve your business projections. To lower your borrowing rates, you may need to put up some collateral (most likely real estate). As a matter of fact, while the borrowing cost is important, what is more important is that you understand your true financial burden. As a final note, don’t rush into getting any loan until you have determined (from various cash flow projections) the amount of temporary borrowing you will need and the amount of amortization your business can comfortably service on a periodic basis (i.e., monthly quarterly, or even yearly).

You must make sure that under the worst conditions, you will have real and sufficient source for repayment.

Remember that your business financials should be separate from your personal financial statements. Your business should pay you and your husband a salary. If you are using your home and vehicles for your business, your business should pay you for the use of these assets. This will give you a true picture of what your business profitability really is.



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Joyce, the wife of the OFW whose husband remits to her $300 or PhP15,000 monthly wants to consider just buying real estate as an investment. She understood from our last talk that she should not invest more than PhP7,000 in real estate so that she can spread her risks.

Her cousin, Tina, is offering her a piece of land in her province as an investment. It is 1,000 sq.m. for only PhP400,000. Her cousin is even willing to accept installment payments if she just makes a 10% down payment of PhP40,000. Joyce has the money for the down payment because her husband just received a bonus.

Tina is willing to accept payment for the balance of PhP360,000 at the installment payments of PhP7,000 per month for 5 years or 60 months. This is actually equivalent to paying Tina an interest rate of only 6.24% p.a. for the PhP360,000 balance due. Tina told Joyce that this is a good deal because the property is well located and there are talks that prices will at least double in five years (this means that the value of the property will increase by 14.4% per year) because the area will be developed very soon. Tina can’t wait for the development because she is getting married and living abroad. The monthly installment is something that she wants to give to her parents as a monthly gift because her husband will be giving her the same amount to give to her parents anyway.

My comments are:

1. In terms of the money involved the deal does look okay if Joyce is able to:


• Make sure that the PhP15,000 or at least PhP7,000 monthly remittance of her husband will really continue for 5 years and that she will have no other need for it except to pay for this property.


• Investigate with the Registrar of Deeds that the value of property recently sold in the area to be really at least PhP400 per square meter.


• Check out that the Transfer Certificate of Title (TCT) is clean and that it really corresponds to the property that was shown to you. 


• Visit the property to see that it does not have any squatters.  Joyce will be paying less than the Php15,000 that she has available monthly so she has the budget to pay for real estate taxes and other expenses to maintain the land free of “talahib” and future possible squatters.


• Ensure that the TCT can readily be transferred to Joyce after full payment considering that Tina will already be living abroad.  Joyce should consult with a lawyer on this.


2. Joyce should try to understand if there is real basis in expecting the value to double in five years.  She should verify from the local government whether or not there are approved infrastructure developments in the area and how long it will take.  “Chismis” can never be reliable.  She has to go there herself and check with the Registry or Deeds and the companies who will be developing the area.
   
   However, even plans of big companies can change.  Then, she has to make an educated guess if the future increase in value will give her returns that are at least higher than the average annual inflation rate of 7%. 
   
   If the property appreciates by only 7% annually, which is the average increase of property values, then the sales value of the property after five years will be PhP 561,000 or PhP527,000 after a 6% capital gains tax. This will mean that the effective return of this investment will only be 5.1%.  This is lower than the average inflation rate of 7% and is therefore not that attractive as an investment
   


3. I need to remind Joyce that land, as an investment, is generally an illiquid investment.  It is something she cannot sell very quickly if she needs cash.  In this case, she can only sell the property after she has completed her installment payments and the TCT has been transferred to her.  Again, this is an issue that ought to be discussed with Tina and the lawyer before the down payment is made.
   


4. In this case, she should be able to sell the land at PhP600 per square meter after five years  if she wants to make a return equal to at least  the inflation rate of 7%.  She must remember that she will have to pay for the transfer of the TCT (about 2% of selling price) after she has completed the installment payments.  Also she has capital gains tax of 6% when she sells the property.
   


5. If Joyce is able to find other uses for the real estate to give her income, she should include that income in the computation of the returns she has derived from the property. This would of course improve the return on that property investment.
   


6. Let us assume that there is a small building on the property that Joyce has been offered for the terms given above.   Let’s say that Joyce has the option to rent out space in that building.  In such a case, when she estimates her rental income, she should remember that she has to deduct the following from her rental income:
   
   
   
   • Cost of daily maintenance if there will be more than one tenant in the building as there will be common areas.
   
   
   • 20% vacancy rate.  This means that there will be no income for about 2.5 months per year.
   
   
   • Cost of major repairs of the building
   
   
   • Possible non-payment of rent by the tenants.
   
   
   • In addition to real estate tax, municipal permits and income taxes.
   
   

I also told Joyce, for her information that others also buy real estate to develop into buildings to rent, sell or into condominiums. However, these involve bigger capital and a lot more serious business management expertise.

We have been given new hope with our President-elect Benigno Aquino III. But it will take time before our “bad economy” really picks up. Thus, there are still many who are considering to emigrate for better opportunities. I’d like to answer a question asked of me: “Is it still possible to give our children a comfortable life here or is the most feasible solution to move abroad?”

You need to weigh your options carefully understanding the following:

The “bad economy” is not limited to the Philippine economy. It is the World economy that is badly hit by the extraordinary ramifications of the financial crises in all developed countries not to consider the rise and still rising prices of commodities (including uncertainty in oil). Anywhere in the world, perhaps unless you are extremely rich, you will feel the painful price increases in food and all other needs.

Your source of income is very important. With the decline in all economies, jobs are precarious. Losing your job while you are in another country is more catastrophic. Here, you have your family and friends you can run to. Abroad, you are usually alone unless you also have family and close friends there. However, those who qualify are given access to government “unemployment benefit” assistance.

You need to define the parameters of “comfortable.” If you live anywhere abroad, you will not have the luxury of house-help like we do here. Hopefully, your children are already trained not to depend on them. You also need to consider the higher costs of additional clothing and heating bills for winter.

Peace and order is a special desire of people who move abroad. The bad news is that kidnappings and killings also happen in other countries. We just don’t hear as much about it. In the final analysis, you just have to choose a good community and your entire family should be careful about safety and security whether you are here or abroad.

Free schooling and medical insurance seem to be the main advantages if you move abroad. However, the culture in other countries is usually more permissive and that may affect your kids’ development both positively and negatively. Medical insurance is usually attached to your job or your citizenship.

Here, the cost of schooling is substantial and needs careful preparation. While medical costs can be high, there are always doctor friends and relatives to run to in addition to relatively cheap medical insurance and/or HMO-based medical plans.

Your children's ability to find better jobs in the future is dependent on their chosen field and not where they were schooled or lived.

The good news however, could be that growth in global economy is now better poised to happen in the emerging Asian economies. Established companies and Investors in general are looking towards Asia as their main venue for expansion and establishment of new business operations. While China may lead the field in this regard, the Philippines has its own unique attractiveness if we get our act together. Going forward, we can expect real growth in the hospitality industries, such as hotels and other service-related operations, which every Filipino can be trained for. One needs only to look around to see that in more developed countries now (e.g. Singapore, Spain, etc), Filipinos are the professionals of choice. Why export our skills when we can build the industries that will hire them right here in our own country?

By and large, we are still considered as an English-speaking nation with good familiarity in western business organizations. While our advantage in verbal and written communications is fast deteriorating, this can still be arrested and turned around with true political will as well as a unified effort among private educational and discrete training institutions.

While other countries may be speeding up to develop skills for global-oriented business operations, the Philippines still enjoys a substantial advantage. We can capitalize on this now!.

Finally, all things equal, it seems more idyllic to live and retire in the Philippines.

To help you cope with your financial issues, join any or all of our seminars: Pisobilities Seminar on May 29, Pera Mo Palaguin Mo Workshop on June 12, INVESTability: The Stock Market on June 18 and INVESTability: Invest for Regular Income on June 25. Call us at 6373731 or 6373741 or write info@colaycofoundation.com.

This comment arose from a portion of my 22 April 2008 blog.

This type of exchange between Glenn and Litong lito is what makes my otherwise fulfilling advocacy, frustrating.

I thought it would be good to highlight this kind of thinking of some people.

The sad part is that they seem to have closed their minds to learning more.

Instead of asking where they could learn more about the principles, they decided it was not possible and chose the easier way out.

They would prefer to have nothing at the end of 10 years rather than setting aside a small amount daily.

Even if it did not earn anything, they would still have that amount of Php10/day x 360 days per year x 10 years = PhP36,000 at the end of 10 years, which might only buy PhP18,000 worth of goods after inflation.

If every peso earned is so important, why is PhP18,000 not even considered important?

I already explained many of the issues in the two previous articles.

Below is my additional reply:

Glenn

Hi Bro,
We are thinking on the same situation.. parang malabo yung 12 percent-20 percent per annual na kita.. kahit maginvest ka pa sa mutual fund or uitf lalo na bagsak ngaun yung mga yun. I dont know how he compute[s] para makuha yung 28.8M in 40 yrs. Kahit abacus gamitin ko parang di mangyayari yun..

Kidding aside, baka maginvest nalang sa lotto ng 10 pesos everyday, baka matsambahan mo yung jackpot on or before 40 yrs instant millionaire ka na, baka more than 28.8M pa makubra mo.

Litong lito

Glenn,

Its seems mas okay nga ang lotto kasi araw araw ay may t[h]rill, saka matalo ka man for ten years, at least part of it ay nakatulong sa ibang nangangailangan.

Pwede mo na rin itong kalimutan tulad ng sabi ni Mr. Colayco na "Since the return is high, the risk is also high. Invest only amounts you can forget for years."

Although after ten years ay zero ang balanse mo kung hindi ka papalaring tumama.

Samantalang yung pag save ng 10 per day ay baka sobrang frustration lang ang abutin ko dahil malaking pera nga ang hawak mo ay wala namang halaga after 10 years.

"parang malabo yung 12 percent-20 percent per annual na kita."

Tama ka pre, hindi ko rin ito kayang paniwalaan, though wala talaga akong alam sa stock market/mutual fund, etc. Ang basehan ko lang ay ang interest sa savings ko sa bangko.

Dati ang bank interest rate ay umaabot ng 10 percent, mayroon pa noon na 12 percent or more sa time deposit.

Pero ngayon ay 3 percent or lower na lang yata.

Ibig sabihin ay hindi na ganoon kalaki ang kinikita ng mga kumpanya, lalo na yung mga inaasa lang ang puhunan sa bangko.

Second is, wala sanang insurance companies na nalulugi pero alam nating maraming nagkakaproblema.

Isa pa, kung talagang siguradong kikita ang mutual funds and the like, siguradong lahat ng mayayaman ay dito ilalagay ang kanilang pera at hindi basta basta makakasingit ang mahihirap or ordinaryong tao.

My apology po Mr. Colayco, frankly speaking, kung wala po siguro kayong ibinebentang libro? ay mas madali pong paniwalaan.

Sana ay masabi nyo rin po sa amin yung mga "negatives" aside from "positives" para po talagang matulungan nyo kami ng tamang pagi invest. Salamat po!

MY REPLY:

Before anything else, my having written books is precisely to help income-earning Filipinos with complete information including positives and negatives.

You can only judge if I have not given a complete explanation after you have checked out the books.

Also, the profits from the books is used to maintain the overhead of Colayco Foundation for Education that continues to educate and advise those who want the information and the advice through info@colaycofoundation.com and the various articles I regularly write for eight publications and two websites.

I cannot force readers to believe in me.

But I do hope they will have the open mindedness to try to understand what I write about objectively. It’s about time that people listen and question the song, and not the singer.

I already explained in the previous article that 12-20 percent p.a. return is very real especially if the investment is made regularly and on a long-term basis.

In the end, one must accept his responsibility and obligation to provide for his own future and that of his family, and then TAKE ACTION.

This requires the willingness to learn about the things that count and the discipline and determination to improve one’s life.

As one writer once said, “if you do not think of your future, you will not have one…”

Php10 gamble in lotto will definitely give you the thrill that you want.

But do not be deceived.

Lotto helps the pockets of people who already have money and not pockets of people who do not have money.

In terms of investment, the chance of winning the lotto is practically nothing.

To add to the sad story, people who win the Lotto also do not hold on to their winnings for long.

They are back to nothing after a while because as the saying goes “Easy Come, Easy Go.”

Keeping money in the bank even in a savings account today earning less than 1 percent per annum still has a purpose.

In the first place, not having the cash with you prevents you from spending it.

Second, it is for safekeeping instead of keeping it in cash in your home.

Again, if every hard-earned pesos is important, shouldn’t the interest of Php10 earned on a deposit of Php1000 be important too?

Finally, the opening up of some Mutual Funds with a minimum initial investment requirement of Php5,000-10,000 makes this investment options available to the ordinary income-earner and not just to the rich.

————————
Check out www.colaycofoundation.com or call 6373731 or 6373741

Happy Easter to all of you!

This is a continuation of my reply to Comments to my April 2008 blog.

“Litong Lito?” continues:

Sabi nyo po:
"Since the return is high, the risk is also high. Invest only amounts you can forget for years. Surely, you can forget Ten Pesos per day. You might even be able to forget One Hundred Pesos a day if you are determined. In which case, you can just multiply your returns as described above by 10!"

Wala po bang ibang alternative na less risky? Sabi po nila mas okey sa "lupa" and the like. Of course, kadalasan hindi namin kaya ang cash, pero marami ding hulugan na lupa lalo na kung Pag ibig or SSS member ka. Para ring 10 peso a day savings.

I remember, 1998 may hinulugan akong lupa at PHP200 per square meter. Today, after 20 years, ay more than P2000 per square meter na ang presyo (99.9% risk free).

Ibig sabihin ang hinulugan kong 1000 square meter noon na nagkakahalaga ng PHP200,000 ay 2 million na ngayon. Hindi pa kasama dito ang paggamit mo sa lupa. Pwede po bang mangyari ito sa Mutual Funds (MF) at Unit Investment Trust Funds (UITF)?

We have our hard earned savings and we want to make sure that we will have the right decision before investing? Kahit na po piso lang araw araw ay malaki na para sa aming mahihirap.

My answer:

There are many kinds of investments just as there are many asset classes. The risks differ for each type of investment.

Government securities like Treasury Bonds and Treasury Bills have the lowest risk. However, the returns are fixed and usually lower than other investments.

There is no chance for extraordinary profits like there could be in mutual funds and UITF.

Moreover, government securities are very liquid. You can buy and sell them anytime.

Real estate or land as financial asset is another sound one.

However, this does not mean that you can put all your investible funds in real estate.

Allocation of assets is key in managing risk in investing.

Income-earning real estate is an excellent venue for investment as in addition to regular income, you have appreciation of the property as a good source for capital growth or increase in value in the future.

Note though that investments here are relatively large amounts and may therefore not be suitable for most ordinary income earners.

Land may feel safer to most people but it certainly is not 99.9 percent risk free.

In the case of the example of "Litong Lito?”, his land value grew by 1000% over 20 years or on simple average 50% p.a.

This simple average return is equivalent to about 12.5 percent annual compounded rate of return.

If the land he chose was really good, then he chose well or was really lucky. But here are the problems of many who invest in land:

• Relatively big initial cash investment needed.
  
• Fake titles.
  
• Squatters in your actual property or near it that will lower land values.
  
• Maintenance expenses like taxes and the costs of keeping the land clean.
  
• Liquidity is not so easy. Will there be a buyer at the price you want when you want to sell it? Sometimes when your need for cash is immediate, you end up selling at a big discount.

Pag-ibig and SSS members are only entitled to housing loans and not to buying raw land.

For those who buy houses for investment, there are other risks in addition to the foregoing to look out for.

For example,

• For every month of vacancy, you actually suffer an annual 8.3 percent reduction in income
  
• Worse if your tenant does not pay, you will have to find a way to eject him and could end up paying for litigation costs.
  
• As a general rule, each time you change tenant, you need to have a fairly big budget to repair the place.
  
• Maintenance of the house from termites and other pests and taxes add to the cost.
  
• When you want to sell, the house would have a depreciated value while the land may have an increase in value.

As you can see, there is no way that real estate investments are risk free.

Whether windfall profit can happen for Mutual Funds and UITFs, the answer is yes if there is a big boom in the economy and if you are able to buy at the low NAV and sell at a high NAV.

For example, if you bought from the best performing Mutual Fund in February 2009 and sold in March 2010, your return for the one-year would be 34 percent.

As you will note, these months were generally not good months for the economy.

I know what hard-earned money is all about because whatever I have today was slowly hard-earned.

I come from humble beginnings and I was blessed with the right teachers through the years.

I only want to pass on what I have learned to anyone who wants to listen.

Part 3 of 3 will follow soon.

We invite you to our Pisobilities Seminar on April 24. Call 6373731 or 6373741 for details.

To those who read my articles, you might have realized by now that I am not able to reply to comments most of the time unless it is sent to info@colaycofoundation.com.

One good reason is that, sometimes, the person making the comment is not really after a reply but is merely venting.

Moreover, many times, my replies in themselves are too long and would be an article in itself.

Oftentimes, there is no way to answer without eliciting more of the same refusal to believe.

But as time passes, perhaps the window of opportunity presents itself to bring up the reply again based on actual facts.

Two years after might be a good time to reply to a comment made to my second article in a GMANews.TV blog dated April 2008.

“Litong Lito?” distrusted the principles that I have been espousing since 2001.

I am bringing up the issues as they were written in 24 April 2008. It will take several issues to explain them so I will cut them up by subject matter.

This comment arose from a portion of my 22 April 2008 blog:

“Saving Ten Pesos a day or Three Hundred Pesos a month invested prudently can earn you an average annual rate of 12 percent.

At this rate, if you leave your money alone, and just let it “roll” it will compound and grow to a value of PhP 66,600 in 10 years.

Look at what happened here?

Over a period of ten years, you actually saved only PhP 36,000 and it grew to almost double the amount.

If you are able to continue this process for another 10 years, meaning saving another PhP 36,000 over 120 more months, your savings will grow to PhP 273,400, or almost FOUR TIMES more than the total amount of PhP 72,000 you saved over 20 years.”

In the meantime, Litong Lito came up with this reply:

After ten years ... ano na kaya ang mabibili ko sa sampung piso?

Ano po ba ang "inflation rate" ngayon?

Naiisip ko lang po na kung ang makukuha kong tubo kada taon sa investment na papasukin ko ay steady 12 percent at ang "inflation rate" ay steady sa six percent (March 2008 = 6.8 percent), ibig sabihin ang neto ko ay six percent lang.

Ibig sabihin ang 10 peso daily savings ko for 10 years ay aabot nga ng PhP66,600 pero hindi na ito kasing "powerful" ng pera ngayon? Baka after 10 years ang PHP66,600 pesos ay parang barya na lang. Not considering the risks?

If I understand “Litong Lito?” correctly, he is saying that the P66,600 will be practically useless because of inflation. Furthermore, there are risks in the 12 percent p.a. investment to contend with.

My reply to “Litong Lito?”:

1) Note that you assumed inflation at six percent per annum and just to keep the example simple, that is half of the 12 percent per annum that I said you could earn over a period of 10 years.

Thus, to keep at par with the six percent inflation you only need to grow your money to P48,750 by the tenth year.

Therefore, the Php66,600 would still be able to purchase for you 36 percent more goods than if you had just managed to keep in pace with inflation. In other words, you would still have P17,850 left over after buying the same amount of goods with your P48,750 now adjusted for inflation.

2) If you still saved the 10 pesos daily but just kept it in your piggy bank and not invested it, you would have Php36,000 at the end of 10 years with a purchasing power of only about half or Php18,000.

3) If you don’t save the 10 pesos daily, you would have spent it along the way on practically useless things. At the end of 10 years, you would have exactly nothing.

4) On the risks of the investment, I reiterate that all returns are risk-driven.

The same is true with mutual funds and unit investment trust funds (UITF).

Though they are closely supervised by the Securities and Exchange Commission (SEC) and the Bangko Sentral ng Pilipinas (BSP), this type of supervision does not extend to the quality of fund management.

Regulatory bodies are focused on compliance with legal requirements and to ensure that fund managers do not run away with the investors’ money.

Actual performance of the funds are published the daily and may also be seen in selected websites. Thus, the risk of losing part of your investment could happen in the following cases:

• choice of a mutual fund or UITF with poor performance by the appointed fund manager. There are many choices and with a little research and analyses, you can find the right one for you.
  
  
• selling at a time when the Net Asset Value (NAV) is lower than your actual average cost per shape. This is unlikely to happen if you are regularly buying the same shares with the same amount of money, (i.e., you are peso cost averaging). This is why it is important to have a long-term outlook.

Here is a reminder for all would-be fund investors.

It is easy to get into a fund.

But the real challenge is when do you get out?

The idea of maximizing returns is never a practical one.

The best rule in managing your investment is to have a specific target amount you want to achieve at a specific time or date in the future and a specific reason or purpose on how this amount will be spent.

This roadmap will automatically tell you what kind of return you will need and what the attendant risks there are.

This defines your own personal benchmark in deciding when to redeem your shares or when you should put in more investments given prevailing unit prices.

I wish to reiterate that investing is very personal.

The key is knowing what investment instruments suit you best.

Don’t get carried away by tips from kibitzers.

Remember:

1) If you were ready not to even save the 10 pesos daily and will have nothing at the end of 10 years, logic dictates that you should not feel bad if you lost the entire investment and have nothing at the end of 10 years.

But I am saying that it is really unlikely that you will lose the entire investment.

2) Do put your entire savings in one investment; only 10 pesos daily, which was really just an example.

In fact, the lowest investment in a mutual fund is an initial Php 5,000 and Php 1,000 additions thereafter.

After the first Php 5,000 investment, you would have to save 33 pesos daily instead of 10 pesos to reach your Php 1,000 additional investment per month.

If you cannot save 33 pesos daily, then this advice may not be something you can follow.

3) I am assuming that 33 pesos daily savings is something you can afford to invest and then forget. Let it just roll and be amazed what it can grow into in 10 years or longer.

4) Inflation rate went down in the past year and the average for the past five years is about 5.7 percent per annum but in the past two years, if you had taken my advice and chosen the best performing mutual fund, you would have earned 27 percent from April 2008 to March 2010 or about 13 percent per annum.

Note though that the first investment is the required Php 5,000 and Php 1,000 regularly thereafter.

For seven (7) stock or equity mutual funds, the average annual compounded rate of return over the last five (5) years ranges from a low of 8 percent to a high of 14 percent.

Note that this average already takes into account the horrible performance in 2008 where the stock market dropped by more than 50 percent.

I will continue with replies to “Litong Lito?” comments related to his real estate investment in Part 2 of 3 soon.

Thank you for your patience.

These coming months will be especially difficult for our country.

We have the El Niño drying up our water sources and creating havoc on our agriculture.

Campaigns and the elections will create a lot of stress in trying to discern who is best for our country and our respective communities.

The bright side of things is that whatever the result, for as long as the elections are conducted and concluded credibly, our economic future will be very bright.

However, if there is a failure of elections caused by the untested automated system, what will surely follow is a chaotic economic and social environment.

More jobs will be lost and each one will have to keep struggling to keep whole until better times come.

Yes, better times will come and we want to look ahead with this sort of parable of HOPE that someone shared with me.

The story has to do with the pear tree in a country, which had four weather seasons, namely, winter, spring, summer and autumn.

There was a man who had four sons whom he wanted to teach not to judge things too quickly.

He sent each of them on a mission to go and look at a pear tree that was far away.

The first son went in the winter, the second in the spring, the third in the summer and the youngest in the fall or autumn.

When they had all gone and arrived, he called them together to describe to him what they saw.

The first son said that the tree was ugly, bent, and twisted.

The second son said that the tree was covered by green buds and was full of promise.

The third son disagreed and said the tree was full of sweet smelling blossoms that smelled so sweet and looked so beautiful.

The last son said that he saw the tree full of ripe fruit ready to be picked and full of life and fulfillment.

The father explained to them that all of them were right because each of them saw the tree in only one and different season of life.

He told them that you couldn’t judge a tree by only one season of life.

The essence of what it is can only be measured at the end after completing all the seasons.

Therefore, if you give up on the tree during winter, you will miss the promise of spring, the beauty of summer, and the fulfillment of autumn.

We can apply this parable to our financial life where there are also these four seasons.

We are still probably in the winter of our financial options.

It has been very difficult for everybody whether an ordinary income-earner or a person with substantial wealth.

In fact, we have seen some take the radical solution in ending their lives simply because they are incapable of seeing farther than winter.

Just as sure as night and day, spring will follow winter.

The challenge though is that it is difficult to predict when each season will end.

It is especially most difficult to accept that “autumn” when all the big profits can be made will end.

Fortunately though, in the financial world, there can be little season cycles within the big season.

There will always be chances to save, invest and earn.

Every asset class has its time.

The challenge is to know which asset class rules in a given season.

This is why I always advise people to choose the right investment option only after making their personal financial plan based on their Personal Statement of Assets and Liabilities (SAL) and Personal Income and Expense Statement (PIES).

Mutual funds (MF) or Unit Investment Trust Funds (UITF) are usually right for most people because you need not invest all your savings in it.

It is also a long-term investment using savings that you can practically “forget.”

Just choose the best MF or UITF that will fit your objectives.

MF range from P5,000 minimum investment and UITF from P10,000 minimum investment.

Invest a small amount in it regularly, preferably monthly whether the market is up or down.

In this way, you will be averaging your cost over the years.

You do not have the look at it too often.

If you are buying regularly, your average cost will surprise you over the years.

Of course, the rule is always to buy low (during winter) and sell high (during summer and autumn).

But we cannot always be checking the market, unless it is our job.

MF and UITF managers know the seasons within the seasons and they will make their funds grow accordingly.

Don’t let the pain of one season destroy the joy of all the rest.

Do not judge life by one difficult season.

We still have the rest of our life still ahead of us.

For those interested in our Pisobilities Seminar on Saturday March 20 2-4pm, please call 6373731 or 6373741. For email inquiries, info@colaycofoundation.com.

Marami na po akong nadidinig tungkol sa Forex trading. May nakausap na po ako na mga agents and traders coming from different investment houses. And their promises are huge income in dollars and fast ROI.

For an investment of $5,000 or Php 230,000 pwede ka nang mag start as investor and pwede nang kumita in dollars. Non taxable ang profit.

My questions are:
1. Safe po ba na pumasok sa Forex trading?
2. Ano po ba ang mga risks na pwedeng mangyari?
3. Is it a stable business venture?
4. Bakit po sya non taxable ang profit?
5. Legal po ba na business ito?
6. Advisable po ba ang business na ito sa may mga small capital lang like Php 250,000?

This is a good example of the makings of a scam that promises big and fast profits.

Forex trading is a highly risky and volatile business.

This is best left to professional and institutional investors with large investible funds (generally in the millions and hundreds of millions).

This is not for the small investor to indulge in.

By its very nature, it is a trading game not investing in the true sense of the word.

It is also impossible for any trader or broker engaged in forex trading to guarantee profits to an individual investor at any time.

Nobody can really forecast currencies or any commodity trading.

Maybe, you can guess the movements a few times but never consistently on the long term.

You can make money a few times but could lose it and more over the long term.

In addition, if you are just an investor and not the actual trader, you will have to trust the institution and its traders who trade for you.

The pseudo ones actually choose who to give the profits to, usually the new investors, to further encourage them to bring in new clients.

Definitely, if you enter currency trading, you will actually be gambling with your savings.

So if any agent promises any profits, be assured that it is a scam.

These agents are there only to solicit new clients and earn their commissions. They are not there to serve your interest.

The $5,000 or Php 250,000 is a lot of money and if it is all you have, you should put it in a business or investment that you really understand.

More likely, the agent is not really explaining to you that your $5,000 is not your total exposure.

Currency trading takes a lot of time to learn and experience to be able to be reasonably conversant with it.

To do actual trading yourself will require more extensive studies and licensing as well.

Currency trading can be legal.

It depends on whether the company has the necessary license from the Bangko Sentral and the SEC.

You should ask them why the profit is non-taxable. In fact, you should quiz them carefully before even considering them.

There are many other options if you want to invest.

Don't be lured by quick returns and fast bucks.

Remember my advice. “The best way to get rich quick is to get rich slow. In investing, slow is fast.”

Happy New Year to all!

At the end and at the beginning of the year, people are more aware of the need to change our ways. This email will require three parts so I hope you will follow the replies in the next issues.

“I got to read your article in the GMA news TV blogger section... I have been searching for a financial adviser for some time now...I believe I need one because I can't seem to really get a grip on my money.

I spend so much that I have maxed out my credit cards (there's two of them) and I have a personal loan. I've gotten myself out of my financial mess before and just when all was doing fine, I'm back in this messy game of debts.

I am a fan of some US financial advisers and I try to do what they say which is why I got myself out of debt also before. I have started saving automatically via our company's coop that automatically deducts my advised amount every payday. I've set up a checking account and a savings account as well.

Unfortunately, it's only the coop savings that is intact right now and I now believe I know the answer...If money is easily accessible to me, I tend to find ways to spend withdraw and spend them. That is why the coop money is hard to spend – it takes time and a lot of paper work to withdraw it so I lose heart to do so.

With this realization, I know that if I am to save, I should do it automatically and it must be in a place that is not as accessible as a savings or even checking account. And that someone whom I can trust so that I don’t backslide must monitor me.

I am drowning in credit card and personal loan mistakes I have made which affect my daily expenses, my daughter's education college plan and my life insurance payments and all these are starting to affect my relationship with my husband...I want to fix my financial mess and save and even invest later on...but I need someone to help me...

I am a manager in a top company and I earn a good salary but it still doesn't seem enough. I hope you could help me (or refer someone who could help me with step 1 all the way to financial wellness) because I am seriously in need of it...”

My reply:

Thank you for trusting us enough to explain your situation. You have gotten out of debt before so obviously, you can be a determined and disciplined person, if you want to be.

As with many other persons, success probably made it is easy for you to find excuses and backslide believing that you can get out of problems should these crop up again.

Your favorite US financial advisers are very good financial advisers and following their advice got you started on the right path.
When you read and listen to them today, they do not say anything different from the first time that you encountered them because their principles are solid and will not change.

You need to review what you did before and what has changed that made you forget the principles that you were following.

You mentioned that automatic deductions to be invested in your company coop prevent you from spending because it is not easily accessible. This seems to show that the items you were spending for were not really that important. If the expenses were so important, then, no matter how difficult, you would get your coop money.

A personal loan of P90k also requires documentation and yet you availed of it. There must have been a special reason unless that was done through a credit card as well which made it so easy.

You know the principles and yet you seemed to have forgotten them when you were not longer in debt. While you could have a financial adviser, a real one will not/should not hold your money for you.

Perhaps, it is best to solve your problem with your whole family involved including your child if possible so she can understand the need to cut down on expenses.

We suggest that you sit down with your husband and put everything down in writing. As we always remind people, money is a family matter. And when the family is involved, solutions to money problems readily present themselves and become relatively doable.

Review all your "mistakes" by examining exactly where the money went and then seriously begin to establish financial goals with specific time lines. It's time to really execute your own purpose-driven saving & investing.

It is imperative though that you first prepare your latest family Statement of Assets and Liabilities and your Personal Income and Expense Statement. These will be your baseline for moving forward to instituting your own wealth generation program.

For now, consider “investing in debt” right away. You should start preparing yourself to the possibility of selling all your assets that are not really that important to generate the cash and pay off all your debts starting with the credit cards.

When you finally are able to grow out of debt, you will have that much more free cash to invest for your future.

Write down your new budget. Follow the principle: Income minus Savings equals Expenses.

At the moment your “Savings” are paying off your debts but when these are paid off, you should really actually save the amounts.

Live within the balance by cutting down on your WANTS and strictly spending only on NEEDs until your debts are fully paid.

If you do not know how to make these Statement of Assets and Liabilities (SAL) and Personal Income and Expense Statements (PIES) budget, you can study our publications, which teach you step by step how to do these.

Besides your US financial advisers, you might want to check on my books that give the same principles but for the Filipino audience and our website, www.colaycofoundation.com.

In the final analysis, you can get out of your financial problems again. However, do not make this a habit.

What you are losing in the process is the time to be able to prepare for your future. You are giving yourself very temporary “pleasures.”

In fact, just after a few weeks after spending, you already have pain and worry because you are unable to pay for your credit card bill.
You have a very good job but you will not have it forever. Use the time you have left to save for your future because you will need it.

In the end, your success is really all up to you.

I would like to add my comment to other emails with similar requests for financial advice.

When you look for a Financial Advisor, I will always ask you to study, not just read, my books first.

For the amount of information you will get, the books are well worth the price. In addition, if you write or visit Colayco Foundation for Education (CFE), we offer you all the options that we know to be good and provide you the names and websites you can visit and study.

Our books, in particular "Making Your Money Work" will be really helpful for choosing the options.

It is not only a matter of knowing how to compute, it is important to understand the principles that go into personal financial planning. You need to understand the principles that are important to move forward.

Remember that when you talk to a Financial Adviser, you will also need to openly show all your SAL and PIES details for them to help you. There will also be a fee unless you go to one who is actually an agent of an insurance or investment company trying to sell you his options.

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