When you want something very badly and don’t have the cash available, you might be tempted to use your credit card without any clear idea of how you will pay for your statement when it comes. Chances are, you will fall into the credit card debt trap. To help you strengthen your discipline not to fall into the temptation, it is good for you to understand what you will have to go through if you ever get into credit card debt. If you are already in credit card debt, then it will be good for you to take heed of the advice.

The highest interest rate charged for loans is the interest on credit cards. When you are not able to pay the complete amount in your statement, the amount due becomes a loan. Unfortunately, interest cannot be suspended and does not end until you pay off your loan completely. Interest rate of credit card loans is usually 3.5% per month. This is 42% per year when the usual loan interest rates are about 12-17% per year. To make matters worse, the amount you pay each month will be used to pay off the interest due on your outstanding balance first before even reducing the loan amount. This means that it is possible that you are paying mostly interest every month and hardly reducing your loan amount.

In addition, finance charges are based on the remaining balance due on the previous billing plus new transactions incurred from the current billing cycle. This means that the moment you get into credit card debt, you have to cancel your credit cards right away and use only cash. Write the company, cut the card and send it with the letter to the bank. Negotiate with your credit card company for a payment schedule with a lower interest rate and try to ask for penalties to be condoned.

For those in debt, if it took you some time to accumulate your credit card debt, it may take you even longer to get out of it especially if you do not start immediately. But do not despair. So many have your same problem but so many have been able to get out of it because of discipline and determination. Your addressing the problem now is a sure sign that you can do it.

For those who are happily not into any credit card debt, don’t even think that you should try it because anyway, you can get out of it eventually. I assure you that you do not want to create stress for yourself and to waste your time thinking of how you will do this. It is better to deprive yourself now of whatever it is that you want to buy. Save first to get the item rather than allow yourself to get into debt. Look at what you have to go through.

Start right away by “investing in debt”. Prepare a reduced spending plan (actually a savings plan) in writing with specific spending items to be reduced, which will be your source for paying your debt earlier. There should be clear timelines or deadlines to reduce your debt.

Save every peso possible to pay off your credit card bill. Respect each peso because it is the start to credit card freedom. Focus on savings first, concentrating on Needs and completely removing any Wants in your daily expenses. The next big move would be to look for additional income. It is important that you talk about these with your spouse and children so that they will be completely cooperative and disciplined enough to limit expenses to Needs. We talked about this in the June 20 blog.

The savings suggestions might sound difficult but you really have to seriously sacrifice until the credit cards debts are fully paid. You will be in bigger trouble if you don’t move very quickly. Remember, these are just the bitter medicines and if properly done, is really only temporary until you get all your plans together.

The only good reason you can borrow at this point is to consolidate all your credit card debts into one loan. You must, however, declare this to the company that is willing to lend you. Most of all, you must make sure that you will be paying less interest rate to this new lender compared to the interest rate incurred in your current credit card debt. You must look at all the hidden costs like service charges etc. Those are not immediately noticeable.

As the use of credit and debit cards becomes more widespread, more techniques for fraud will also be created. With the benefits come risks and costs. Major card issuers have come out with advisories on cards issued from developing countries with the Philippines among them. Recently, the major card issuers like Europe-Pay, Master Card and Visa have come out with more stringent standards on security features of credit cards to force the banks to take more serious steps in eliminating fraud.

Actually, you have the real responsibility for the security of your credit card. The credit card companies and banks can only do so much. I want to share with you tips that I have personally experienced and that have been relayed to me by others.

Do not sign the back of your credit cards. Instead, put 'PHOTO ID REQUIRED.'
Make sure the credit cards in your wallet are yours.
When you to sign any receipt charged to your credit card, make sure you scratch the number off. Some establishments are using only the last four digits, but some of them are still putting all the information.
Many people just take back the credit card without even looking at it, "assuming" that it is theirs. FOR YOUR OWN SAKE, DEVELOP THE HABIT OF CHECKING YOUR CREDIT CARD EACH TIME IT IS RETURNED TO YOU AFTER YOU USE IT!
Cellular phones can take pictures of your credit card without your even knowing it. Whenever you are using your credit card be aware and notice who is standing near you and what they are doing when you use your card.
Place the contents of your wallet on a photocopy machine. Copy both sides of each credit card. Keep the photocopy in a safe place. This way you have all of the account numbers and phone numbers to call to cancel. By the way, do this also for your passport, license etc.
When you are writing checks to pay for your credit card Accounts, DO NOT put the complete account number on the 'For' line. Instead, just put the last four numbers. The credit card company knows the rest of the number, and anyone who might be handling your check as it passes through all the check processing channels won't have access to it.
If your credit card is stolen, file a police report immediately in the jurisdiction where it was stolen. Remind the credit card company to place a fraud alert with the organizations who can trace especially through the internet.
* Generally, try not to use your credit card in the internet. There are so many ways for computer experts with bad intentions to make your life miserable. But sometimes, it cannot be helped because of expediency. Here are some tips to lessen your exposure:

1) You should be sure that the company you are dealing with is really reputable. It is better that you have visited their offices and checked out their credentials with the SEC and other government agencies related to their business.

2) Make sure that the website is really that of the company. Sometimes, websites use the name of other companies and you may not realize it. You can check this out when you visit/call the company yourself.

3) Reputable websites have safeguards for your credit card not to be intercepted by hackers. The warnings come out in the website telling you what procedures to follow and how you are protected. If there are no warnings and there are no safeguard notices and procedures, be wary. All the more you should take time to visit their offices.

4) Use only one credit card for internet purposes and review your statements very carefully. Keep a good record of the charges you make each time. You will not receive a copy of your charge slip like you do when you buy something regularly. You have to take extra effort to keep your records well.

5) Be aware that you must protect very especially the three numbers at the back of your credit card located beside your signature. Anybody can know your name and your credit card number but without these numbers, you cannot be charged by anyone.

6) If you get a charge that is not yours, you should alert the credit card company immediately. Sometimes the amount is small but they could just be testing you. Even if it is a hassle, you should report it. If you don’t, the next charge might be much bigger. The credit card company will ask you to pay for your entire bill even if you have a question. Otherwise, you will be charged for late payment penalties and fees, not only for the questionable amount but also on your future usage while the questionable amount is unpaid. When the credit card is able to verify that you are correct, they will reimburse the mistake and change your credit card number and card for free.

Another reminder: You must all understand the terms of your credit card even before you apply for it. When you receive the actual card, you must take time out to read the terms printed in the document that comes with the card even before you actually use it. If you still didn’t read it then, the terms are again printed behind each monthly statement that you receive. If you cannot understand the terms, you should ask them to explain the terms completely.

To own a credit card, you have to pay yearly. In many cases, the credit card company offers the first year charge free to entice you to take the card. But the next year charge is no longer free. You can pay in cash or you can use the points that you have accumulated from past purchases, if you have enough points. Each credit card has different ways of accumulating points so you have to ask them.

It can be interesting to manage your credit card and the points that they offer that give out nice gifts. Just be sure you pay on time so that you do not get into unwanted credit card debt.

Remember that you need to write info@colaycofoundation.com if you want me to answer your questions.

FRANCISCO J. COLAYCO is an entrepreneur, a venture developer and financial advisor. He has over 40 years of experience that covers service contracting in the Middle East, manufacturing, trading construction, shipbuilding, management consulting, banking and financial services. He is the Chairman of the Colayco Foundation for Education (CFE), a prime mover of the financial literacy movement. He joins our website blog to share with ordinary income earners, Overseas Filipino Workers (OFW) and students the simple principles to "Save what you earn and grow what you save."

CFE is the publisher of Mr. Colayco's bestsellers: Wealth Within Your Reach (2004 National Book Award for Business and Economics), Making Your Money Work (Nominated in 2005, National Book Awards Business and Economics), Pera Palaguin Workbook and Money for Kids. The books are available at National Bookstore, Powerbooks, Fully Booked and other bookstores or directly from CFE. CFE is also the producer of the PISOBILITIES DVD series, available at all SM record bars, Odyssey, Astrovision, Astroplus and other major audio-video stores nationwide.

CFE conducts talks, seminars, and workshops. Learn more about the advocacy at www.colaycofoundation.com or via email info@colaycofoundation.com, text +63917-8537333.

Some things may seem so basic and should be part of common sense. But actually, many do not think out issues carefully. People do things mostly on impulse and those who are not impulsive, analyze a little and then just assume things will work out on what they have decided after partial thought. They take action based on goals that are not sufficiently clear or detailed. The biggest example of this phenomenon is the hundreds of thousands of OFWs who invest their hard-earned savings on businesses offered to them that are clearly unsuitable to their particular situations. And why did they invest? They were simply driven by their general desire to earn more money. The how, the when and the why issues do not even get serious attention. They rush to invest without defining their expectations. Worse, they do not even compute what they will make out of it versus the possible risks of failure. They invest based on the assurance of trusted friends and relations who are not even qualified nor experienced enough to give them such advice.

This kind of confused decision process is demonstrated every day. It is so common for OFW families to rush investing in tricycles, FX taxis, sari-sari stores, etc, etc. When asked why they invested, nine out of ten are not able to say why except to say, “I wanted to get into business and make money”. Their objective of getting into business is valid. But in reality, the investment does not serve the real purpose of making money. The thought processes, unfortunately, end there. No further thinking goes into asking whether or not the particular business will, in fact, make money for them. They listened to stories that their investments would be profitable based on the experiences of others. They should have at least asked themselves two more questions. What is it that I should earn and how will this investment make me earn that amount? The failure to ask these questions is precisely because people generally do not define their purpose clear enough so that they can correctly study it sufficiently think it through before they decide.

Cultural nuances

There are three Tagalog phrases that, to my mind, reflect perhaps this cultural flaw in our thinking processes. These are: “Pwede Na (That’s good enough), Medyo (More or less) and Akala ko” (I thought that, or I assumed that). These words show thinking that is not exact and accurate. Unfortunately, this kind of thinking finds itself in the work place resulting in mediocre performance.

Overseas, the Filipino worker behaves differently. He is extremely productive and the reason is because he is given specific and detailed work objectives, which are measured on a regular basis. The reason is clear. Rules and other work-related systems are required. Supervision is consistent. Proper tools are provided and the workers are given feedback of their productivity very quickly and regularly. There is no room for imprecision.

In most local organizations, decision processes are mostly influenced by behavioral or cultural feelings and practices. Short cuts are more the rule than the exception. Any questions or doubts, if any, are resolved based on assumptions. Even where strict rules on quality control and management systems are in place, the quality of action still, more often than not, falls below standards. Supervision is perceived most lacking when in comes to service industries. When supervisors face a situation where they have to choose to stick by the rules versus cutting work time or “hurting the feelings” of either clients or co-employees, rationalization wins. For example, they start thinking that the employees will feel bad if their attention is called and cannot work well anyway. So, they allow them not to follow the strict rules. Or they need to meet a deadline so they allow short-cuts. All the other employees see these bad examples. Eventually, everybody follows the wrong standard and quality suffers.

How does one overcome these behavioral or cultural practices? One way is to start on the financial aspect of one’s life. After all, finance will probably be the most precise part of each person’s personal life. Practice in being precise in the management of personal finances, encourages care in the thinking process in work, family and other relationships.

The first exercise in managing personal finances is to know where one is financially at any point in life. A Personal Statement of Assets and Liabilities and Personal Income and Expense Statement are requirements to get started. With these tools, one can be more precise in moving forward to make his own Personal Financial Plan. With such a plan, one can better assess the opportunities that come up.

In teaching financial literacy, our CFE Team gives the basic principles and “commandments” but reminds everyone that no one can start on a journey without a map. The journey to financial literacy starts with one’s financial plan. What the plan is able to do though is that enables the individual to draw up alternative road maps to reach the same personal financial goal. No short cuts, no “Pwede na”, no Akala Ko”, no “Medyo” can be allowed.

I have to remind the reader that I can only reply to comments or questions sent to info@colaycofoundation.com.

FRANCISCO J. COLAYCO is an entrepreneur, a venture developer and financial advisor. He has over 40 years of experience that covers service contracting in the Middle East, manufacturing, trading construction, shipbuilding, management consulting, banking and financial services. He is the Chairman of the Colayco Foundation for Education (CFE), a prime mover of the financial literacy movement. He joins our website blog to share with ordinary income earners, Overseas Filipino Workers (OFW) and students the simple principles to "Save what you earn and grow what you save."

CFE is the publisher of Mr. Colayco's bestsellers: Wealth Within Your Reach (2004 National Book Award for Business and Economics), Making Your Money Work (Nominated in 2005, National Book Awards Business and Economics), Pera Palaguin Workbook and Money for Kids. The books are available at National Bookstore, Powerbooks, Fully Booked and other bookstores or directly from CFE. CFE is also the producer of the PISOBILITIES DVD series, available at all SM record bars, Odyssey, Astrovision, Astroplus and other major audio-video stores nationwide.

CFE conducts talks, seminars, and workshops. Learn more about the advocacy at www.colaycofoundation.com or via email info@colaycofoundation.com, text +63917-8537333.

During this serious time of hardship because of the rice shortage and soaring gasoline prices, it seems out of place to talk about wasteful consumption. You might react saying that what you earn is not even enough to pay for food, rent, utilities, and transportation to and from work. How can you even think of wasteful consumption? Some of you might say that it is easy for me to tell you to limit your expenses because I don’t know what it is to be in your situation.

Unfortunately, I am also affected by all these price increases. For those who have read my books or my articles in other publications, remember what I said before that each one has a chosen lifestyle. I am not filthy rich. I have enough for my chosen lifestyle. Except for the filthy rich, no matter what your chosen lifestyle is, any increase in price will affect your financial plan and it will hurt you because that is not what you want for your lifestyle. The main difference is that I will not go hungry like what is happening to so many of our countrymen. I can adjust my lifestyle by simply reducing my wants.

Many times, a lot of families do not even know where their money is going. They just say they are unable to save. Many people think they are poor but in reality, they are not poor. They just can’t buy everything that they think they want. There are many ways of saving a little more each day.

Our CFE Team shared with us some of their practices in their families and stories of other families to help cope with the difficult times and continue saving. I’d like to share some with you.

All family members are involved in discussions about money and its management (spending, saving, investing, etc). Parents try their best to be good role models to their children.

The biggest help in saving and managing family finances are the children. Parents have to carry a "positive" attitude during money matters discussion and try not to “lecture”. They have to sound confident, honest and open ask a lot of questions to find out where the children are coming from.

A big rule is “NOT TO TALK DOWN to the kids and NOT TO BRING UP OLD money disagreements. It is good to talk to the kids about money matters.
They feel trusted that they are mature and responsible enough to be allowed involvement and with some independence.

All members of the family who are old enough to write try very hard to always carry a small notebook for our expenses. It helps each member at least in identifying, labeling and categorizing his expenses so that we can really understand where our money went.

Samples of expenses and savings that can be discussed as a family are electricity, water, gasoline, food, entertainment, vacation, and tuition. Some interesting practices are quoted and shared below.

“We don’t have house help. Each member has a responsibility area in the house. The kids have agreed and accepted that YES they may eat to their hearts' content but no eating out - my kids cook! Our kids go with us to the grocery holding the grocery list that ALL OF US agreed on with a very strict rule - if not on the list; HINDI bibilhin!”

“We have a vacation fund not just a vacation envelope. We agree on our targeted vacation fund. We regularly set aside savings for the vacation and invest it regularly in a mutual fund. The cost of the vacation we finally get will depend on what our vacation fund earns. We know that for this year, we may have to postpone our vacation because of the low mutual fund prices. However, we look forward to a better vacation when prices improve.”

“We understand that there should be no such thing as an emergency loan for tuition fees. Tuition fees are not an emergency. We all know that the period May to June are school fees time so we have a separate envelope for this. From the start of the school year, we have the motto - Save Now to Enroll for Next School Year”.

“Recreation/Family Bonding Moments need NOT be costly or pricey all the time.
One weekend we had quality and good quantity of bonding time of 5 hours with the kids - chit chatting, laughing and a lot of horsing around at the cost of PhP45.00 - a deck of cards! We learned/re-learned and played various card games from 10pm to past 3am!”

Other inexpensive bonding activities told to us are:

- freesbie playing in the park
- playing a sport together (an inexpensive one)
- movie watching at home not in the malls

Finally, one practice that is clearly effective is making sure that every family member knows the true financial condition of the family. Everyone knows that if we don’t save, we will all suffer the consequence. Posted around the house is the sign: “IF YOU DON’T WANT TO AGONIZE… ECONOMIZE.”

May I please remind everyone that I will not be able to reply to questions unless these are sent to info@colaycofoundation.com.

FRANCISCO J. COLAYCO is an entrepreneur, a venture developer and financial advisor. He has over 40 years of experience that covers service contracting in the Middle East, manufacturing, trading construction, shipbuilding, management consulting, banking and financial services. He is the Chairman of the Colayco Foundation for Education (CFE), a prime mover of the financial literacy movement. He joins our website blog to share with ordinary income earners, Overseas Filipino Workers (OFW) and students the simple principles to "Save what you earn and grow what you save."

CFE is the publisher of Mr. Colayco's bestsellers: Wealth Within Your Reach (2004 National Book Award for Business and Economics), Making Your Money Work (Nominated in 2005, National Book Awards Business and Economics), Pera Palaguin Workbook and Money for Kids. The books are available at National Bookstore, Powerbooks, Fully Booked and other bookstores or directly from CFE. CFE is also the producer of the PISOBILITIES DVD series, available at all SM record bars, Odyssey, Astrovision, Astroplus and other major audio-video stores nationwide.

CFE conducts talks, seminars, and workshops. Learn more about the advocacy at www.colaycofoundation.com or via email info@colaycofoundation.com, text +63917-8537333.

Two Similar Emails on Condominiums:

Question #1: “sir, thanks for all your financial guides...i just want to ask questions about investing in condo...a lot of condo projects are coming up, their selling point is "good investment". may i ask, is buying or "investing" in this type of project is really an investment? what are promises or good possibilities of having this kind of investment? at the current situation in phils, is it really wise to invest in pre-selling condos?”

Question #2: “Moving towards financial stability that I learned from your books, I'm thinking of purchasing a condominium unit, because not only it's much cheaper compared to a regular house and lot (here in Metro Manila), it also allows you to choose one that's near your work.

However, I have these questions that make me skeptical. Is it a good investment? I mean, will the unit value appreciate over time? Will it be the same with the other unit of the same size or will it differ base on the location. Is it the higher the floor the better, or vice versa?

I know that you have a title and all, but is it also true that it will be demolished after 50 years? If so, what happens to your property?

My impression is like this; the floor you're stepping is the roof of another people. Just like the wall you have, you're sharing it with someone else. It's like the ownership is really not established. What happens in case of fire and the building (God forbid) turns to dust? Do you still own anything? I've asked these questions to real estate agents but they can't give me any straight answers.”


REPLY:

You can check out http://www.geocities.com/reibs.geo/Informative-condominium.html to answer your questions on how a condominium is to be built and operated.

If you are buying real estate to establish your home, your parameters should be more focused on what is most convenient for yourself and your family. As a home, it should not be looked at as a financial investment. Rather, it should be considered as a life goal. However, if you just want to invest, please make sure that you have carefully analyzed a real estate investment versus other investment options based on your personal financial plan.

If you definitely want to just invest in real estate, choosing between a condominium and a house and lot would use the same parameters in analyzing its financial viability. Here are some of them.

1. location which includes convenience and attractiveness of neighborhood and security.

2. reputation for quality of development of the builder (this is particularly true for condominiums which are high-rise)

3. rules of the association governing the neighborhood and costs in relation to this association

4. your ability to maintain all amortization and maintenance (association, repair, taxes) payments.

If you intend to rent out your condominium, you need to project your income and costs and assume that there will be times when the unit will be vacant and will need repair. Rental rates normally over around 5% of the market value of the condo unit provided rental income is constant throughout the 12 months in a year. Vacancy rates therefore have a very strong impact on the effective return on the rental property. In considering buying a condo unit for rental purposes, you must assume at least a 20% vacancy rate over the life of the property.

The condominium requires you to live in closer proximity to others and that could be difficult. At the same time, it gives you better security because you can leave your unit and it will be more secure (if it is a good condominium, of course). It is all a matter of personal preference. There will always be a group that will prefer an individual house and a group that will prefer a condominium.

Many who have cash to invest like to buy condominiums that they will have their children inherit eventually. In the meantime, they believe that the condominium will bring them some income in the meantime plus even increase in value. However, as children grow older, more and newer condominiums will be built. Your choice may not be your children’s choice.

As a financial investment, condominiums do not generally perform well over the long term compared to stock mutual funds or even balanced mutual funds and other types of securities. Except for a few notable offerings, the costs of owning condominium units drag down the resale value. Physical depreciation of units, monthly membership and maintenance dues plus real estate taxes imposed on condominium owners can be quite substantial over the economic life of the unit. There is also the issue of capital gains tax and the VAT applicable when the unit is sold. All these taxes have to be paid before you can transfer the ownership registration of the condominium unit to the buyer. If you include all these ownership costs and the reduced rental earnings due to the 20% vacancy rate, the percentage net return per year when you sell the unit (assuming you can find a buyer) can be very disappointing. Simply put, the cost of acquiring a condo unit is not your only cost. The cost of ownership and the cost of selling are real costs to the owner. And these generally make condo units marginal investments.

I will also not react to issues not related to personal financial management. You can email us at info@colaycofoundation.com if you want to clarify anything. We reply to all emails to us. I will try to reply to relevant matters brought up in the blog but I cannot assure you that I will choose your topic and/or when I will write about.

FRANCISCO J. COLAYCO is an entrepreneur, a venture developer and financial advisor. He has over 40 years of experience that covers service contracting in the Middle East, manufacturing, trading construction, shipbuilding, management consulting, banking and financial services. He is the Chairman of the Colayco Foundation for Education (CFE) and the author of bestsellers: Wealth Within Your Reach (2004 National Book Award for Business and Economics), Making Your Money Work (Nominated in 2005, National Book Awards Business and Economics), Pera Palaguin Workbook and Money for Kids. The books are available at National Bookstore, most other bookstores or directly from CFE. He joins our website blog to share with ordinary income earners, Overseas Filipino Workers (OFW) and students the simple principles to "Save what you earn and grow what you save." CFE conducts talks, seminars, and workshops. “Managing Personal Finances For The Future” a seminar-workshop developed in partnership with the Ateneo Graduate School of Business, Center for Continuing Education. June 21, 2008, Saturday, 9:00 am to 6:00 pm. For registration and inquiries, please call Marleth Calanog at 830-2050. CFE is also the producer of the PISObilities DVD series, available at your favorite audio-video shops in May 2008. Learn more about the advocacy at www.colaycofoundation.com, email info@colaycofoundation.com, via SMS +63917-8537333 or through (632)637-3741.

In my May 13 blog, there were significant comments related to the risks of Mutual Funds (MF) and Unit Investment Trust Funds (UITF) specifically on the need to understand risks.

I could not agree more with the comment that one should not just follow without understanding the risks. In fact, in my first book, “Wealth Within Your Reach,” one principle I emphasize is “Seek Professional and Expert Advice.”

However, I do not agree with the comment that, in analyzing, negatives should come before positives. What is more important is to first have a specific financial goal in an absolute amount over a specific and definite time period It is only when you have such a clear and definitive target that you will be able to assess the level of risks you must take to reach that targeted amount. Without that amount and time period, there is no way for you to identify and evaluate the odds or risks in achieving your goal. Once you have set such a target, assessing the pros and cons go hand in hand. And, in assessing the negatives, understand why they are negatives and how you can therefore reduce their influence. A blog, by its very nature, cannot be all encompassing. This is why I emphasize that people who need to clarify anything can email us for more information.

Before talking about the risks in MF and UITF, you must understand that there will be fluctuations in the value of the MF and UITF Net Asset Value or NAV. NAV is the computation of the value of each unit share based on the market value of all the investments in the portfolio of each MF and UITF. A MF and UITF can be likened to a basket of many fruits that a group of friends bought by contributing the amounts of money they could afford. Here, the underlying assets that support the value are the quality and quantity of the fruits in the basket. There are a different number of pieces of each fruit in the basket and each has a different value. But the friends want to know how much their ownership is in the basket of fruits because each of them contributed a different amount to buy the fruits. In the same way, each MF or UITF is made up of different financial assets in varying quality and quantity. This is what makes the specific MF or UITF desirable or not. The composition of the financial assets in the Fund is determined and decided upon by the Fund Manager. This is why we always say that you should pay close attention to the character and strategy adopted by the Fund manager of the MF or UITF you are invested in.

The process of computing the NAV can be likened to being able to compute the ownership of each friend in the basket according to the amount of money he contributed. It is a mathematical process that is accepted worldwide by all financial institutions. The NAVs of MFs are published daily in newspapers and websites. The NAVs of UITFs are published in the website of the bank offering the NAV.

Let me now clarify what I mean by risk. Everything has a risk including your life. Each minute of your life here on earth, there is the risk that you can die. The lowest risk is when you are born without any problem whatsoever. The risk of dying increases, as you grow older because we will all die. Your risk of dying increases if you have a disease, if your job is dangerous, if the place where you live or work is dangerous, etc.

It is the same with investment risks. There are risks in all investments and the least risk is in Government Securities. The higher risks are in putting up your own business particularly if you do not really know or have a passion for the business. Directly investing in the stock market if you are not technically knowledgeable and/or investing in properties and products that are questionable or are beyond what you can afford will certainly result in capital losses. This is because you can lose all the capital you invest.

The higher the risk, the higher the return. The lower the risk, the lower the return.

While there are risks in MF and UITF, the real risk lies if you make the investment for a short time period only. The greatest mitigator of risk is TIME, not TIMING.

Thus, you can take bigger risks if you have much time available to achieve a specific financial goal. This also means that because you are expecting a higher return, the amount you need to invest will be smaller compared to targeting the same amount of financial goal but over a shorter period of time.

The NAVs go up and down over short periods but in long periods like three to five years, the NAV levels are increasing. So you can reduce the risk of losing value by being prepared to keep your money invested for at least three (3) to five (5) years. This is one way of controlling the risk in possible reduction in NAV value. When the NAV fluctuates, you should not panic. As long as you do not sell, you have not lost any money and the NAV will eventually improve. The moment you sell at a loss, your loss is permanent.

You must also remember that MF and UITF do not give interest or dividends. You get your money back only when you sell your shares. The difference between your buying NAV and your selling NAV is your profit or your loss. You must choose to sell when the NAV is high enough for the returns to be acceptable to you.

There are three types of MF and UITF. Equity or Stock Fund, Fixed-income or Bond Fund and Balanced Fund. An Equity Fund is mostly invested in the stock market and therefore offers higher gains but is also more risky A Fixed-income Fund or Bond Fund is mostly invested in government securities and other fixed-income securities and therefore offers modest returns because it is less risky. A balanced fund is where half of the fund is invested in the stock market and the other half is invested in bond or fixed-income funds. The returns here would be moderate but so also is the risk.

It is best to always spread your risks. Do not put all your savings in one type of investment or in one company. You choose the risk that is best for your own financial plan.

When you start saving and investing early in your life, you can take the bigger risks and therefore, have the chance to earn higher income from your investments. If you make a mistake in taking the bigger risk and losing the income that you were looking forward to, you still have the time to recover. It is just a matter of making a clear personal financial plan and strategy to reach your objectives.

Unfortunately, if you are advanced in age and have not planned for your retirement when you were young, the automatic tendency is to want to make up for lost time and choose the high income potential even if the risk is very big. That is a big mistake. Making high-risk investments at your old age is pure gambling.

In MF at UITF, you should also spread your risks. Choose to invest only from the top ten best managed and best earning funds. And, if you have enough savings, choose to invest in different types. For example, do not choose all equity funds or all fixed-income funds or all balanced funds. Spread your risks by putting a part in equities, part in fixed-income and part in balanced funds. Again, how you distribute your investments will depend on how much you want to accumulate over a specific amount of time.

I will take up the advantages and disadvantages of investing in a condo in my next blog. This was a significant comment in the May 13 blog.

FRANCISCO J. COLAYCO is an entrepreneur, a venture developer and financial advisor. He has over 40 years of experience that covers service contracting in the Middle East, manufacturing, trading construction, shipbuilding, management consulting, banking and financial services. He is the Chairman of the Colayco Foundation for Education (CFE) and the author of bestsellers: Wealth Within Your Reach (2004 National Book Award for Business and Economics), Making Your Money Work (Nominated in 2005, National Book Awards Business and Economics), Pera Palaguin Workbook and Money for Kids. The books are available at National Bookstore, most other bookstores or directly from CFE. He joins our website blog to share with ordinary income earners, Overseas Filipino Workers (OFW) and students the simple principles to "Save what you earn and grow what you save." CFE conducts talks, seminars, and workshops. “Managing Personal Finances For The Future” a seminar-workshop developed in partnership with the Ateneo Graduate School of Business, Center for Continuing Education. June 21, 2008, Saturday, 9:00 am to 6:00 pm. For registration and inquiries, please call Marleth Calanog at 830-2050. CFE is also the producer of the PISObilities DVD series, available at your favorite audio-video shops in May 2008. Learn more about the advocacy at www.colaycofoundation.com, email info@colaycofoundation.com, via SMS +63917-8537333 or through (632)637-3741.

FINANCIAL LITERACY IS NOT ABOUT NUMBERS.
IT IS ALL ABOUT MINDSET.

“Saving for a rainy day” starts with a mindset of abundance. Some believe in the saying “Make merry today because tomorrow you die.” or “I can’t even make ends meet with the increased cost of living.” or “I can’t wait for 40 years. I might as well play the Lotto and hope to hit it big.” Perhaps then, saving is not for you and no matter what I say, you will not want to save. That is your choice.

A word of reminder, though. In a market-driven economy like ours, it is an obligation to save, invest and sustain financial well-being over your lifetime. The simple reason is that you will not be able to work and earn actively for your entire life. You need to plan for the day you can no longer earn actively. You need to provide for your future. Thus you must learn to keep a portion of what you earn and do more with what you keep! Life is about growing your earnings, protecting it, learning how to spend it wisely and sharing it.

For those who question how P10 per day can grow to P28million in 40 years if you invest at 20% per annum, I’d like to bring up: Time and Compounding. Let’s put it to good use.

When I was a struggling youth, I would look at the rich and believe they had everything. True, they had the money to start with and I had to start with practically nothing.

Unfortunately being young, nobody emphasized to me in money terms that rich or poor, we all have 24 hours a day. No amount of money can buy even an extra minute to extend our day. An hour that has passed is forever lost.

So now I want to pass on to you that whatever it is you want to do, you must do it now.
Time is your greatest asset and in fact, is part of the capital you have to grow your wealth. Combined with savings and the knowledge on how to use compounding, you will be well on your way to financial independence.

“Compounding” is a phenomenal tool to grow wealth. Albert Einstein defines it as man’s greatest invention. Compounding can grow even a little amount into a huge amount if you allow it to stay invested for a long period of time.

You just “roll” your money. You allow the earnings on your investments to be added to your principal or original investment amount. The result is that your principal and its earnings will earn even more earnings each year. For example, in one year, 1000 pesos that earns 20% per year will grow to 1,200 pesos in that one year. In the second year, if you “roll” the entire amount of 1,200 pesos to compound, it will earn 240 pesos for a total of 1440 pesos (P1,200 + P240). As time passes and as you continue to roll your investment and earnings, allowing it to compound, the growth in earnings becomes even faster. For example, 300 pesos saved each month and invested to earn 20% compounded per annum will grow to 28.8 Million Pesos in 40 years. This is 200 times PhP144,000 (300 x12 x 40), which is the actual amount of cash you invested over the 40 year period.

Note though that if you SPEND the yearly earnings or gains of your investment, after 40 years, you will be left with only PhP144,000. This is the same amount of money you set aside. This is because you did not avail of the power of compounding.

I personally did not take advantage of this principle in my early working years. Like most young professionals, I was impatient and wanted to live a lifestyle I wanted right away. Looking back, I would probably have ten times more of what I have now and be much better off, had I religiously invested even small amounts and practiced these principles much earlier.

For those who doubt the very assumptions of 20% and 40 years, let me set the parameters more strictly for the sake of argument.

If you are going to absolutely technical about it, we all know that:
1) It is not possible to invest P10 to earn any amount of interest. Even a savings account will require a minimum deposit of P500 in some banks and P1,000 in most banks.
2) Earnings of 20% per year is difficult to attain for a short-term investment.

However, it is possible to:
1) Pool your small money with an investment “club” made up of friends or save your money until it accumulates to P5,000. You can then invest this amount in equity mutual funds which can average a yield of 20% per year over a period of at least 5 years.
2) In most Mutual Funds, It is possible to add as low as P1,000 or more to your P5,000 investment as often as you want.

We can email the specific results of certain Mutual Funds to those who are interested to know the performance details of the reputable and responsible Mutual Funds.

I believe that the average 20% per year over a period of 40 years is possible. There are no guarantees of course. However, the chances of achieving these returns improve over a longer period of time.

At today’s market when all the values are very low for mutual funds and UITFs, there are even bigger chances of very high increases in the future. As I always advise, buy regularly whether the market is up or down and the law of averages will keep your investment on the right track.

But let us just say for the sake of argument that you are not able to get 20% per annum and that you are not disciplined enough to save monthly for 40 years. If you still saved your P10 per day (something you normally throw away for unnecessary expenses) for 17 months until it your savings reaches P5,000, invested at say 15% p.a. and added P1,000 every 3 months (the time it takes you to save the amount at P10 per day) you will still end up with around P7.6 Million at the end of 20 years. You might not find this amount exciting but it certainly beats nothing. Note too that the amount you actually put aside in 40 years is only P159,100.

At an average inflation rate of 5%, your P 7.6Million at the end of 40 years is the equivalent of around P1.08M in today’s peso. You could buy a respectable studio unit in a medium level condo today with this money. Presumably, that’s what you could also acquire at the end of 40 years assuming that prices increase based on the average inflation rate. That would also be a reasonable amount to get started on a small to medium business venture, something you could leave for your children or even your grandchildren.

Why do I set higher targets than perhaps you would believe possible? Because, whenever it will not harm anyone, that is the way to set your targets. Believe in the impossible and it will happen.

Is betting on Lotto then believing in the impossible? It is not believing in the impossible. It is simply betting on the improbable. Betting on the Lotto is sure loss if you will only think of it in money terms. Your chances of winning is perhaps one out of 10 million. But if you want to join the ranks of people who want to “Get rich quick.”, that is your choice. I believe that in accumulating wealth, “Slow is fast.” Just save the little that you will not worry about and put it in instruments that will grow and leave it alone. You will be surprised one day that it has grown much more than you thought possible.

Does land investment meet my criterion of “Slow is fast.”? I believe that investing in land to be used for your home is good. I also believe that investing in land that you will develop to earn income for you is a good option. However, both cases are good only if you can afford all the necessary costs for improvements and maintenance. For ordinary income earners, buying land in the hope that it will increase in value over time (i.e. land banking) is not a good option. This type of “positioning” is more of speculating than investing, I do not believe in land banking without any specific objectives and long-term resources. While there are some cases of vacant land values going significantly up, there are also a great number of cases of negative growth caused by land squatting and spurious titles on land left idle.

Again, I do not know if I answered all the questions in the comments. I appreciate the many comments but my CFE Team and I may not be able to pick out all the questions. Please write info@colaycofoundation.com if you have specific questions that we can address.

YOU NEED TO EARN INCOME FIRST TO BE ABLE TO SAVE
YOU NEED TO SAVE TO BE ABLE TO GROW YOUR WEALTH

Shouldn’t need any explanation, right? But some of the comments to my first blog seemed to indicate that these statements should not be taken for granted. This is the reason for these blogs and the books I have written. Actually, the strong push to those visiting our website to buy the books is more to educate those who are interested as quickly as possible. The books give the proper perspective on where I am coming from. Our CFE Team replies to all emails sent to info@colaycofoundation.com as best we can. At times we will refer your queries to the more authoritative parties or authorities. Unfortunately, we might miss out on some comments on the blogs. However, others are there to help so it is good to continue with comments.

The first few blogs I will be contributing are for further reinforcement to those who have studied my books and for basic background for those who don’t want to read them. I cannot give all the information at the same time. I cannot please everyone in the same way. I can only do the best I can within the options given to me. With a little patience, sooner or later, I will get to the issues that interest you most.

No matter how poor you feel, you still have to wake yourself up to reality that it is your obligation to prepare for your financial future. Ours is a market-driven economy. This means that each will grow according to his deeds. You cannot and should not depend on others for your future, or worse, on your spouse, your children or relatives at all. Being prepared cannot happen overnight. It takes discipline, determination and decisiveness to make it happen.

Preparing for your financial future requires that you grow your money. Growing your money is investing for the long term. To invest, you need capital and time that will allow your invested money to compound. This means leaving your money alone. Let it roll with income or interest earning on interest and principal continuously. More importantly, you should plan to set aside savings for investment on a regular basis to maximize your accumulation of wealth starting from your initial savings.

How will your save? For most Filipinos, the first step is to earn. There can be no savings without earning income first. Here, you have two types of income available to you: ACTIVE INCOME and PASSIVE INCOME

Active income is the income you earn by working, i;e spending time talent and sweat. This is your salary, overtime, commissions or sideline. This is the income that you do not get unless you actually work. As they say, no work, no pay.

Passive income is the income you earn from investing your savings. This is interest earned, rental from properties, commissions from your downlines in case of legitimate networking an/or profit or capital growth from sale or increase in value of assets you own. If you are receiving an allowance from your husband, that allowance is to you, passive income. The income will come to you whether you work or not. The “secret” for ensuring financial comfort for yourself in the future is make sure that AT ALL TIMES, YOU MUST HAVE BOTH ACTIVE AND PASSIVE INCOME. Remember, you can only earn active income for a part of your life but you can become a knowledgeable investor and earn passive income for your entire life.

Beat Inflation!

Your next question is how to invest what you save. To choose among your options, you need to understand that the value of money changes over time. I personally am so aware of this situation since I still experienced what a 10 centavos bottle of soft drinks tasted like. I can’t believe time has flown and value of money has changed! Today, that same soft drink bottle costs me at least P9.50 and even as much as P180 in fine dining outlets in hotels.

What used to cost One Peso many years ago may cost Two Pesos today. This increase in cost is called “inflation.” Inflation is a universal phenomenon that happens in all countries and economies. You cannot stop inflation. It will creep up no matter what. With inflation, your money actually loses value every day. However, in more developed western and European economies, the rate of inflation goes up very slowly.

We need to understand why our savings should earn at a rate higher than inflation. If you leave your money in a deposit where the interest is lower than inflation, your money is losing value every year. For example, if inflation is 6% every year and your money is earning only 1-5% per annum in your savings or time deposit, the value of your money is going down by 1-5% (6% minus the rate that you earn from your deposit) every year. In this case, the amount that you have saved will buy less and less over the years. Therefore, when you invest your money, you must remember that you must earn more than the inflation rate.

So now you want to know where you can invest your savings to earn more than inflation. There are many options nowadays. We will be talking about those options after we have covered the basics.

What Your Ten Pesos a day can grow to!

You will surely agree that there are very few important items that you can buy with Ten Pesos. Even a can of soft drinks already costs more the Ten Pesos. Therefore, it should be very easy for you to save Ten Pesos a day, if you really want to.

Saving Ten Pesos a day or Three Hundred Pesos a month invested prudently can earn you an average annual rate of 12%. At this rate, if you leave your money alone, and just let it “roll” it will compound and grow to a value of PhP66,600 in 10 years. Look at what happened here? Over a period of ten years, you actually saved only PhP36,000 and it grew to almost double the amount.

If you are able to continue this process for another 10 years, meaning saving another PhP36,000 over 120 more months, your savings will grow to PhP273,400, or almost 4TIMES more than the total amount of PhP72,000 you saved over 20 years.

What if you can earn 20% per year instead of 12%? Then your PhP300/mo will grow to PhP101, 700 in 10 years, PhP731,700 in 20 years, PhP4.6Million in 30 years or PhP28.8Million in 40 years. And what do you have to do to accumulate this wealth? SAVE AND INVEST ONLY 300 PESOS PER MONTH!

What’s the hitch? You need at least P5,000 to start on an option that can earn you an average of 12% up to 20% per year over the long term. 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!

The option to earn good returns starting with P5,000 over a period of at least 3-5 years are the Mutual Funds (MF) and the Unit Investment Trust Funds (UITF). The returns are not guaranteed and the values can go up or down. However, actual results over the last 14 years show that long term investments on a regular basis at least in Mutual Funds would have yielded you much higher returns over inflation. I will be discussing this in future blogs as there are many issues that ought to be clarified.. You can sneak a peek in our website www.colaycofoundation.com FAQs.

FRANCISCO J. COLAYCO is an entrepreneur, a venture developer and financial advisor. He has over 40 years of experience that covers service contracting in the Middle East, manufacturing, trading construction, shipbuilding, management consulting, banking and financial services. He is the Chairman of the Colayco Foundation for Education (CFE) and the author of bestsellers: Wealth Within Your Reach (2004 National Book Award for Business and Economics), Making Your Money Work (Nominated in 2005, National Book Awards Business and Economics), Pera Palaguin Workbook and Money for Kids. The books are available at National Bookstore, most other bookstores or directly from CFE. He joins our website blog to share with ordinary income earners, Overseas Filipino Workers (OFW) and students the simple principles to "Save what you earn and grow what you save." CFE conducts talks, seminars, and workshops. “Managing Personal Finances For The Future” a seminar-workshop developed in partnership with the Ateneo Graduate School of Business, Center for Continuing Education. June 21, 2008, Saturday, 9:00 am to 6:00 pm. For registration and inquiries, please call Marleth Calanog at 830-2050. CFE is also the producer of the PISObilities DVD series, available at your favorite audio-video shops in May 2008. Learn more about the advocacy at www.colaycofoundation.com, email info@colaycofoundation.com, via SMS +63917-8537333 or through (632)637-3741.

Our team at the Colayco Foundation for Education is focused on teaching financial literacy to Overseas Filipino Workers (OFW), regular income earners and students. Financial literacy sounds so complicated. Actually, it just means knowing how to manage your money, save and grow your savings.

In the course of our interaction with our target markets, we noticed that the concept of wealth is usually equated to having lots and lots of money. In reality, having money, even lots of money, is no assurance that one is automatically wealthy and can therefore afford to stop working for money. Wealth and money means nothing unless it is matched with time and expenses.

Are you wealthy if you had PhP 1 Million in your pocket? What about PhP 2 Million, PhP 10 Million or PhP 100 Million? The answer lies in your expense profile. If your living expenses are very high because of your lifestyle, or perhaps because you have so much debt, then maybe even if you had PhP 100 Million, you would still be financially short.

So if you had cash and other financial assets that can support your lifestyle for say ten years, would you consider yourself wealthy?

Wealth or kayamanan has to be also based on how much time you have left in this world. If you are in retirement and have ten years to go, then you are wealthy enough if you had financial assets good to support your lifestyle for ten years. But if you only have resources good for five years, then you are not wealthy enough. In this case, you still have to grow your financial assets or lower your lifestyle to match your financial capability.

Savings: Your First Source of Capital

Savings is your first source of capital. Kung wala kang kapital para magtayo ng sariling business o mag-invest sa negosyo ng iba, mag-ipon ka muna. First, find a job (or any source of inome) and save a portion of your salary. Ok lang kahit kakaunti ang maipon mo kada araw. Lalago ang savings mo nang mas mabilis sa inaakala mo at magugulat ka na lang na may sapat na savings ka na para sa gusto mong antas na kabuhayan.

Very few of us (less than 2% of Filipinos) are born into wealth. Most of us will have to work and engage in some form of business or practice of a profession to make a living. Most of us will need to go through some form of learning (whether formal or informal education) to be able to earn some form of income. All of us depend on our ability and intellectual capital to produce the economic resources so that we can live a fulfilled and happy life with our loved ones and the community around us.

Unfortunately, a majority of income earners assume a very non-productive attitude towards working and the income they derive from it. They view working as a necessity and as the only means to earn money. And earning money is simply a means to be able to spend for their needs and wants now. These are the people who earn so they can spend. If they manage to save, it is because they want to temporarily accumulate a certain amount which they intend to use to buy something they want RIGHT AWAY, perhaps a new model of a cell phone, a brand new TV, fancy jewelry, a new fad, etc.

The cause of this kind of financial behavior is really short sightedness driven by the desire for instant gratification. Everything has to result in an immediate gain. We need to appreciate and be constantly aware of the reality that we have to plan for our financial future. This cannot happen overnight. It takes discipline, determination and decisiveness to make it happen.

The good news is… at any income level, we can plan to be financially independent provided we learn to be financially literate, to be knowledgeable investors, to be passive entrepreneurs. Securing sufficient financial comfort is within our reach. As we earn our incomes actively as employees or professionals, we must put aside savings and invest them for long-term accumulation of wealth. SAVINGS is our first source of capital.

The better news is that no matter how small an amount you can start saving, you can grow this money into substantial lifetime wealth. Making your money work for you is not difficult at all. You just need to set your financial goal, learn your options, be patient and START INVESTING. We are here to help you start.


FRANCISCO J. COLAYCO is an entrepreneur, a venture developer and financial advisor. He has over 40 years of experience that covers service contracting in the Middle East, manufacturing, trading construction, shipbuilding, management consulting, banking and financial services. He is the Chairman of the Colayco Foundation for Education (CFE) and the author of bestsellers: Wealth Within Your Reach (2004 National Book Award for Business and Economics), Making Your Money Work (Nominated in 2005, National Book Awards Business and Economics), Pera Palaguin Workbook and Money for Kids. The books are available at National Bookstore, most other bookstores or directly from CFE. He joins our website blog to share with ordinary income earners, Overseas Filipino Workers (OFW) and students the simple principles to "Save what you earn and grow what you save." CFE conducts talks, seminars, and workshops. Learn more about the advocacy at www.colaycofoundation.com, email info@colaycofoundation.com, via SMS +63917-8537333 or through (632)637-3741.