Put simply, our country has an extremely low level of financial literacy.  Ask the average person and they will probably not know about stocks, mutual funds, real estate, FOREX products, UITF’s, VUL’s and private banking products.  For most people, their exposure to the world of Finance only extends as far as bank deposit products and a life insurance plan or two.  Very few people actually take the time to actively manage their own finances.  Seriously, ask yourself and the people around you when was the last time you sat down and figured out where to place your money?  Yesterday?  Last month?  Last year?  Since that time, have you updated yourself on how your money has been performing?  Are you ahead?  Behind?  On schedule?  Most importantly, what do you plan to do next given the current financial crisis?  Now, admittedly, that all seems like a lot to take in at once.  Especially if, like most people, you were never taught about these things in school. In most schools, subjects about Finance are generally only offered to Business or Management students.  Furthermore, the books and materials used often assume an American financial system and a lot of the conditions prevalent there do not apply here.  The way I see it, what generally happens is that while our schools teach our people the skills they will need to earn a salary, very few of them teach students what to do with the salary that they will ultimately earn.  Put another way, the sad fact is that the majority of our people learn about Finance in one of two ways — either through a haphazard collection of books / seminars (Kiyosaki anyone?) or when they get “scammed”.  (By “scammed”, I mean not only true scams like Ponzi or Pyramiding but also legitimate instruments that people buy without understanding what they can do and when they lose money they still end up feeling victimized — UITF’s, stocks, mutual funds to name a few.)

So where does that leave us then?  The short answer is that we have to educate ourselves as fast and as early as possible.  “Fast” because if you have never sat down and prepared your own financial plan, then the ugly truth is that you do have a lot of catching up to do.  Consequently, you also have to do it as early as possible since you will want to give yourself time to recover from any mistakes — and trust me, everyone makes mistakes.  The only question then being can you recover from the mistakes you will make?

With all of that said, succeeding posts in this blog will tackle the common (and not-so-common) investment instruments that are available here in the Philippines.  Specifically, we will talk about stocks, mutual funds, UITF’s, Insurance, Pre-Need, bank products and real estate.  For each product, we will discuss the risks, the rewards and common mistakes to avoid when dealing with that particular product.  Next, we will tackle the practical side of each product as in how do you actually put money into them  and, most importantly, how do you get your money back?  Lastly, we will discuss the suitability of each product for different situations so that people can better determine which product fits their need the best.

Second, it was also pointed out to me that a number of plans also come with optional benefits — usually medical or travel insurance.  Now, if you don’t already have any of those in a separate policy, then it may make sense to sign up for them — especially if you travel a lot.  However, do not chose to get them just because they are advertised as being “free”.  Nothing is ever truly “free” and you can be sure that someone, somewhere is picking up the tab for your freebies.  (Even the “free” items you get for signing up will have to be paid for somehow and most probably it will be you as there is really no way for you to check that they didn’t use part of the money you paid them for “advertising expenses”.)

With all of that said, let’s continue our discussion…

Now, though the hubbub has died down a bit, the question still remains as to what people should do regarding their pre-need plans.  Well, depending on what specific circumstance you’re in, here are some things to consider…

First, if you are considering getting a pre-need plan, then here are some things to ask before you hand over any  money.  To begin with, ask for a copy of the company’s financial statements or annual report.  The key here is to get a sense of whether their trust funds are consistently growing over time.  Do not simply rely on leaflets and other marketing materials as the information there can be very,very different from what is recorded in their books.  Now, if the company is not publicly listed, they are well within their rights to refuse to provide you with any of the above.  However, it is my belief that if somebody expects me to fork over a substantial amount of my money for the next decade or so, then the least they can do is show me official documents as to how they have handled other people’s money in the past.

Next, ask for a breakdown regarding the company’s trust portfolio.  Ask to see where they will put the money you will invest.  Ideally, they should invest in non-related businesses and securities whose values can be independently verified.  A good example would be a fund that invests in corporate bonds, managed funds, stocks, government securities and other privately held firms (like Pilipinas Shell).  In all cases, the value of the different instruments can be tracked independently and it is easy to see whether their values are rising or falling over time.  A bad example would be a fund that invests predominantly in land and other non-revenue generating forms of real estate.  The reason I say this is because these types of investments are hard to value and difficult to liquidate.  Specifically, let’s say the fund buys pieces of land in a new development with the intention of selling it in the future.  The question then becomes whether the fund will be able to find a buyer at the price it wants at the time it wants.  Furthermore, what method will the company use to determine the value of said properties at any given point in time?  How will they know if they are ahead or behind?  After all, just because the owner of the property right next to theirs was able to sell at a certain price doesn’t automatically mean they can do the same.

Finally, if they are willing, try to find out just how much of the amount you pay them will actually be invested.  If they do provide you with a number, use the small table in part 1 to calculate the rate of return they will have to generate in order to deliver on their promise to you.  As a rule of thumb, if the required rate of return starts hitting the high teens and especially if it goes past 20 percent, then I would steer clear of that particular fund.

OK, now what if you are currently paying for plan?  Do you stop or continue?  Unfortunately, there is no one answer for every person but what I can provide are a series of questions to help you arrive at a decision.  First, how much have you paid?  This is the most immediate concern as stopping payments usually means foregoing all previous payments.  Follow this up by calculating how much more you have to pay.  Now, take stock and consider what would happen if you simply wrote-off all previous payments and basically started over with the amount you still have to pay.  What rate of return would you now have to achieve in order to reach your goal?  Of course, given the reduced amount and shorter time period, this will probably be higher than before, but it helps to know that figure.  That way, you get an idea of exactly where you are and how far you are from your goal.  Now, the best case scenario is that you continue paying and the company is able to pay you what you are owed.  Unfortunately, if you accept that possibility, then you also have to accept the scenario that the company will tank and you get nothing.  Ultimately, you will have to decide on whether you are willing to take the loss now and start anew or just keep paying and hope for the best.

The last scenario involves those people who have fully paid for their plans and are just waiting for the maturation period to pass so that they can get their benefits.  The first thing you should do is check if you have the option to cash in your plan earlier.  Some plans have offered this in the past though it meant you would receive a significantly smaller amount than originally agreed upon.  However, if you find that you can no longer even sleep due to the stress and uncertainty then maybe you should seriously consider cashing out now and gain some peace of mind.

In all three cases though, you should be willing to do your own legwork and gather all the information you can before you make a decision.  Go on-line, read news archives, ask whoever you can but make sure to get as much hard data as you can — don’t simply rely on rumors and hearsay.  Get hard evidence then make a choice.  Keep in mind that this is you’re money we’re talking about and no one will ever really value the work you put into earning it as you.  Take charge of your money so you can make better decisions now and in the future.

First, lets look at how a pre-need plan is supposed to work.  At its most simple level, a pre-need plan consists of an individual handing over cash to a company in exchange for the promise that the company will return a much greater amount at a future date.  The simplest example would be a person paying 10,000 pesos now with the promise of getting 20,000 pesos in 10 years.  Sounds simple right?  So lets go deeper…

Now, in order to establish a baseline, let’s ask ourselves what annual rate of return would the 10,000 have to accomplish in order to double in 10 years?  The answer is approximately 7.2% compounded annually.  Keep that figure in mind for now.

From the questioning of Senator Roxas, it was revealed that the average pre-need company does not actually invest the entire 10,000 pesos that an individual gives them.  Instead, they only invest part of that amount — the rest of the money is used to pay for the company’s operating expenses.  This then is the crux of the entire matter.  Since only a part of the 10,000 is actually invested, this means that the amount that is actually invested now has to earn a higher rate in order to deliver the promised return of 20,000 pesos.  To illustrate this, I have constructed the following table.  The first column represents the amount that is invested while the second column shows the annual rate of return the first figure would have to achieve in order to deliver 20,000 pesos in 10 years.

Now, from press releases coming from the pre-need companies themselves, they say that they usually target an annual return of about 12%.  If true, this would mean that they regularly invest about 65% or 6,500 pesos for every 10,000 pesos that they receive.  Furthermore, an annual return of 12% is very doable.  Hell, I’ve done more than that by myself working from home so it is a very realistic figure.  Unfortunately, this nice little picture has some rather big, glaring problems.

First, it is unclear just how much of the premiums they receive pre-need companies actually invest.  From the hearings I saw on TV, (and somebody please correct me as I hope I heard wrong) it sounded to me that they sometimes actually invest less than half of the money they get.  If that is true, (and I truly hope it isn’t), that would mean that they will have to achieve an annual growth rate of about 15% just to hit the 20,000 peso target.  And that brings me to the second issue…

Remember when I said that a 12% return was doable?  Well, it really is, but here’s the catch — It is EXTREMELY difficult, if not verging on impossible, to do that for 10 consecutive years.  In recent times, Madoff was pretty much the only one who claimed never to have posted an annual loss and we all know how that turned out.  It is almost a statistical certainty that at least one year in 10 will result in negative growth.  In my case, while I have definitely made more than 12% in some years, I have also lost more than 30% in other years.  Now, for an individual, that usually just means some belt tightening or the pushing back of some planned purchases but a pre-need company doesn’t really have that luxury.  What do I mean by this?  Consider this example :  Assume that on January 1, 2000, somebody placed 10,000 in a pre-need plan with the understanding that on January 1, 2010, they would receive 20,000 pesos.  Next assume that from that date until December 31,2007 everything went according to plan.  Assume that while there were some bad years, there were also some really good years so that by December 31,2007, the fund is on schedule to meet its payments and is valued at 15,943 pesos.  Then 2008 happens but assume that the fund manager was so good that the fund did not lose any money (super best case scenario).  So, at the end of 2008, the fund’s value is still 15,943.  What does this then mean?  It means that in order to meet it’s commitment on January 1, 2010, the fund will have to earn 4,057 pesos or an annual return of 25.44% — a very tall order.  Of course, since the company definitely sold other plans after January 1, 2000, its very easy to say that they can just use those funds to cover the Janury 1, 2010 obligation.  The trust fund money is fungible after all.  Unfortunately, that leads to the next problem.

If the company does use “other” funds to pay its maturing obligation, it is in effect digging a hole as the remaining funds will now have to work harder in order to recover the amount that was, in effect borrowed from it.  Remember, before the company “borrowed” that money, it only had to earn 12%; but since the money has been reduced, then whatever is left has to achieve higher returns — thereby increasing the risk that the company will be unable to meet it and be forced to “borrow” again.  Keep in mind that even a 15% annual return, which would normally be considered good, becomes meaningless if the required rate is 16%.  After all, that 1% difference becomes very significant once we’re talking about millions if not billions of pesos.  It therefore becomes a very vicious cycle and it only becomes worse if the period of low returns extends past one year.  (I actually ran some figures on Excel but its too depressing and scary to put here.)

Whew, long piece but there’s more to go.  Let’s take a short break but before you go, take a look at this page as we’ll need to chew on it next….

Back for more?  Well, hold on as things are going to start getting bumpy…

Did you check out that link above?  It pretty much lists the performances of most of the mutual funds over the past five years.  Why is that important?  Well, it’s important because a significant number of pre-need companies either invest directly in those mutual funds or in the very same securities (such as stocks, bonds and t-bills) that those mutual funds invest in.  Consequently, the returns achieved by those mutual funds can serve as a pretty fair indicator as to how the funds invested by pre-need companies would have performed over the past several years.  If you think that’s not reasonable, then please let me know of another publicly available resource that we can use.  I just used those figures because they encompass the great majority of investment options currently available here as mutual funds invest in a whole plethora of tools.

Next, go back to that page and take a look at the column titled “5-yr Return”.  Look at all the figures in it.  Notice anything?  If you look at all the funds listed, you will see that only one fund achieved double-digit returns consistently over the past 5 years.  Think about that and remember that pre-need companies are supposed to be earning at least 12% annually for 10 years.  And that 12% is based on the assumption that they invest 65% of the money they get.  If they invest less, then the rate becomes higher.  Now, here’s the kicker…(As if we haven’t been kicked enough.)

Based on this report, which is admittedly 3 years old, the Pre-Need code pending in congress all this time can potentially allow pre-need companies to invest only 48% of the amounts they receive.  What that means is that they can potentially keep more than half of what you pay for themselves and just use the remainder to grow into the amount that they promised you.  Of course, if they fail, and given the high rates of return they set for themselves, (remember, they are the ones who make the promises, not the consumer), there is actually a very good chance that they will be unable to meet those promises, they can just declare insolvency / bankruptcy or whatever and leave you, the consumer, to deal with the consequences of their failures.

Ok, now that we’re all gloom-and-doom, the question now becomes what can we, as consumers and regular pinoys, do to protect ourselves and our hard earned money?  Well, we’ll tackle that in part II as it is now nearing lunch and I am kinda hungry already…Stay tuned for Part II

GUEST POST: Who decides where to put your money?

Posted under Guest Posts, Investing, Pre-Need

By Aya Laraya, RFP*

With the global financial crisis hitting everyone and so many people losing their shirts, a lot of people are beginning to lose heart and quitting the whole financial planning mindset.  And as lousy as it can be to talk investing when you have just lost your life’s savings, you will only be able to recover from things like this if you develop a sound and coherent plan. How?  By being the one who actually decides where your money goes.  What do I mean by this? Consider the following:

First, ask yourself, how did you arrive at the decision to purchase your last investment?  (Let’s say a pre-need educational plan.)  Did you decide on your own or was it recommended to you? Did you consider other options before deciding on the pre-need plan? (Like stocks, mutual funds, etc.)  What factors made you decide to take that option over the others?  (Risk? Accessibility? Rate of Return? Cost?)

Second, who decided on which provider to buy from?  Did you research who the industry leaders were?  Or was it based on word-of-mouth?  Or on the fact that your friend or relative worked for said provider?

Third, who decided on the amount you would invest?  The worst thing that you can do here is to allow an agent to decide how much of a certain product you “need”.  Keep in mind that a great number of them work on commission and that the more you invest, the greater they earn.  Consequently, their objectivity in this matter would be somewhat suspect.

Ok, so much for the questions.  How about some suggestions? The ideal decision process would be as follows:

First, decide what you want to accomplish.  At this point, it can still be something vague like “Provide for my child’s education” or “I want to retire at 55″.

Second, quantify that target.  You have to get an idea as to how much you will need to hit your target.  Talk to your desired school to get an idea of how much their tuition fees increase annually and use a calculator or Excel to project that figure to the time when you expect your child to need it.

Third, (this is actually interchangeable with the second step), examine your current finances to determine how much you can truly afford to invest. Ideally, you should make a projection for the period during which you expect to make the payments to truly see if you can pay them all.  Very many people fail in this step and end up defaulting on payments.

Fourth, using the figures from steps two and three, determine what investments can achieve the desired rate of return.  This is the most technical step in the process and you may want to get outside help. However, the key point here is that you have to be the one to decide which investment vehicle to ride in.

Fifth, examine the different companies that sell these investment instruments. Find out who the industry leaders and laggards are. Make it a point to visit their head offices to see how they do business. Is their office all flash but filled with unresponsive people? Do they try to hard-sell you the minute you walk in? How easy is the office to get to? What is the process for you to get your money back?  (In my experience, making that initial investment is the easiest thing in the world. It’s when you want to get your money back that you suddenly have to fill-up so many forms and jump through so many hoops.)

Sixth, get proposals from at least three firms.  Make sure that the terms come from you so that it will be easier to compare options. Think of this step as like going to the pharmacy with a prescription. For example: I have P50,000 right now, what blue-chip stocks would be good to buy?  I don’t want oil, mining or other speculatives. Or: I can pay P4,000 a month for the next five years. What plans can your company offer me? In both cases, the control lies with you. You already know what you want and it simply becomes a matter of whether they can provide it or not.  If it’s the latter, then just walk away.

Lastly, always monitor the company you invested with. If the past year has taught us anything, it’s that even century-old institutions can be wiped out and that it’s the individual investor who pays the price. Ask for financial statements on at least an annual basis. If you invest in a managed fund that dabbles in stocks, make sure you check their portfolio regularly. Simply put, NEVER assume that investing is a fire-and-forget process.  The hard truth is that you can never relax because, at the of the day, everyone is looking after their own interests so you better make sure you protect yourself.

*Registered Financial Planner

Financial Planning FAQ

I recently conducted a half-day seminar on financial planning for some professionals and it was a rather enlightening experience on the mindsets of people when it comes to financial planning. As always there was an open forum at the end and quite a number of questions were asked – some were the usual and some were rather unusual. So for those of you who may have had some of these questions in mind but didn’t know who or what to ask; here is a small FAQ on financial planning.

What is the best investment? This is definitely the most common question that has been asked and the short answer is this : There is none. More specifically, there is simply no investment tool that is the best for all people all of the time. There are instead, instruments that are best suited to each individual’s particular needs, plans and current financial condition. Simply put, what is good for your friend, spouse, relative, lover, workmate, neighbour or child may not necessarily be good for you due to the undeniable fact that you and your friend, spouse, relative, lover, workmate, neighbor or child are two different individuals. Consequently, the two of you will have different sets of wants and needs at different times and will therefore need different solutions. Therefore, be very wary of anyone who tries to sell you a panacea for all of your investment needs as it simply does not yet exist.

Where can I get information about (x)? Despite the fact that we are very much in the online age, very many people still do not know where to get even the most basic information about financial products. From equities to managed funds to pre-need plans; people seem to be at a loss as to where to go. Here are some websites that you can visit as well as what you can expect to read.

For Equities :
1. www.pse.com.ph : This is the Philippine Stock Exchange’s official site. Lots of content from latest market news to an online trading simulation. Best site for IPO news as well as corporate changes such as cash and stock dividends. The bad side is that the site is sometimes abysmally slow and their market ticker has been known to display faulty data.

For UITF’s :
1. www.uitf.com.ph : This is a site run by the Trust Officer’s Association of the Philippines or TOAP. Site contains basic information about UITF’s as well as links and info about the participating companies’ UITF’s. Not a very nice site as quite a number of links are broken and there doesn’t seem to be a way to compare fund performance between different banks. All in all, about 17 banks are participating so this is still quite a good source of preliminary info.

For Mutual Funds :
1. www.icap.com.ph : Maintained by the Investment Company’s Association of the Philippines, this site lists a pretty large number of funds dividend by their primary investment type – (Equity, Balanced, Bond, etc.). Has a pretty good primer but the heart of the site is the page detailing the returns of each fund. This site allows you to directly compare and contrast different funds so it is easy to see which funds in each class have been performing the best over the short, medium and long-term.

Are investment returns guaranteed or risk-free? The short answer here is no. In the interest of public safety though, here is a breakdown of common investment products and the answers for them.

EQUITIES: No broker, agent or salesman is legally allowed to guarantee the performance of any stock.
MANAGED FUNDS: Regardless of whether the fund is a Mutual fund, a UITF or some other managed fund; managers are not legally allowed to make any guarantees about a fund’s performance.
BANK PRODUCTS: Savings accounts, time deposits and other bank deposit products are allowed to make guarantees. To be certain, check the fine print.
PRE-NEED PLANS: It depends. Certain pre-need plans promise a fixed return after a specified period and that is ok. Other plans promise a return based on the performance of a pre-determined standard and a guarantee for those products is not ok. As a rule of thumb, check to see if the words “Past performance is no guarantee of future returns” or something similar appear on the materials given to you by the salesperson or agent, then they are not allowed to guarantee any return.

Where can I get (x)? Quite often, after you have decided to get a certain product, finding someone who actually sells that product is quite a chore. Here are some ideas on where to get certain products.

BANK PRODUCTS: Not surprisingly, you get bank products from banks. However, aside from savings, checking and time deposit products, many banks also offer other, more sophisticated stuff. To start, go to your bank’s branch and ask if they have any retail investment products available. Most often, they will offer you their UITF though the really big banks will probably offer you a lot more options.
MANAGED FUNDS: UITF’s are sold by banks so if you are interested in them, go to the nearest universal bank. Mutual funds are sold by investment companies and they are slightly harder to get hold of. You can begin by asking within your social circle as it always helps if the agent is someone you see regularly. Failing that, you can go directly to the investment company’s head office and open an account there.
PRE-NEED PLANS: If you live or work in the Philippines for a significant amount of time, it is almost 100 percent sure that you will know someone who sells a pre-need plan of one kind or another. Just send an email or text to everyone in your address book and there will be someone there who either deals in these products directly or knows someone who does.
STOCKS: You can either sign-up at one of the online brokerages or you can troop over to one of the two trading floors (Ortigas or Ayala). Should you choose the latter, you can ask the guards at the ground floor to point you to one of the brokerage houses in the building. To open an account, you will basically just need your tax identification number and two government identification cards. Some brokerages will also require a minimum investment account though not all do so.

Is it smart to invest in a memorial plan

By Ma. Salve Duplito
INQUIRER.net
First Posted 04:16:00 10/31/2008

Filed Under: Financial & Business Services, Investments, Personal Finance

In a largely happy-go-lucky country, talk of death still spook Filipinos, and most try to avoid planning—and even just thinking—about kicking the bucket.

“I am not comfortable with the idea of getting a memorial plan. Irrational as it may sound, I feel like it’s courting bad omen,” says Ed Timbungco, a 30-something professional working in Makati City.

This sentiment is not uncommon among the young, and the topic becomes even more of a taboo when parents or grandparents are around. Unfortunately, the cost of putting a loved one in his final resting place may be a bigger reason to get scared.

From moving a body from the hospital to the funeral parlor to entertaining visitors with the ubiquitous biscuit and “sapin-sapin” (these days it’s catered food) to bringing them to the memorial park, you can spend anywhere from P300,000 to as much as P4 million, depending on the design of the casket, the length of interment and the burial lot, among others. For someone, who is already grieving and who may have spent a lot of money on hospital bills already, that will be both emotionally and financially draining.

The high side of the figures does make death sound like such a rip-off, but given the realities, how does one pay for something that can happen when it is least expected? An informal survey is very telling: Seven out of 10 office workers are unprepared for funeral costs, with no memorial plans, and only one in the group has plans to buy one in the near future.

The reasons vary, and most of them have to do with budget and cash flow. “I am more concerned with living now, than dying,” says an artist. “It’s not yet in my priorities. I am still saving up for the kids’ education,” says INQUIRER.net assistant editor Erwin Oliva.

However, a few of those in the group have prepared for funeral costs through other means: The expected inflow from insurance policies, pension plans and other investments. They prefer to prepare for the cost by saving at their own pace and controlling where to put their money, rather than handing their savings over to a company or a funeral home.

Advantages

Registered financial planner Malaya Laraya says there are good and bad points in memorial plans. He advises that spreading the costs over time if you yourself plan to use them makes more sense than investing in them with the hope of selling at a higher price in the future.

Affordability, low initial outlays and increasing attractiveness of additional benefits await persons, who are thinking of preparing early for the inevitable.

Laraya says initial outlays for a simple memorial lot, which one can buy from a developer, can be as low as P2,000. Getting a plan from a tie-up between a developer and a life insurance company will also allow buyers to get add-ons like funeral service arrangements—something that can be comforting to a person, who is grieving and may be worried over other expenses like hospitalization costs. But these can be more expensive.

What’s attractive is that memorial plans are also forms of forced savings, something that helps ordinary Filipinos pay for a future need in “tingi” [piecemeal]. With the high cost of living and generally low incomes, that can be a blessing even if returns are not much.

Alvin Tabañag, also a registered financial planner, a memorial plan becomes heaven-sent for someone, who doesn’t have sufficient savings. “Funeral services excluding memorial lots can cost says P15,000 to P20,000 for simple coffins and basic services to P200,000 for the more elegant ones,” he says.

Disadvantages

Both Tabañag and Laraya, however, do not expect memorial lots and plans to be good investments over time because they are usually sold at a loss and their values do not appreciate.

“Most long-term time deposits can beat memorial plans in terms of returns, and they are insured up to P250,000,” says Tabañag.

Laraya also points out that selling memorial plans and lots can be tricky because there is no easy way to put a price tag on them.

“The market is very inefficient. Anyone would know how to sell a Treasury bill, but a memorial plan or lot? Plus, how do you value the add-ons and extras that came with it? Can you explain it to a buyer the way an agent could? Aside from getting a discount on it, why would a buyer then get a memorial plan from you instead of going straight to the developer or the life insurance company?” Laraya says.

There’s also the hassle of transferring titles to your name and going through the fine print of the contract.

These, however, do not mean saving up for funeral expenses should be put in the back burner. It still makes sense to prepare for it in advance so that you are not pressured into throwing an expensive “last hurrah” for a loved one when you’re feeling extra vulnerable.

Whether the preparation is done by handing over your savings to a company or a funeral home, or through a do-it-yourself memorial savings plan, may not really matter. What matters most is that the tears, in the end, will not be because of financial stress.

Fear Factor

A common sentiment I hear from people these days is that though they would very much like to invest, they are afraid to do so. They are afraid that if they invest in things like stocks, mutual funds, pre-need plans or UITF’s, they will lose their money. Consequently, they keep the majority of their funds in savings accounts or time deposits since those are the products that they are familiar with. Unfortunately, this type of thinking only ensures that an individual will never be able to accumulate enough cash or assets to ensure a prosperous life. To illustrate, let me use this brief analogy.

Let’s say you live in Fairview and would like to go to Enchanted Kingdom for a day of fun and relaxation. Ideally, the best thing to do would be to wake up early and drive there. That way you get to spend the maximum amount of time at the park before it closes. If you don’t have your own vehicle or don’t want to have to deal with the hassle of driving but still want to spend the most amount of time at the park, the next best thing would be to wake up earlier and commute to the park. I don’t think anyone would consider going to Enchanted Kingdom from Fairview by walking there. Not only would you arrive very, very late but I doubt you would be in much shape to enjoy all the attractions the park has to offer. Actually, there’s a very good chance you will be unable to reach the park at all due to sheer physical exhaustion.

Now, regardless of the method of travel you choose, there is a realistic chance that something will go wrong and you will either arrive at the park late or not at all. Your car’s radiator could overheat or the bus you are riding could get a flat tire. As a worst case scenario, the vehicle you are riding in could actually get hit by another car and mess up the trip completely. All of these events could happen and not a day goes by wherein someone, somewhere, gets a flat tire, an overheated radiator or gets involved in a collision. But would you actually let these things stop you? Would the possibility of being involved in a vehicular accident dissuade you from either riding or driving a motor vehicle forever? Would you let the fear of a possible accident determine where and what places you can go to?

Believe it or not, the process of investing is very much like the situation I just described above. To begin with, we all have our own vision of Enchanted Kingdom – the life we would like to have wherein we are free from the day-to-day cares and worries of life.

Second, the time at which we wake up and begin the trip is the time wherein we begin to invest actively for our personal goals. Simply put, the earlier you start on your journey, the earlier you will get to your destination. Furthermore, starting early gives one the luxury of taking things slowly. We don’t have to rush and can take the time to enjoy the trip. Most importantly though, starting early gives one a buffer zone that can definitely come in handy should a flat tire or some other emergency arise.

Third, the mode of transport we use equates to the investment methods and products we pick – running a business, investing in stocks are like cars (fast and expensive); mutual funds, pooled funds are like public transport (slower but cheaper) and savings accounts / time deposits are akin to walking. Of course, much as there is no intrinsically “best” form of transport, there is also no intrinsically “best” form of investment. Instead, there are “suitable” or “efficient” investments. To be more precise, much like it would be more efficient to walk short distances, so are time deposits and savings accounts more efficient than stocks for short-term needs.

Fourth, the type of transport we select determines how involved we have to be in the investment process. For example, if we regularly travel by car, it would be in our best interest to keep the car well maintained. However, as any car owner will tell you, properly maintaining a car takes time and money. It simply will not take care of itself. Running a business requires the same amount of involvement. Ask any successful entrepreneur- trader and they will tell you that maintaining a business takes quite a bit of time and money. One cannot simply enter the market and expect everything to work as they expected.

Fifth, much like something can always go wrong on a trip, no investment instrument is 100% risk free. There is always a chance that, no matter how carefully you’ve planned things out, something somewhere will go terribly wrong and mess things up. For example, let’s say you decide to drive to your destination. Now, you’ve properly maintained your car and you drive as carefully as you can. Unfortunately, there is very little you can do to prepare for the drunk driver on the other lane who decides to slam his vehicle into yours. The same thing holds for investing. No matter how well you plan your portfolio, events outside of your control can suddenly just step in and wipe out most of your holdings. (Example: Asian Financial Crisis of the 90’s.)

With all of that said, what can we then do to eliminate or minimize whatever fear we have of investing? Well, much like we would learn to drive a car or memorize the different routes jeeps and buses ply, so must we exert the effort to learn more about the business and/or stocks and other investment tools. To put it bluntly, it is only through education that we can master our fears and prevent them from limiting the kinds of lives and the kinds of dreams we can achieve.

Check Operator Services

In my previous article, entitled “The day after,” I discussed how we should be very conscious about where our money goes on a regular basis. In said article, I brought up the concept of “stealth expenses”—or those small expenses we normally ignore but which can pile up if left uncontrolled.

Two examples that I used were DVD’s and parking fees—items that a lot of us pay for every day with hardly a thought but which can really become burdensome over the long term. With that in mind, let’s continue with another example of a “stealth expense” as well as some methods by which we can track and control.

Load

In today’s world, practically everybody and their dog has a cellular phone. In fact, it’s quite a common sight for teenagers and employees to have more than one phone or line. In every place and in every occasion, it is very, very common to see an individual madly texting away for some reason or another. From jokes, to tones to pictures and short video clips, people are always forwarding something to someone.

Unfortunately, what most people don’t realize is that this type of behavior can get extremely expensive. For example, let’s say you get a really funny joke and decide to forward it to everyone you know. That small act can quickly cost you over a hundred pesos. If you happen to forward an MMS clip, then that can quickly cost you several hundred pesos. (To be more specific, one cellular company charges around P20 for every MMS sent. So, if you send 10 MMS items a month, that’s a quick P200 right there.)

Downloadable ring tones of current music hits as well as downloadable pictures of celebrities are two more examples of expenses that we can definitely do with less of. At a minimum of P15 per download, these things easily escalate out of control and I know of individuals who spend hundreds, if not thousands of pesos on these things on a monthly basis.

And the sad part is that most of them do not even realize that they are spending that much. They justify it, if they even bother to do so, by saying that “it’s just one tone” or “it’s just one joke.” But that “one” tone or that “one” joke easily multiplies when you start sending it out to multiple people. Anyone who doubts this only has to look at the profits the big cellular providers have raked in over the past five years to see just how much people have spent on forwarding those jokes and pictures.

With that said, what can we then do to control this type of expense? One way is to get a postpaid line. That way, we can easily monitor our monthly usage and adjust our plan or our usage patterns to what we can afford. This is because, lack of regular monitoring is the number one reason that these types of expenses balloon out of control.

Quite often, we do not know where the hundred pesos we just loaded the other day went. Or, that the P30 we loaded today is actually the tenth time we have loaded that amount this month. All we know is that we get flashed those three words dreaded by prepaid users—“check operator services” and therefore have to purchase load once more.

Unfortunately, postpaid services are not a perfect solution as they do come with a number of caveats. The first is the lock-up period if you avail of the “free” phone and the second is the hassle of actually applying for one. Quite often, the documentary requirements one has to submit are time-consuming to prepare and it is really so much easier to buy a prepaid SIM-kit from your local store. Also, one is never embarrassed with a prepaid SIM since everyone who can pay for one can get one. With that in mind, what else can one do? Beyond all the theories, what are actual ways that we can cut down on these expenses?

One person I know keeps a running tally of his loads in his cell phone. He keeps all the text confirmations for his load purchases in his phone so he always knows how much he has spent for a given month. At the end of each month, he erases them and starts anew. Another buys her cell cards wholesale and allocates a set number of cards per month. Still another refuses to buy a new phone and sticks with an old phone that does not have a camera and can’t download MMS items since she does not want to be tempted into paying for MMS downloads and MMS messages. From her point of view, her phone is for business calls and messages only—it is not for entertainment.

In all three cases, though, the common component is the commitment and discipline to monitor the expenses. This is because, as the term “stealth expenses” implies, these expenses get out of hand because nobody pays any attention to them. Now, is it easy to monitor these expenses? No. Is it time-consuming? Yes. However, the plain and simple fact is that if we fail to monitor these things, then it is tantamount to admitting that we simply do not care about the money that we work hard for. And if we don’t care for our money, then who else will?

The Day After

It’s the day after payday. Do you know where your money is?

A common complaint among salaried workers is that they often don’t know where there money goes. Quite often, employees feel that right after their wages arrive, it gets whisked away without them being able to even hold or savor it. With that in mind, let us then try to find just exactly where your money goes.

Credit cards

The very first place anyone should look for their money is in their credit card statements. Ideally, each person should only have two credit cards; one Mastercard and one Visa. Anything beyond that is an unnecessary expense. This is because, after the first year, most credit cards will charge an annual fee and those fees can rack up if an individual has four or five different credit cards.

For example, lets say you have four basic credit cards. (By basic, I mean those entry-level credit cards that are offered in most shopping centers.) Most of them will waive the first year’s annual fee as an incentive for an individual to join but on the second and succeeding years, those fees will be applied. Now, most of them will charge an annual fee upwards of P1,200 and if you have four cards, that’s two credit cards and an annual expense of at least P2,400 that you can easily forgo.

Furthermore, having many credit cards makes it very, very easy to accumulate crippling levels of debt. This is because the interest rates credit-card companies charge are, despite the many ads that imply otherwise, actually quite high. For example, if your credit card charges you an interest rate of 1 percent, that actually stands for 1 percent a month and, if you just pay the minimum amount required every month, you will actually end up paying over 12 percent for the year. The charges are much higher if you actually miss a payment so it makes very good sense to always pay your credit-card bills in full and on time.

Going back to our previous example, if you had four credit cards with a credit limit of P20,000 each, you could very easily end up in debt to the tune of P80,000. Add to that the monthly interest of at least 1 percent and you can very easily fall into the situation wherein you end up paying just the interest every month and cannot reduce the principal. In that case, you could theoretically end up paying your credit- card companies indefinitely.

In order to minimize the chance of that happening, along with maintaining just two credit cards, I usually advise people to have a total credit limit of no more than 2 months of their net monthly salary. That way, the amount they owe stays within manageable limits and can be easily pared down over time. ( Lastly, should your credit-card company raise your credit limit without your prior consent, ask them to put it back down as having two credit cards with very high limits is almost as bad as having several cards with low credit limits.)

Stealth expenses

The next place one should look for one’s money is in what I term stealth expenses. By this I mean those small, incidental purchases we make whenever we go out and we never seem to notice or keep track of. My favorite examples of these are DVDs and parking fees. In the first case, since DVDs are so cheap nowadays, we tend to lose track of just how much we spend on them. Especially if you purchase pirated discs, it is very easy to rationalize the purchase since it is much, much cheaper than an original version.

However, a purchase is still a purchase and those pirated discs can quickly accumulate. Seriously, check how many DVDs you’ve purchased over the past year, the number may surprise you. Combine this figure with any computer games and music discs purchased during the same period and you will come out with quite a significant amount.

Parking fees are another expense which we quite often overlook. If you keep track of it, though, you will see that these fees can also become quite significant if left unchecked. For example, if you go to two or three different malls in one day and park in each of them, that’s an easy 120 bucks. (Assuming a flat rate of P40 per mall.) If you mall hop quite regularly, as in every weekend, that P120 can quickly escalate to several hundred or even over a thousand pesos every month. (The latter happens if you park in those per-hour parking sites or avail yourself of valet parking.)

So what can one do to minimize these stealth expenses? The simplest way is through disciplined planning. A budget is very useful here as it will enable us to allocate funds in a rational way and not allow sudden impulses where our money goes. Specifically, if we allocate enough money to purchase two discs a week and stick to it, we can better control our purchasing behavior. In the case of parking fees, some scheduling before each trip and the willingness to walk to some of the malls will go a great way in minimizing parking fees. (In my case, I routinely walk to Megamall and Podium from my office in Tektite. Not only do I save on the fees, I get a bit of exercise as well.)

Of course, there are other places our money goes to—gimmicks, clothes, gadgets to name a few, and those things can also spiral out of control but our space has run out so we will leave that discussion for another time.

What we do

In a nutshell, RFPs, as the name implies, design financial plans for people. We make them plans and strategies that will allow them to achieve their personal financial goals within their desired time frame.

For example, assume you wanted to plan for the college education of your child. You have an idea of how much it would cost if your child went to college today, but what if your child will go to college in five years? 10 years? 15 years? How do you estimate how much tuition will be at that time? Next, assume that you have an estimate of tuition in 15 years.
How then will you pay for it?

Of course, if you are already rich then it may not be much of a problem. But if you are not, finding a way to pay for that expense will occupy a lot of your time and energy.
Specifically, how do you evaluate and decide which investment product will give you the best chance of meeting that goal? Do you stay with a savings account? Purchase blue-chip shares on the Philippine Stock Exchange? Make a placement in a unit investment trust fund? How about a mutual fund? Variable life insurance? Preneed plans?

How do you know which of these instruments, if any, would give you the best chance of achieving your desired goal within your desired time frame? Put another way, who would you ask if you wanted to know which investment alternative is best for you? Answering these questions is pretty much the entire point of being an RFP.

What we don’t do

As a general rule, we do not actually hold or manage any of the money of our clients. (Though there are some who do.) We design the plans and monitor them but implementation is ultimately left to our clients.

To better illustrate what I mean, consider the following scenario. Let’s say you want to improve your general physical fitness. Of course, there are so many choices available. You can go on a diet. Go to a gym. Take up yoga or Pilates. Learn a sport. Now, while you can definitely just jump onto the Internet, do some research and develop your own plan; it would be more efficient and less risky to your health if you engaged the services of a trainer. That way, you can avoid many of the pitfalls novices fall into as well as have someone to monitor your progress and keep you motivated.

Registered financial planners pretty much work the same way—we help our clients develop a plan, we monitor the plan and we motivate our clients to stick to the plan. However, much like the fitness trainer cannot do your situps for you, RFP’s cannot do your investing for you.

Where to find us

OK, just in case you’ve decided that engaging the services of an RFP is for you, the next concern would, of course, be where and how do you hire one. A comprehensive list of RFP’s can be found at here. Once you’ve established contact with one of my colleagues there engaging their services boils down to the following process:

First, tell the RFP what it is you are planning for. Is it credit minimization? Educational planning? Estate planning? Increased investment returns? This is very important because it will allow the RFP to determine if what you are looking for is something he or she can provide. If the RFP says that what you are looking for is beyond his purview, then ask him for a recommendation as to who can meet your needs.

Second, along with telling the RFP what you want to achieve, be sure to give him an idea of when you want to meet said goals as well. This way, he will give you an initial feedback as to how realistic your goal is and if he can meet them.

Third, ask him how much he charges. In general, RFP’s charge either per project or per consultation. Rates, of course, vary and depend on the particular project and individual RFP.

Miscellaneous

With all of that said, I would like to emphasize the following points before I end my column this week:

First, does everyone need the services of an RFP? The answer is no. If you are pretty much happy with your finances and don’t find yourself wondering where to put your money on a regular basis, then getting the services of an RFP would be pretty superfluous. However, if you are having problems figuring out where to put your money or which of several investment options is best for you, then an RFP may be your best bet in answering those questions.

Second, the RFP can only tell you what you should do. At the end of the day, it will be up to you if you decide to follow your RFP’s advice or not. To paraphrase the old adage—RFP’s can bring you to the trough but we can’t force you to drink from it.