Pesos and Sense

Financial Planning for Non-Financial People

Financial Literacy

If you take a look at the ongoing confusion regarding the country’s pre-need industry, one thing you’ll notice is how a lot of otherwise well-educated, well-trained and hardworking Filipinos are in a state of shock / denial regarding the possible loss of their investments.  There is also a great sense of fear and uncertainty as no one is 100% sure as to the state of the different pre-need companies.  People are scared and don’t know what to do.  Now, I have already detailed some possible actions that can be done now in a previous post so I won’t go into that here.  Rather, I will examine the underlying cause behind situations like this and what we, as a people, can do about it.

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February 16, 2009 Posted by | Financial Planning | 1 Comment

Pre-Need Part II

Welcome back everyone.  Now, before we plunge into part 2, just a couple of additions to the stuff discussed yesterday.  First, the example we used yesterday featured one lump-sum payment at the start of the pre-need plan.  However, as someone pointed out to me, most people don’t do it that way.  Most people, when they purchase a pre-need plan, elect to make installment payments — from monthly, to quarterly to semi-annual to annual.  Now, the effect of such a set-up is that it actually makes things more difficult for the pre-need company since the later installments now have a shorter time frame within which they have to double.  For example, a lot of plans require the holder to pay for five years and wait for another five years before they receive the benefits.  Now, assume that the holder elects to make 5 annual payments, the second to fifth payments will have fewer years within which they can grow so the rate they will have to achieve will have to be higher.  Of course, a number of companies off-set or minimize this difficulty by either increasing the amounts the holder has to pay or by lowering the amount the holder will receive in the end.

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.

February 9, 2009 Posted by | Pre-Need | | Leave a comment

Pre-Need Part 1

Unless you’ve been living under a rock, you’ve probably heard about the senate and congressional hearings about the state of the pre-need industry.  The crux of the matter being that a group of pre-need companies have signified the very real danger of them being unable to pay the benefits theypromised unless the government gives them help either in the form of relaxed regulations or an outright bailout.  For the most part, they have pointed to the ongoing global financial crisis as the culprit behind the erosion of their companies’ trust funds.  Now, on the surface, that seems like a reasonable argument as everyone is suffering from it but if you just dig a little deeper, I believe that you will agree with me in saying that most of the problems currently facing the pre-need industry were of their own creation.  Why?  Consider the following…

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February 4, 2009 Posted by | FAQ, Financial Planning, Pre-Need | , , | 1 Comment

Who Decides Where Your Money Goes?

This is the second article that I wrote for Money Smarts and is my latest published piece.  The original can be found here.

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?)

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February 3, 2009 Posted by | FAQ, Financial Planning, Inquirer | , , | Leave a comment

Financial Planning FAQ

One of the most popular and in-depth financial blogs around is the one run by Ms. Salve Duplito on the Inquirer website.  Appropriately titled Money Smarts, the site offers tons of articles on a variety of topics.  Best of all, the site has a very independent streak in that they do not push or protect any one product, industry or company.  It is also visited by people from all walks of life so their comments and concerns give a pretty accurate idea of what the average Filipino thinks about financial issues.  You should definitely check it out.  Anyway, what follows is a small FAQ that I wrote for them in February of 2008.  The original can be found here.

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.

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February 3, 2009 Posted by | FAQ, Financial Planning, Inquirer | , , | Leave a comment

On Memorial Plans

This is an interview that I did for the Philippine Daily Inquirer last October.  In a nutshell, we discussed the merits of buying a memorial plan as an investment versus purchasing one to be used.  As the interview was done over the phone, (I was in Baguio at the time giving a seminar), the interview had to be short and to the point.  So if anyone has any further questions or concerns, feel free to post.  The original article can be found here.

Is it smart to invest in a memorial plan

By Ma. Salve Duplito
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.

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February 3, 2009 Posted by | Inquirer, Memorial Plan | , | Leave a comment

Fear Factor

I seem to remember writing this for Business Mirror some time ago.  However, I couldn’t find it on their site and instead found it here.  In any case, this is one of my favorite pieces as I think it tackles one of the biggest hurdles most people face when trying to make a financial plan.

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.

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February 2, 2009 Posted by | Financial Planning | , | Leave a comment

Check Operator Services

This is the sequel to “The Day After”…. Published in Business Mirror and the original can be found here.

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.

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February 2, 2009 Posted by | Business Mirror, Financial Planning | , , | Leave a comment

The Day After

No, it’s not the disaster movie that came out some time ago… Rather, it’s the first of a two-part piece that I wrote for Business Mirror some time back.  The original can be found here

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.

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February 2, 2009 Posted by | Business Mirror, Financial Planning | , , | Leave a comment

What We Do

The following is a piece I wrote for Business Mirror a couple years back.  The original can be found here and was printed on 12/04/2006.

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?

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February 2, 2009 Posted by | Business Mirror, Financial Planning | , , | Leave a comment