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The Pinoy Financial Planning Guide Book 1


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Published in: Economy & Finance, Business
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The Pinoy Financial Planning Guide Book 1

  1. 1. BOOK 1 By Mr. Alijeffty C. Gonzales, CIS, RFP
  2. 2. A True Story... During a lull in a product orientation seminar of a life insurance company, the trainer noticed a participant who stood out as he was obviously the “oldest” among this batch of new recruits. Curious, he wandered towards the end of the room where the man was visibly struggling to come up with the solution to a computation problem he asks the class to solve. “May I help you sir?” “Yes please, mahirap palang i-compute ito ng walang calculator...” “How old are you sir, if I may ask?” “I’m 68...” “Mahirap ho ang buhay ng ahente, you may have to go all around to see a lot of people every day doing the computation for each of them, are you sure you are up to this? Should you not just stay home, relax; enjoy the company of your grandchildren...?” In was then that he opened up..., He related that because of a recent incident in his daughter’s house where he is currently staying, he has to go back to work to try to make a living, as he is beyond the mandatory retirement The Pinoy Financial Planning Guide is currently staying, he has to go back to work to try to make a living, as he is beyond the mandatory retirement age of 65, it seems that his only option of earning an income is to become an agent. The old man with tears starting to form in his tired eyes disclosed that the other day, he overheard his daughter on the phone talking to his son. “Kuya!, ano ba yan! Diyan naman sa inyo si tatay! Two weeks na siya dito at sinumpong na naman ng sakit nya last week at kami ang nag-pagamot, nagagalit na ang mister ko!, Yung pinadala niyang pera na dapat pambili ni junior ng cell phone, di ko na naibili dahil naipambayad ko sa ospital, diyan naman sa inyo si tatay!” IF YOU ARE THE OLD MAN, HOW WOULD YOU FEEL? Let us just imagine that we can turn back time and re-write the story of the old man’s life, let us imagine...What if the old man was able to save and invests during his productive time, this same conversation could have turned out like this. “Kuya!, ano ba yan!, Two weeks na dyan si tatay, dito naman sa amin!, mabuti nga yung mga anak mo naibili na ng cell phone, tong si junior ko e wala pa!”
  3. 3. The Pinoy Financial Planning Guide Most of us started to make a living earning just enough to satisfy our physiological needs. Isang kahig, isang tuka ika nga, After a while, our income have increased but our expense seems to grow as well, kung dati ay happy na tayong naka- pamasyal sa SM once in a while, ngayon, parang kulang ang saya kung wala tayong bitbit pag-uwi. SAYANG YUNG SALE! 50% OFF, LAKI NG NATIPID KO! Naka-tipid ka nga ba? Yun bang nabili mo ay talagang kailangan mo? Mas nakatipid ka siguro kung di mo binili? Abraham Maslow, in his 1943 paper “A theory of Human Motivation” proposed that human needs Abraham Maslow, in his 1943 paper “A theory of Human Motivation” proposed that human needs can be stacked up in terms of their order of priority. This hierarchy of needs is often depicted as a pyramid consisting of five levels, an individual normally works on the lower level needs first and move up as his financial status improves. From a financial planning perspective, this insight would explain why some of us are stuck in a day- to-day, hand-to-mouth existence; it is because we never “graduate” from the lowest level of this hierarchy. Once an individual has moved upwards to the next level, needs in the lower level will no longer be prioritized. For instance, a businessman at the esteem level who is diagnosed with cancer will spend a great deal of time concentrating on his health (physiological needs), but will continue to value his work performance (esteem needs) and will likely return to work during periods of remission. ('s_hierarchy_of_needs)
  4. 4. The Pinoy Financial Planning Guide PART 1: WHERE ARE YOU NOW? Computing your net worth Reviewing your income/expense patterns Creating a budget PART 2: WHERE DO YOU NEED TO BE? “Bakit gusto mong yumaman?” TABLE OF CONTENTS “Bakit gusto mong yumaman?” Your personal definition of wealth Setting your life goals PART 3: HOW WILL YOU GET THERE? Your financial plan The three portfolios of your life
  5. 5. START ON YOUR ROAD TO FINANCIAL INDEPENDENCE: COMPUTING YOUR NET WORTH A financial plan is your road map; it is a comprehensive personal document that gives you an overview of where you are financially. The basic components of a financial plan are: A statement of your assets/liabilities, income/expense worksheet, budget plan, savings and investment portfolio worksheet, and your insurance /risk management worksheet. Where are you now?PART 1 The first step in coming up with your financial plan is to compute for your net worth, this is done by listing down all your assets and liabilities: Categorize your assets into current assets: assets that can be utilised or sold within the next three months, and other assets: these are assets that you own in which you won’t and can’t easily be sold. Current assets include your bank account balances, cash on hand and the market value of your marketable securities likes bonds, stocks and mutual funds.
  6. 6. List under other assets all other assets that you own including your car, house, furnitures and fixtures, the cash value of your insurance policies, your interest in a business, jewelleries and others. Then categorize your liabilities into current and other liabilities. Current liabilities are your obligations that requires payments within the next three months or continuous regular payments like credit card bills, loan and mortgage payments. Other liabilities would be financial obligations that require payments in a future date three months hence. Deduct the total value of your liabilities from the total value of your assets; you now have an estimate of your NET WORTH. Where are you now?PART 1 One key consideration in managing your net worth is to try to minimize if not eliminate high-costs debt, one typical example is consumer borrowings from credit cards, the following table illustrates the “earnings” you gain by placing Php 10,000 in a savings account and “interest expense” of a Php 10,000 credit card balance.
  7. 7. REVIEW YOUR INCOME/EXPENSE PATTERNS: ACTIVE INCOME is generally considered is to be a variable; as it depends on an individual’s ability to engage in an active pursuit of a job, profession or business and this ability may be hindered by reasons of health and other unforeseen events like accidents. The pursuit of an active income large enough to have some savings is the primary reason why a lot of Filipinos (myself included) go overseas to work. While the initial intent is correct, a lot of Where are you now?PART 1 While the initial intent is correct, a lot of us fail to established a base for financial independence because we don’t have a follow-through plan, surplus income from an overseas posting are normally spent on non-essentials or invested arbitrarily (without consideration of our needs and goals). This lack of a clearly defined set of goals placed us in a position where we tend to choose an investment that looks better as compared to its alternatives rather than invest in something that matches our goals. --- MY OFW EXPERIENCE
  8. 8. Expenses can be managed better if we are able to categorize our expenses; •FIXED EXPENSES are generally expenses associated with our day-to-day predictable expenses such as food, clothing, shelter (the physiological needs in Maslow’s hierarchy), it also includes essential spending on education, transportation and communication. •DISCRETIONARY EXPENSES on the other hand is unplanned non-essential expenses like buying that 42” LCD TV while your 27” is still working. A careful analysis of your spending patterns will reveal that discretionary expenses are normally the culprit in an un-balanced budget. PASALUBONG! The many months or even years of absence from our family and loved ones Where are you now?PART 1 absence from our family and loved ones during our overseas posting normally would evoke a certain feeling of guilt at homecoming. The result of this is that we tend to overspend when we buy our “pasalubongs”. Does my 4-year old kid really need a cell phone? How about the 6 one-liter bottles of johnnie walkers for my kumpares, I think my wife will like the 40 gms. 18k gold bracelet i got her... While there is really nothing wrong with this, we need to understand why we do the things that we do. --- MY OFW EXPERIENCE
  9. 9. A BUDGET PLAN CAN HELP IN MANAGING EXPENSES Aside from distinguishing your expenses into fixed and discretionary expenses, it can also help if you have a clear understanding of the difference of expenses associated with your needs and wants. WILL BUYING A “GERM PROTECTION” SOAP CLEAN YOUR CONSCIENCE? Where are you now?PART 1 Advertising and peer pressure plays a critical role in our perception of our needs and wants, consider a bar of soap: We buy soaps in order to make ourselves clean (a need), but a particular soap advertising contends that being clean is not enough, we have to ensure that we are germ-free, thus, you “need” their product. Another soap advertising claims that their product not only makes you clean, it also ensures your skin is soft and smooth (to please your partner?), there is actually nothing wrong with this but if you consider the additional expense involved, it may have an impact on how much would be your surplus (thus your savings). Prepare a budget plan by listing down all your household expenses, indicate the budgeted amount per expense category, tracked your actual expenses on a month-on-month basis, include a column to indicate actual and variance, this would prompt you if you are already going over the budgeted amount.
  10. 10. •SAVINGS IS THE KEY TO WEALTH ACCUMULATION, every one peso you save today is going to make you Where are you now?PART 1 •SAVINGS IS THE KEY TO WEALTH ACCUMULATION, every one peso you save today is going to make you one peso richer tomorrow. •Income from an active pursuit of a job, profession or business is “active income”. There is no absolute certainty that we may be able to maintain this indefinitely as certain fortuitous events such as illness or accidents may hinder or worse bring it to a halt, our goal therefore, is to “store” our savings from our active income so that we can draw on this reserve on any eventuality. •Allocating our savings into our three life portfolios (current needs, future needs, protection needs) is an effective framework to help us maximize the benefits of our savings. •Understanding our own personal life goals is needed in the creation of the three life portfolios.
  11. 11. WHY DO YOU WANT TO BECOME 100 things to do and Where do you need to be?PART 2 WEALTHY? 100 things to do and accomplish before I die… *WEALTH is the ability to fully experience life ---HENRY DAVID THOREAU
  12. 12. HOW MUCH WEALTH IS ENOUGH? ENOUGH FINANCIAL RESOURCES TO ALLOW YOU TO ENJOY LIFE …And achieve all your life goals. Where do you need to be?PART 2 …And achieve all your life goals.
  13. 13. HOW MUCH DO YOU NEED TO BE ABLE TO STOP WORKING? Where do you need to be?PART 2 A definite and measurable level of wealth is important in the achievement of financial independence, this table shows how much you need to accumulate to stop working and enable you to enjoy the things you’d rather do. The first column shows your average monthly household expenses; to have enough to support a Php 50,000/month lifestyle for 15 years, you need to have a wealth base of Php 6.76M.
  14. 14. A. B. Where do you need to be?PART 2 PAYS ZERO PERCENT CAN’T OPEN TILL THE 20TH YEAR PAYS TWENTY PERCENT CAN OPEN ANYTIME If you set aside two pesos each day and placed one peso on each of the two piggy banks, which piggy bank do you think would have more money at the end of twenty years?
  15. 15. The normal answer would be the piggy bank that pays 0% (A) interest for the reason that we can’t open it. In our advisory practice in financial planning, we always advocate that any financial plan that leads to an investment decision should be made with a specific goal in mind. Let me take myself as an example, i have a goal of ensuring that i have enough funds to enable my children to go to the best schools in this country, and let us say they would be in college in twenty years, i will now “attached” this goal to the one peso i placed each day on the second piggy bank (B - the one that i can open anytime and pays 20%). Where do you need to be?PART 2 on the second piggy bank (B - the one that i can open anytime and pays 20%). With a goal now attached to the second piggy bank, after twenty years, which one do you think would have more money? FINANCIAL PLANNING is the process of meeting your life goals through the proper management of your finances, it provides direction and meaning to your financial planning decisions.
  16. 16. ?car, ?house, ?college fund for children, ?set What Are Your LIFE GOALS? Where do you need to be?PART 2 ?car, ?house, ?college fund for children, ?set up own business, ?comfortable retirement, ? financial independence, etc… VISUALIZING – focus on the tangible benefits. MEASURING – attaching a monetary price tag allows you to measure your progress.
  17. 17. Where do you need to be?PART 2 If i am 45 years old now, it means that i still have 15 years to build up a Php 15M wealth base. In implementing my investment plan, i can now compute how much i need each month in savings to achieve this goal, if we do our financial planning this way, do you think it is now more achievable?
  19. 19. How will you get there?PART 3 your personal circumstances your three life portfolios core portfolio components basic performance measures
  20. 20. How will you get there?PART 3 Once you have identified a regular source of savings, the first portfolio you need to build is your current income portfolio, try to achieve a savings level at least equal to three to six months of your average monthly expenses
  21. 21. How will you get there?PART 3 For your future needs portfolio, the basic rule of thumb for selection would be the timeline to your goals: •2 to 5 years – Bond Funds (peso or dollar) •5 to 10 years – Balanced Funds •More than 10 years – Equity Funds
  22. 22. How will you get there?PART 3 DESIGNING YOUR PROTECTION PORTFOLIO *Consider term insurance when buying life insurance protection, it offers the largest coverage at the least cost. the least cost. *ILLUSTRATION: •30-year old •20-year level term •Php 1 Million coverage •premiums on the 11th year drawn from cash/account value
  23. 23. November 15, 2008 Manila Dear Reader, Thank you for spending time to read this guide, although it may not be as extensive as i want it to be, i hope that it has given you a broad understanding on how to lay down the framework for a personal financial plan. I would be coming out with a “Book 2” soon after where i would be discussing specific suggestions on how to create a “future needs” portfolio, please email me at if you’d like to reserve a copy and please provide me with the following information which i would use as basis for illustrations. for illustrations. NAME, AGE, LOCATION, MARITAL STATUS, NUMBER AND AGES OF CHILDREN, DESIRED RETIREMENT AGE, MOST IMPORTANT LONG TERM GOAL. In closing, please allow me to share a guiding principle which have a profound impact in my own quest for financial freedom – “A rich man is not one who have the most, but is one who needs the least.” Maraming Salamat, Alijeffty C. Gonzales, CIS, RFP