One step back, two steps forward

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Opinion

Written by Edmund Lao / Personal Finance

Sunday, 27 September 2009 20:24

SOUNDS like cha-cha? “Two steps forward, one step back” is usually a negative term to describe someone who is having trouble making progress. But switched around, “One Step Back, Two Steps Forward” means that instead of grousing or feeling guilty about a misstep, you can still come out ahead if you put your head down and push forward. This was the strategy of Chairman Mao of China when he ruled. But the more popular application took place in the Philippine Basketball Association, courtesy of the brilliant Utex Wranglers bench tactician Tommy Manotoc. During the 1980 Open Conference, the Utex Wranglers were going up against the Toyota Tamaraws having the legendary Robert Jaworski as one of its star players. In that game, Utex, with less than seven minutes left, was trailing by 11 points but ahead in the best-of-five series, 2-1. Coach Tommy pulled out all his starters, including the two imports, in an apparent sign of surrender. After the game, when asked by reporters why he gave up with so much time remaining, he quipped, “One step back, two steps forward,” referring to his tactic of reserving his players’ energy in preparation for sudden death Game Five. His tactic worked as the Wranglers overhauled a four-point deficit, sent the game into OT, and won the series. In our personal financial planning, can we also do a Tommy Manotoc? The answer is a resounding YES! Being employed in the corporate world is similar to playing a basketball game. We gain employment with the goal of earning money that will sustain our present and future needs. Majority of us think that working harder guarantees higher income. Realistically, we can earn more by working smart. Similar to a basketball game, the harder the team members play, the more points they can possibly make. However, in some cases, the opposing team makes more points seemingly at ease. How is this similar with regard to our finances? Before we earn our paycheck, we already lose. That is because we have a fixed expense in the form of tax , which is withheld from our monthly salary. Taxation is one of the causes people find it hard to build wealth. Income taxation here averages 25 percent of the gross. Then there is another loss—Inflation. Inflation erodes our money’s purchasing power. Although it cannot be seen, it can be felt. It is, in effect, our money’s silent killer! Third, there is unwise spending. It is an example of negative compounding of stewardship of money. Last, scams. We lose money when we unwittingly get involved in investment scams. They are schemes designed to lure us into putting our hard-earned money into the scammers’ pockets. These four are our money’s major opponents. As we build up our financial points, our money’s enemies also build up, making it hard for us to accumulate wealth. Most of the time, our financial opponents outpace our hard-earned money to the point we end up having a huge debt. What should we do? There is a way! Take one step backward, two steps forward. Realize and admit defeat first. Then declare victory later. For the first two factors, tax and inflation, there is not much we can do. We can’t control the tax imposed on us but we can go around it. Ask experienced accountants on how to do it. We also cannot control inflation, as this is the effect of the economy on our money. For the first two enemies of money, we have to admit that we lose since we cannot control them. This is the time we take one step backward and start planning. Then strategize to eliminate the third factor by learning to control money. Just like in basketball, control of the board by a good center can help ensure victory or snatch victory from certain defeat. The same principle also goes with controlling the money that goes into our pocket. In order to gain control, the following steps are recommended: 1. Have the discipline to control your emotions against impulse buying. Remember that money saved is money earned. Doing so will improve the financial points you are building. Create the habit of saving money regardless of the amount. The key is to trick your mind into believing that there is no more money after the money has been saved. Then, with discipline in place, start saving 20 percent of the income to build the investment fund. Spend only on needs. Sometimes it’s okay to spend for wants as long as it’s in check. 2. Take advantage of time, one of the allies of wealth-building. The earlier we save and invest, the lighter the financial load to begin with. Time is the most neglected part of wealth-building, and yet it is the most impatient of all. It waits for no one. Once gone, you can only look back but never go back. Use it wisely to make it an ally for it can’t be replaced. Otherwise, it will be your enemy. 3. Another ally of wealth is compounding interest. It is the 8th wonder of the world. As Albert Einstein said, “it is the most powerful force ever discovered by man.” Compounding interest means your money’s interest is earning interest. Your money is growing without any effort. This means that your money is working for your financial points. Assuming you have P100,000 today invested at 12 percent compounded annually, your money would have grown to P6.4 million in just 36 years! Determine your goals, risk preferences and your investment horizon. Consult reliable financial planners for more information and guidance. 4. For scams, it is observed that history repeats itself, but people never learn. Scams come and go, but due to greed, people always gamble away their money after being sweet-talked by scammers. Always remember the golden rule: If it’s too good to be true, then it’s not true. Investigate before investing. Check with different government agencies on the legality of the investment company. Make a background check on the stability and integrity of the company before deciding to invest your hard-earned money. Having done the recommendations, it is time to start the game again, and armed with the strategies, we can be sure to win the money game and take two steps forward to our financial freedom. Then the final buzzer sounds…only one person knows who won or lost…. It is YOU. **** Edmund Lao is a candidate for Registered Financial Planner (RFP) designation. He is a graduate of electrical engineering from Mapua Institute of Technology. Currently he is a sales engineer in one of the biggest media companies in the Philippines. He is also an active contributor to www.income-tacts.com, the country’s premier personal-finance web site. Join the 17th RFP Program (October 17 to December 12, 2009). Visit www.rfp-philippines.com or inquire at info@rfp-philippines.comThis e-mail address is being protected from spambots. You need JavaScript enabled to view it /Tel. No. 634-2204.

How to save on Christmas

How to save on Christmas

Planning Your Holiday Expenditures

– by Edmund Lao

Pasko na naman! The –ber months arrived and comes the season for celebration and giving. Majority are getting busy thinking about gifts and presents as well as food and parties for the coming holiday. Pinoy entrepreneurs will be busy in making money this season from consumers. In short, this is the season of spending for people from all walks of life.

Here lies a big problem that I hear every year. After the celebration is over, you will find that everyone was not able to save their bonuses and benefits received. Worse, almost everyone ended up in debt. If there was forward planning, I believe we can celebrate Christmas without having to splurge a large amount of money. Believe me, it can be done.

Following are my recommendations:

1. Plan ahead. Just like childbirth (which is certain to come, the parents should save for the moment pregnancy takes place). We all know that yearly, we celebrate Christmas. Treat Christmas as if it is a childbirth. As early as March, list down people you want to give gifts. Look out for mallwide sale, inventory sale, closing out sale, or even calamity sale. Definitely the price will be lower.

2. Go to Divisoria stalls. It is fun shopping there as you can haggle for discounts.

3. Look for UK goods (not the imported from London, but the ukay-ukay stalls).

4. Recycle the gifts received last season. That would be the best as you do not need to shell out money, time and effort. Just make sure not to accidentally gift it back to the source.

5. For foods intended as gifts, it is better to do it at home than to buy. Food need not be expensive. It is the thought that counts. Self-made delicacies will be appreciated more than those bought.

These are just some ideas to make Christmas worth celebrating without hurting our finances. Just keep it simple. Remember that during the first Christmas, there were no extravagant celebrations. The best way to celebrate is for every family to go to church for thanksgiving and have a simple dinner. Make it a practice and you will see how it can change your finance for the better.

Saving in Time of Crisis

By Edmund Lao

(This article appeared in the July-August issue of Money Sense)

Last week, a Singaporean businessman was here to join the exhibit on outdoor advertising industry. While we were having a short talk, he mentioned that even progressive country like theirs is not immune from the effect of the financial crisis. Business is not good, consumers are not willing to spend, and some employees are laid off. According to him, at least here, the effect is not quite felt. His observation is quite true. While there are companies that cut their costs, there are also companies that are in the expansion mode. For the advertising and signage industry, in this time of crisis, the opportunity to grow is evident as can be seen from the food and banking industry.

For the average people, are there opportunities too? The answer is YES. The only key is awareness to what is happening around. Business opportunities are everywhere, with potential income starting from a minimum of fifty thousand pesos per month. Although going into a business may help, a lot still depends on how well a person handles his finances. A lot of businesses preach financial freedom through earning more money and living extravagant lifestyle rather than preserving and growing the earned money. Just be careful with your emotion in order that you will not be drawn into a pyramid scam.

Building wealth may be difficult but with the right information and proper planning, the task will be a lot easier. Below are some pointers.

1. Begin with the end in mind. This is one of the seven habits in the book of the author Stephen Covey. Without the end in mind, no one would start his quest for financial success. One has to think far into the future so that he can determine what he has to do today. I remember a quote from an anonymous source. It goes like this: “A wise person thinks of tomorrow today. His years of hard work must give a reward which will take care of his needs in the far future”.

2. Invest in your education. Read books, attend seminars, look for mentors, network with people, surf the internet for financial knowledge. Many young people spend money like there is no tomorrow. They think it is time to enjoy when they start working. They are unaware that it is only the beginning of schooling in the University of Life. As the saying goes, “If education is expensive, try ignorance”.

3. Invest in your health. Health is wealth. By maintaining good health, you can eliminate spending huge amount for medicine and hospitalization. Imagine how much critical illness can hurt your finances. With a single stroke, your wealth can be wiped out instantly.

4. Eliminate or reduce vices. Vices are one of the greatest hindrances to wealth building. These are the unnecessary wants that we can live without. Just imagine a person smoking a pack of cigarette everyday. How much money did he burn in a year? Not only that, he also is not investing in his health. In short vices are not good to one’s physical and financial health.

5. Live below your means. This statement has been used so often but is taken for granted. Yuppies tend to splurge money to enjoy the money they worked hard for. That is instant gratification. Sometimes they spend too much that they have to incur debt just to sustain their extravagant lifestyle. Isn’t it debt sounds like death? Remember the book “Till DEBT Do Us Part” by Chinkee Tan? The only way to delay instant gratification is to have proper mindset. You have a choice, either “SACRIFICE NOW, ENJOY LATER or ENJOY NOW, SUFFER LATER”.

6. Start your savings program. Saving money is not at all difficult. Every time people hear the word “savings”, there is only one response” “I have no money left for savings”. They do not realize that the amount of money to be saved is irrelevant. It is the discipline and habit that matters. By saving, you are in principle, “paying yourself first”. Imagine paying all your bills first and leaving yourself for the last and penniless? The trick here is to consider yourself as an expense on top of your other expenses. Take ten to twenty percent of your paycheck and save it. (Remember the story of Joseph as governor of Egypt?) Then budget the remainder for your expenses. Learn to determine the wants and needs. Cut down on wants and focus on the needs. If the budget is still short, it is time to look for additional income so that you can increase your cashflow for your budget.

7. Create emergency fund. As a rule of thumb, savings equivalent to three to six months of salary must be reserved for emergencies. The usual problem is there is always emergency but no fund. Emergencies are those events that suddenly arise without our control. Childbirth can not be considered emergency. Some time in the past, a worker was borrowing money from me for emergency because his wife will be giving birth. I frankly told him that it is not emergency because the time he learned his wife was pregnant, he should have planned and prepared the amount needed.

8. Invest to grow money and outpace inflation. After accumulating emergency fund, it is time to transfer excess money to an instrument yielding higher rate of return. Inflation can not be seen but can be felt. Inflation, by definition, is the loss of value of money over a period of time. To make it plain, just imagine you have fifty pesos last year. That amount today can not be able to buy the same thing you bought last year. So it pays to learn different investment vehicles for your financial growth.

Time is of the essence here. It can be your ally or enemy. One only realizes the full importance of TIME when there’s little time left. Everyone’s greatest asset is one’s unexpired years of productive life. Take advantage of time and make it work with your money.

Checkmate!

Written by Edmund Lao / Personal फाइनेंस/बिज़नस Mirror

Sunday, 23 August 2009 23:00

Chess…an ancient game of strategy that traces its origin to India, has been around for centuries. The objective of the game is to capture the opponent’s king by checkmate within 2.5 hours, a position where the king has nowhere to go. When an opponent gets checkmated, the game ends. The game has three main stages: opening, middle, and the end game. The opening consists of the starting and the developing moves by deploying key pieces to their most effective positions to control the center. The middle game is the planning and execution stage. It is here that complications arise. The skill of the player in defense and offense and making critical decisions determines the outcome of the game. Erratic evaluations from a deceptive move by the opposing player can cause a winning game to be lost. Making decisions can even gain or lose a tempo (time on/against the side of a player who seizes/wastes opportunity). This is where the nerve of the player counts a lot. The end game is the result of a properly or poorly planned middle game. Masters have varying styles: aggressive, conservative or both. It is usually the young ones who are aggressive and the young “once” who tend to be conservative. In the financial game called money, how do people move and win? Financial planning is like a good game of chess. The opening Playing the opening game in chess poorly always results in a crushing defeat. The same principle applies to personal finance. When one starts earning income (more or less at the age of 22), it is the best time to begin the quest to win the money game by making savings a habit. In this game, money represents chess pieces. As chess pieces are moved forward to attack, one has to move his money forward, too. He has to learn how to manage money and make it work through wise and aggressive investment moves. By being in control early on through financial discipline, the financial success is not hard to achieve. In chess, studying the position is a must in order to have a good chance of emerging victorious. The player has to seize the initiative at the opening. In financial planning, one has to study his position and gather information for him to make good financial decision. Unfortunately, majority commit the same blunder by delaying savings early on and putting first instant gratification or having the herd (or heard) mentality in investing. This kind of financial blunder is very costly, as one cannot take back lost time. Self-control is the key to success. One has to be in control or else he will be under control. By committing himself to learn first, he already built a strong foundation for his personal financial planning. Take advantage of time. Control your emotion and discipline yourself. Think of your goal of checkmating your financial opponent (you). In chess, the opponent is the other player. In financial planning, the opponent is ourselves. It is out human nature to resist change. We need to overcome and change old selves if we want to succeed. The late Bruce Lee once said we need to empty our cup. That means we need to discard the old and useless and retain the useful/absorb the new ones. Be up to date with financial information and put it into action. The middle game As a person begins to earn more, his expenses, unfortunately, also begin to keep pace. It is sometimes inevitable that because of factors such as family needs, lifestlye changes, impulsive buying decisions or new investment opportunities, a person’s expenses exceed his income. When this happens, a correct mindset plays a a very crucial role in keeping in check with your financial target. Before investing your money, investigate first. Remember that scammers will be very happy to have a chip of your hard-earned money. They usually invite people to their business-opportunity seminar and will make them “feel good” and part with their money, only to realize later that they had been “hypnotized” and pressured into taking part with the organization; although not all business-opportunity seminars may be scams. Financial planning has never been a “feel-good” session. In fact, financial planning will present to you the harsh realities of life that you need to address and solve! One needs to gather information and use logic before jumping into any decision. Ask around, make research or background investigation, weigh your options before risking money. Even if you failed because of a bad decision, begin again. Remember the sayings “It ain’t over until it is over” and “There’s no failure until one stops trying”? Like a chess game, a player in an inferior position still has the chance to win when his opponent makes a wrong move. As long as one does not quit, there is always room for success. Whatever the result, continue playing for a win. End game At last! We come to the end of the game and the battle of wits is almost over. The scenario now is much simpler and easier to analyze. There are only a few pieces left on the board. Checkmate is in the offing. Only one will emerge victorious. The winning player remains composed and has plenty of time to make a move while the losing player is usually stressed and finds himself in time trouble. Then suddenly, checkmate! The question is: Are you the announcer or the receiver of the announcement?