One step back, two steps forward

http://www.businessmirror.com.ph/home/opinion/16549-one-step-back-two-steps-forward.हटमल

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.