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Maybe it’s just as well that I use children story references in a Blog that’s supposed to talk about money. (I started with “Alice in Wonderland”, the Red Queen and the Hamster in the other blog, might as well do the same on this one, he he) After all, weren’t we somehow taught about money when we were just kids? The ant and the grasshopper (the value of saving money), the golden goose (money management), the turtle and the rabbit (the value of perseverance and long term investments), the Fox and the Crow (protecting oneself from scams), etc, are all surprisingly still very applicable to our present day money problems.
If you were not listening then, then perhaps your present day money worries should compel you to listen to them now. So curl up and fix yourself a hot cup of chocolate drink, or a bottle of beer, or whatever you think is best. Maybe you just need to take a trip back in time to finally find your way to the golden brick road.:)
The Ant and the Grasshopper
…tell you what.. maybe I’ll just skip the story and get straight to point.. Let’s not embarrass ourselves any more than we have to, he he
The Ant and the Grasshopper story is basically about the value of saving for the rainy season. Grasshopper played all summer while little ant stocked up on his food inventory. Along came the rains and grasshopper ended up living with the ant and eating little ant’s food. Little ant probably ends up being eaten by grasshopper as well but that’s beside the point. (Beware of grasshoppers that come knocking at your door!)
Anyways, the moral of the story is to always save enough for the rainy days (rainy days in our case are retrenchments, retirement, emergencies, etc.) Easier said than done!, you might say and you will be right. If saving money were so easy, I wouldn’t be writing this blog now, wouldn’t I? Moreover, you wouldn’t be spending your time reading “children stories” too, right? he he
The problem with saving money doesn’t stem from the fact that you don’t earn enough, it stems from the fact that you spend too much. Consider your monthly salary and your monthly expenses, better yet, write them down. Because if you don’t have any money left at the end of each month, then maybe its time to start dissecting your expenses and trim it down.
Your accomplished list will look more or less like this:
Income (from work): (your salary less the taxes)
Secondary Income (from raket, gig, part time job, parents, etc): (0 for most, for those still being supported by their parents, you lucky bastards! He he)
Residual Income: (Income you get even without working): (interest payments from bank account, stocks, etc) (substantial for a few, minimal for some, and a dream for most)
Expenses:
Rent or Mortgage Payments: (usually a fixed amount)
Food Budget: (The kryptonite of my budget, have a bad habit of spending more as money becomes less to ward off depression, he he)
Utility Bills: (water, electricity, cable, cellphone, telephone, internet, LPG or gas, etc)
Groceries: (this includes your midnight snack inventory, your toiletries, dog food – for the dog, household supplies like detergent, bleach, etc)
Transportation Budget: Unless you work at home like me.:)
Loan Payments: For your credit card, for the loan shark, for your mortgage, for the car, for your implants, etc, etc.
Entertainment Budget: For the trips to the mall, for the gifts for your girlfriend, for the pirated DVDs you buy, for the trips to you-know-what places, for the concert tickets, etc, etc.
Ok, so now comes the hard. Remember the EQ test shown in TV commercials a while back? Remember the marshmallow and the fact that the baby isn’t supposed to get it? Well, for this discussion, that baby is you. Financial stability after all is intimately related to deferred gratification or the lack of it.
So if you want to save money, keep your hands off that marshmallow!
If you got enough balls to ask your boss for a raise though, you can skip the rest of this section. If not, let’s roll up our sleeves and find a way to trim down those expenses. (Let’s worry about the lack of balls later).
Expenses
Rent: Do you really need such a large or expensive place? If yes, maybe you can rent out the extra room instead? If not, then maybe its time to look for a cheaper pad.
Food Budget: Eating out is expensive, cooking your own meals is not. At least, up to a certain extent. Also, this will also enable you to put your neglected refrigerator into good use.
Utility Bills: Turn off that Aircon, make sure the room is adequately sealed, use it sparingly or at least dial it down a few notches, remember this adds at least P3,000 to your monthly bill. Buy your own washing machine instead of having your clothes laundered, this may cost a lot initially and will cost you extra for the electricity but you’ll eventually recoup your investment after a few months. Think about subscribing to a lower cost internet, phone, cellhpone or cable TV plan if you don’t use these that much. Use internet calls instead of long distance calls. Use florescent lights instead of ordinary ones, they use much less electricity. Conserve water, flush your toilet bowl once a week, he he. By reducing your utility bills alone and paying them on time (to avoid interest charges), you can save as much as P4,000 monthly.
Groceries: Buy in Bulk, This not only saves you several trips to the convenience store (transpo cost), it also gives you the opportunity to rack up your shopping points, get discounts, join promos, etc. prices in convenience stores are also way higher than those in shopping malls.
Transportation Budget: Get your car in tiptop shape, it may cost a lot initially but you’ll recoup your expenses through less gas (higher efficiency engine), less maintenance costs and less major repairs. Carpool with your neighbours, friends and anyone else who are interested. This way, you get to save gas money without sacrificing your convenience. Budget your time, this saves you from having to take a taxi because you are already late. Ask for a discount if there are no more seats on the bus, he he.
Loan Payments: Remember that credit cards charge at least 3% in interest rates every month. Consider it as your little loan shark. This means that for every P10,000 purchase, you pay P300 in interest charges every month non withstanding late fees and other hidden charges. Pay in cash if you can afford to do so or try to pay off your credit card loans as soon as possible.
Entertainment Budget: Ehe he, if you’re a girl, find a boyfriend as soon as possible and make this item HIS problem. If you’re a guy, bash your girlfriend on the head with the “equality between the sexes” line. Buy plastic flowers instead of real ones and reuse them every valentines, he he he. Kidding aside, have a definite schedule and a budget for this item monthly.
You save 50% or more on your rent, say at least P2500, at least P3000 on your food budget, more or less P4000 on your utility bills (especially if you have deactivated your aircon), at least P500 off your grocery expense, at least P1000 off your transportation budget, At least P500 from loan payments, and last at least P1000 off your entertainment budget.
That’s at least P12,500 monthly that you can direct to your savings account! P150,000 a year! Which brings me to my next point: How much should you save and how much you should invest?
The Golden Goose
Remember the story about the goose and the golden eggs? Well, for this discussion, consider everything that comes in the income portion of your income statement as the golden eggs (salary, dividends from investments, interest from time deposit account, profits from business, etc). The golden goose (or geese for grammar’s sake) on the other hand are the money vehicles that are making this cash influx possible (stocks you own, business, your job, etc). Stephen Covey calls them the p/pc or production and production capacity.
The rule of the game is actually very simple (you can write this down): DO NOT KILL THE GOLDEN GOOSE. Instead, make it fat, make it grow, sing to it, encourage it to flirt with other Ganders (male goose) on a regular basis, anything that’s going to make it lay more golden eggs.
Now that you have the eggs DO NOT PUT THEM ALL IN THE SAME BASKET or diversify in financial lingo. This means put some in your regular savings account (4-6 months worth of salary), put some in a time deposit account, set aside some in insurance or college finds (for your kids), and invest the rest in money vehicles.
WHY? You may ask. After all, keeping it in the bank seems perfectly fine. Well, the answer lies in the fact that you actually lose money in the bank in the long run.
Consider:
The banks pay you 1-2% in interest for your money in their savings account and 4-5% for your time deposit accounts. This means that your P100,000 savings will earn P1000-2000 in a year’s time. A P100,000 time deposit account on the other hand will earn P4000-5000 pesos in a year’s time.
Your P100,000 peso savings then becomes P102,000 (if kept in a regular savings account) or P105,000 (if kept in a time deposit account). Not bad right?
Wrong! The average annual inflation rate is more or less 7%. This means that the peso loses 7% of its value (the amount of good that it can buy) in a yearly basis. Taking the inflation rate into consideration, this means that your P100,000 is actually worth only P93,000 the following year. Add the interest your bank has given you and you still fall short of what you have actually deposited. (P98,000)
Money vehicles are those options that will give you a return for your money higher than the inflation rate (7% interest rate of higher). What are these?
Stock Market: When you buy a stock, you essentially get to own a small piece of a public company. Consequently, you also get to share in its annual profit (dividends) and the value of the stock itself increases over time. The big question here is: will the company grow and make a profit? If not, you lose a lot of money. Market volatility aside, stocks offer some of the highest possible returns for your money (10-20% if you’re good). You will just have to mitigate your risk by learning about the ins and outs of the market.
Bonds Market: When you buy a bond, you agree to lend corporations or the government money at an interest of course. You earn money by cashing in your bond before or when it matures. Because this is a low risk investment, the returns are also lower. (8-10% for usual bonds)
Mutual Funds Market: When you buy a mutual fund, you are essentially pooling in your money with other investors. Your money is then invested in several stocks, bonds or other mutual funds. For most people, this is a lot safer than investing in stocks because the risks are dispread out over several stocks, bonds, etc.
Take note that the more effort you put in and the higher the risks are for the money vehicles, the higher your possible returns. This is why the highest returns are realized when you do business. Consider the following simple examples:
Sari-Sari (Convenience Stores): Convenience stores usually mark up the price of their products by 15%. This means that the Ligo sardines you have just bought for P10.00 is actually only worth P8.50 if you buy it in bulk from the supermarkets. For the sake of simplicity, let us assume that complete inventory turnover (all products bought are sold within a time frame) is once a month and the inventory value is P100,000. This is a P15,000 or 15% gross profit monthly or a gross interest of 180% every year!
Of course, then you’ll have to contend with Inday and her irritating habits, you’ll also have to pay for the rent, the utilities and the personnel.
Microfinancing: Have you ever noticed those dark colored guys with the weird accent (DVD/VCD?) making daily rounds in the supermarket carrying their lists and their umbrella? They usually have red colored scooters they use to move from place to place.
These guys lend money at an interest of 10% every month. They don’t require collaterals, papers, or anything and they usually loan out amounts in denominations of P10,000. Imagine P100,000 loaned out to 10 different people at 10% a month. This is a 120% interest in your money in a year’s time!
Then again, these guys have to contend with irate fish vendors armed with bolos and knives in a daily basis. He he he.
The Turtle and the Rabbit, The Fox and The Crow
Always keep in mind that since the rate of return for your money is always ALWAYS proportional to the risks you have to take, get rich quick offers and those that generally sound too good to be true are ALMOST ALWAYS scams.
Use your head and don’t stretch your neck out too far. Slowly and surely ALMOST ALWAYS beats the fast and dangerous approach to managing your money. Remember that money isn’t as much as a tangible thing but a product of the mind and making it more about mitigating risks than taking them head on.
In Ayn Rand’s words “Money Will Not Serve the Mind that Cannot Match It.”
So use your head before clicking your heels.
See you down the golden brick road!!
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