Credit Cards

Why do I have credit cards? I used to own two Mastercards, one of which gives me the opportunity to earn miles because I love to travel. My mastercard has now earned me enough miles to fly me to Europe via Northwest. Since I am paying for an annual membership for my second card which is also a mastercard, I decided to discontinue it and applied for a Visa card which gave me a free gift certificate of roundtrip domestic travel via Asian spirit. This Visa card also waives the annual membership fee if you meet the minimum amount charged to the card. What do I charge with my credit cards? Almost everything that I have to pay cash for anyway: groceries, fuel, tuition fees, pre-need premiums, school and office supplies. If I can swipe it with my card, I will... for the points. I just have one rule for all my credit card swipes --- I pay everything in full at the end of the month.

How do I keep track of my credit card expenses? I always keep all receipts. I have a separate envelope for my cash receipts and another envelope for my credit card receipts. I set aside my cash payment for the credit card even before the monthly bill comes in. As soon as I have put aside cash for a particular transaction, I write "ok" on the credit card receipt. This way I am able to monitor which receipts have been "funded" with and which are still due. All the credit card cash payments are then deposited to a checking account. The money in that checking account is considered "spent". So when the bill comes in at the end of the month, there is a standby fund in the checking account which I just conveniently transfer for the payment of my credit card bill. No matter how huge the amount is, I know there is fund for that because I keep track of the receipts and have "okayed" these with the cash payment.

So what is the important lesson here? When you swipe your credit card, make sure you have the equivalent cash to pay for that particular transaction and set that cash aside immediately to a checking account. At the end of the month, all the receipts will have that "ok" sign on it and you can pay all your transactions with peace of mind. This way you do not get into huge credit card debts because of the interests incurred by unpaid transactions. At the same time, you are able to benefit from the freebies that your card is offering you.

Mutual Fund Investment in the Philippines

The current global crisis plaguing the world has made many investors fearful of their investments. In the US, even banks are closing down that is why a lot of Americans have been distributing their money to many banks to make sure the amount in each bank stays under the amount covered by FDIC. This will assure them that should their banks close, their money can still be covered through the insurance.

In the Philippines, the covered amount by PDIC is just P250,000. There is an ongoing proposal in the government to increase the coverage to P500,000 but this is still a proposal. For now, that small amount of coverage simply means that if you have P1 million in a particular bank, should that bank close, you can only get back from the bank a maximum amount of P250,000. Let us just hope that the banks in the Philippines remain stable and does not start folding under the current crisis.

Those who have invested in mutual funds and unit investment trust funds are also hurt by the current global crisis. How is this so?

You should first understand the principle of investing in mutual funds (MF) and unit investment trust fund (UITF). These two types of investments are pooled investments, meaning, your money will be pooled with other investors' money and you allow an investment company (MF) or a bank (UITF) to manage your money for you. They charge you fund management fee in exchange for their expertise in investment. The main difference between MF and UITF is that you are a shareholder in MF. Y0u receive dividends when dividends are distributed and the investment company is obliged to show you their books and financial statements as well as disclose to you where they invest your money. As for UITF, this is not so. You simply entrust them with your money and manage it for you.

So where is your money invested?

There are four general classifications of mutual fund investments that you can choose from: Money Market Fund, Bond Fund, Balanced Fund and Equity Fund.

Money Market Fund are invested in fixed-income securities issued by government. This is the most conservative among all mutual funds and has the lowest rate of return. It is also the most liquid because you do not expect too much fluctuations in the yield so it is viewed that you can withdraw your money anytime without fear that you may be withdrawing at a loss. Though lately, there have been very minimal losses with this type of investment as well. The yield is usually on the average comparable with most rates of time deposit but unlike time deposits your money is locked out for a particular period.

Bond funds are invested primarily in securities issued by government and corporations. This means your money invested in this pooled fund will be used to buy securities in exchange for a fixed interest rate from these entities. This is the reason why when the stock market collapses, the bond fund is the least affected of all, though it is also affected because it can also be traded in the stock market.

Balanced funds on the other hand is invested in both bonds and equities. When the stockmarket is bearish, the balanced funds will have lesser losses compared to those of equities because it can opt to put some of its investments to bonds and cash which is not too much affected by the stockmarket. However, it cannot totally pull out everything from equities therefore losses can also be incurred.

Equity funds are the once that is heavily invested in the stockmarket. This is the reason why when the stockmarket falls, equity funds also fall and when the stockmarket is bullish then equity funds soar as well. During bullish market, expect those who are invested in equities to have really high yields.

How do you invest in the mutual fund to maximize your benefits and minimize your losses? You should invest in mutual funds for your retirement for the long term and start withdrawing and transferring that retirement fund when you are 5 years from your retirement. If you are 20 years old, start investing in a balance or equity mutual fund and if you choose to retire at 65 year old, start transferring your fund at 60 years of age into more conservative funds like bond fund or time deposit.

How do you start? You allot a fixed amount of money each month and invest it in your retirement regardless of whether the fund value is high or low. This way you can benefit from peso cost averaging. In the long term, the growth you expect to yield from a balanced or equity fund will be in the average of 12-14% per annum. The important tenet in mutual fund investing with this long term outlook is not to panic when the market crashes. Why? Because the economy is governed by economic cycles and a bearish and bullish phase will always occur in the stockmarket. It crashes and then picks up itself from the dust and begins to rise again. Historically, it has always showed a graph of minute volatilities but the trend has always been going up in the macroscopic point of view.

Where do you invest? You can check out http://ww.icap.com.ph for a list of mutual fund companies in the Philippines.

Do not be swayed, however by the current ranking because it changes everyday. Look at the 3-5 year performance of the company. Look at where each company puts its investments. Discern, pray, act, start investing and ask God to bless your investments.

How Much Life Insurance Coverage?

It is not uncommon that sales agents would just offer you a proposal for life insurance with a face amount of P1 million. You may think that P1 million is already big but if the insured individual is the sole breadwinner of the family, his demise will potentially wreak havoc to the finances of a family who is just left with P1 million to budget for their daily subsistence, education of the children, for funeral expenses, payment of loans and credits, etc. That P1 million may just easily vanish in thin air especially if the lifestyle of the family is high.

So how do you practically compute for your life insurance coverage or in other words, how much life insurance do you really need?

Let me give you a basic guideline. You must compute for the total protection needs by identifying these needs:

Immediate Needs - Before the insured dies, there are expenses which you can assume that may have to be covered like:

• Hospitalization
• Funeral/ Burial
• Mortgage/ Liabilities
• Estate Debts

Educational Needs - If you have no education fund for the children, you must include this in the insurance coverage. You may opt to include just college education fund for all your children or you can include in your estimates the high school educational expenses as well.

Replacement Income - You can compute this by the monthly contribution that you give to the family multiplied by 12 and divided by 0.08. This is the amount that they need to invest in an instrument that will give them a yield of 8% so that they can live on the interest of your insurance.

Adding all the values computed from above will give you the total protection needs that will be equivalent to the face amount of your life insurance. The beauty of life insurance is that you do not need to pay this much to the life insurance company in order to get that much amount of insurance coverage. Ask your life insurance agent how much premium you need to pay for that amount of coverage and have him or her compute for term, whole life and variable universal life and see which among these you can afford for now.

You can also decrease your total protection needs by deducting your current assets which your family may be able to use, should the unexpected happen. Examples of such sources are:

• Peso cash and placement
• Dollar cash and placement
• Any existing life insurance (group or company)
• Real estate

This will decrease your required protection needs and you can just get additional life insurance based on your computed shortfall.

I strongly suggest that the one who computes for the insurance needs is the household manager which I presume would be the wife because she will have a better grasp of how much insurance protection will be needed by the family especially the children should the breadwinners meet an untimely death.

What Kind of Life Insurance?

How do you choose the kind of life insurance that is most suitable for you?

Do not depend on the proposal that is handed out to you by a life insurance agent. Determine the kind of life insurance that you need.

If you are single, have no dependents and still young, the most likely reason for you to get an insurance policy is to avail of the lower premium. The younger you are, the lower is the cost of insurance and the easier it is to become insured. Eventually you have the plan of getting married and having your children. The most advisable life insurance for you will be the variable universal life insurance. It will give you the flexibility of increasing or decreasing your insurance coverage in the future. It also gives you the chance to invest in equities which will potentially earn greater yield in time. Since it is presumed that you have more cash at your disposal, you can well afford this kind of insurance.

If you are at the early stage of family life where budget is tight and you have many other financial priorities, you should get a term insurance. A lot of people at this stage tend to discount the importance of an insurance since dying seem too far off. Yet it is precisely at this stage wherein a great financial devastation can occur should the breadwinner meet an untimely death. With the big burden of financial obligations to the family, the loss of the breadwinner is truly crippling. If you care enough to insure your car, you should care enough to insure your life. It is totally irresponsible to overlook this need and simply disregard it. Other people insure themselves for the sake of getting an insurance but the coverage is miserably low that it can only actually just cover for the funeral expenses and the hospitalization bill if the untimely event should occur. There is not enough to replace the lost income, much more to cover for future needs such as the education of the children. The good thing about a term insurance is that it is very affordable and gives the maximum protection for the family. If started early enough, the premium is low and it can later be converted to a whole life policy when the family can already afford the whole life policy which offers not only protection but also savings. When converted to a whole life policy, there is no need for insurability if the coverage is the same. That is the beauty of a term insurance converted to a whole life policy.

There are also what you call riders. These are additional benefits that you can attach to your basic insurance policy. For example, a critical illness benefit is a rider which gives you a big amount of protection in case you are struck with a critical illness included in the insurance company's list. There is the more common total disability benefit which ensures premium coverage even when the insured can no longer pay for the premium because of disability. There is also the accidental death and dismemberment. Other riders are hospital income benefit rider and female benefit rider. You should ask your agent the different riders being offered by the company and choose the rider which you think you would have great need for.

Life insurance is also very useful for estate planning. High income individuals with many properties can get so much for their money by just buying an insurance instead of paying for estate taxes, donor's taxes or capital gains' tax. I believe life insurance is the 9th wonder of the world because it gives you instant cash when you need it the most and you do not even need to invest the same amount to be protected for that amount. You may wonder what the 8th wonder of the world is. It is compounding interest.

Prevention is Better Than Cure

I tend to get frustrated when people simply refuse to listen when I start talking about life insurance. I just do not know why there is such a bad perception about life insurance. My only suspicion is that people view insurance agents as just mere salesmen who are out there to make a sale. So when they hear about insurance, they immediately associate it with an expense which they will never benefit from. It's as though the only person who will benefit from the insurance is the beneficiary who will enjoy the benefits at the expense of the insurer's death.

Actually, I am also guilty of this perception... until I became a financial planner. Then I was able to see the value of insurance as a tool for risk management and not just a product that are being sold by salesmen who are out there to make commissions. The first talk that I heard about insurance came from a preacher who does not sell insurance. I guess that was the factor that made me a believer.... that the speaker was trying to sell an idea and not a product. And it was funny that the second talk I heard about insurance came from someone who said "don't tell me you don't believe in insurance because insurance is not a religion." That struck a sensitive cord in me. And finally, when I finished the financial planning course, I came to realize the value of insurance not just for the living beneficiaries but also for the insurer.... i.e. you do not need to die in order to benefit from your life insurance coverage.

I affiliated myself with an insurance company in order to dig deeper into the many facets of life insurance and the different types of life insurance with the sole purpose of finding the right insurance for me and my husband. Again, I am guilty of having a lack of trust for insurance agents. I wanted to see and study the products for myself. However, in the process I got a first-hand experience of my own behavior towards life insurance agents when I got the same response from my friends when I started to talk about life insurance. It was truly frustrating. As a financial planner, I know that some of my friends are treading on dangerous grounds with such a lack of foresight and a limited knowledge about risk management. It's as though they are immortals! Then I realized that perhaps it is because they do not know the different types of life insurance that are available in the market.

Term insurance will provide for their beneficiaries if they die young at a cost that is very affordable. Whole life insurance has the the cash value which they can use while they are still alive. Variable universal life insurance gives them the option to invest in equities and securities at the same time have the protection they need in times of untimely demise. There are other living benefits which some life insurance packages offer such as total disability benefits, female and maternity benefits, critical illness benefits, hospital benefit. These vary from one insurance company to another.

If you are as paranoid as I am, then sign up as a life insurance agent in one respectable and stable insurance company so you can study the products for yourself. Insurance is a real preventive measure for financial disaster and it can really protect a family from such an unfortunate event of untimely death of the breadwinner. You do not need faith to know that this is true, you only need common sense.

Wealth Diagnosis and Plan

You should have done the SALS and PIES inorder to get a good diagnosis of your financial status. Do you have a positive net worth or are you blinking on the red light? Learn to be very honest and don't make excuses if you see yourself on the negative side of the coin. The first step towards financial freedom is knowing where you are and knowing where you are going.

Having known your financial status, you should list down your financial goals. Make the goals specific and time-bound. For instance, if you are buried in credit card debt, make it your goal to get out of debt in say, two years. List down your action plans such as consolidating all your credit card bills into one credit card company with the lowest interest rate, paying off that credit card with a fixed amout every month, refraining from using the credit card unless there is a cash equivalent that can pay for the purchase, and curtailing all wants and listing a budget per month.

If on the other hand, you are the type who is disciplined enough to set aside money for monthly savings, then part of your goal must be to define what this money is for. Is this for retirement, for downpayment of your home, for your wedding? Depending on the time horizon, you can classify your goals as short term (0-2 years), medium term (2-10 years), long term (more than 10 years). You could then decide where to invest this money depending on the time horizon when you would be needing it. For the money that will meet a short term goal, put it in certificate of deposit or time deposit, money market fund and short term securities. For money that will meet a medium term goal, you can choose to put it in bond or balanced fund. For money that you will not need until after ten years, you can choose to invest in equities and stocks, real estate or your own business making sure you choose the right ones in order to benefit from greater yield. Of course, you should always remember that the greater the yield that you foresee, the greater is the risk for such an investment.

Part of investment planning is to know the percentage that you put in equities, bonds and balanced funds. If you are young and have the luxury of time on your side, you can choose to put 60% or more of your assets in risky investments such as equities that will give high yield because time will give you the chance to recover losses if it happens. If on the other hand, you are about to retire, do not jeopardize your financial status by investing your retirement fund in the stockmarket hoping to make it double in a year or so. You may succeed but there is also a big chance that you will fail. You cannot take such a risk at this point in your life unless you are willing to work for another decade or so.

Pathophysiology of Your Poverty

After having assessed your financial status, it is imperative that you also assess your behavior towards money. Your behavior will definitely explain why you are in your current financial status. In the medical field, it is what we call the pathophysiology or the basis of the disease. There is a cause for every effect.

If you are poor, there is a reason for such poverty.

1) You do not believe you will become rich

2) You do not like to become rich

3) You do not know how to become rich

Which one are you?

You do not believe you will become rich.

The greatest hurdle to all your dreams is your own mind. If you do not believe, then it shall be done to you according to your word. For the person who believes, all things can be overcome. For the person who do not, all things are insurmountable. For the person who believes, there is always a WAY. For the person who do not, there is always an EXCUSE. In The Millionaire Mind, majority of the millionaires who became rich did not grow rich because of inheritance nor did they get rich because they were exceptionally intelligent. These millionaires believe that top 5 success factors for their wealth are honesty, discipline, ability to get along with people, supportive spouse and hardwork. They simply had the tenacity of spirit to pursue their dreams.

You do not like to become rich.

Much as you refuse to believe that this could be possible, there are people who really do not like to become rich. For them, wealth is evil. It will lead them to the road of perdition. They believe that Jesus will not allow the rich person to enter the Kingdom of God. With this mental attitude, they refuse to think about money. It is understandable considering how greed can turn people against God and commit sins and heinous crime simply because of money. The love of money is the root of all evil... but the lack of money can also be the root of evil. In the end, it is simply a question of detachment. God sees the hearts of men. If you cannot be trusted with small things, such as money, how can you be trusted with the Kingdom of God. Jesus admired the shrewd manager for using money to aid him his salvation. That ought to be our attitude towards money. That is the idea of tithing 10% of your income to God. Give to God what is due to God. Then do not worry. Look at the birds of the air, they neither sow nor reap but your Father in heaven feeds them. For the one who gives will surely receive, hundredfolds, pressed down and overflowing. The tithe is an obligation to God. What is given above the tithe is the offering. This is the only command that can be "tested" by man. Do not put Him to the test... but when it comes to tithing, you can put Him to the test. He is true to His promise. When you give your tithe, you will be blessed. For God surely appreciates the money that is given from want than from surplus.

You do not know how to become rich.

It is amazing how the Holy Bible is filled with financial nuggets. Some believed that the parable of the talent is about "talents". However, the talent is actually a form of currency in Jesus' time. Jesus was well aware that money buried under the ground will not earn anything. Money deposited in the bank will earn only a meager interest. Money needs to be invested if you want to make it grow. Wealth does not fall on the lap of the foolish person. Even if it does, it soon vanishes. This is repeated over and over again in the Book of Proverbs. Financial literacy is needed in order to gain and keep wealth. King Solomon became very wealthy because he asked for wisdom not wealth. Evil people use all sorts of scheming devices to hoard money at the expense of their soul. That is not real wealth. Soon enough, evil and misfortune strikes them. Wisdom is the key to wealth. Creativity lies within each individual. Having a mentor makes it easier. There are many roads to riches but the answer lies within. God's abundance is being showered everywhere around us. But only those with open arms and open minds will receive His blessings and abundance.

Now, if you already know why you are poor, it will be easier for you to solve your problem. Knowing the cause is the first step towards financial healing.

Wake Up Call

How do you know if you are financially healthy or financially sick?

As doctors, we learn that a person is sick because they come to us with complaints which we call symptoms. It is something that bothers them and causes them problems. But there are also those who have no symptoms at all. However, when they come for a routine medical check-up, they are confronted with a disease that has been evolving silently... thus we call it an incidental fnding.

Same goes with your finances. You will have symptoms that will point to a diseased pocket. And what are these symptoms?

1) Always falling short of funds even before the month ends

2) Having no savings or emergency fund set aside for rainy days

3) Constant fights about money matters

4) Outstanding debts that are not being paid

However, there are also instances when you think you are actually living the affluent life and is financially healthy. How will you know if there is no silent financial disease eating at the bottom of your pocket? The routine financial check up that can diagnose this problem is the SAL and the PIES.

The SALS is the statement of assets and liabilities. You can easily compute for this by listing in one column all your assets to include personal property and their current cash values, savings and investments and retirement savings to include maturity value of pension funds. In another column, list all your liabilities to include personal debts like credit card bill, bank loans and mortgages as well as investment debts like premiums payable for pension fund or educational fund. By subtracting your liabilities from your assets, you will know your NET WORTH. A positive networth will signify financial health while a negative networth signifies a disease eating inside your bones without you being aware of it. Such a silent financial disease if not diagnosed this way will emerge as an "incidental finding" when a crisis suddenly hits the family like death of the principal breadwinner or sickness and disability in the family.

The PIES on the other hand stands for Personal Income and Expense Statement. This way you can determine your cash flow every month. Keeping track of all your monthly income, whether fixed or variable and listing down all your expenses every month and subtracting your expense from your income will show if you are living beyond your means, within your means or below your means.

Another way of determining if you are living a financially healthy life is by looking at your financial behavior. If you regularly set aside at least 10% of your income every month to an emergency fund or savings and investment fund, then you are financially fit. This is akin to exercising regularly to keep yourself fit. However, if you are the type who really do not care where your money goes and live as though there is no end to the money supply, then you are living a dangerously precarious financial life.

This honest self-appraisal and self-assessment is a must if you really want to know if you are financially fit or sick.

The earlier you go about this exercise, the better because preventive measure is always better than curative. As in any form of disease, it is best to treat the problem when it is still not in its advanced stage. Do not procrastinate!