Question: We are newlyweds who want to start on the right foot financially. Friends and relatives are giving us all sorts of advice and to be honest, we are getting confused. Some suggestions even run counter to our present beliefs. What is the best way to sift through such advice?—Couple making a conscious financial effort
Answer: At the height of his popularity, legendary mixed martial arts superstar Bruce Lee gave this advice: “Empty your mind. Be formless, shapeless like water. You put water into a cup, it becomes the cup. You put water into a bottle, it becomes the bottle. You put it in a teapot, it becomes the teapot. Water can flow or it can crash. Be water my friend.”
Little did master Bruce know that his advice would be relevant to people practicing personal finance.
His piece of advice can be broken down into two parts; emptying the mind and becoming like water.
A lot of the pitfalls in personal finance have to do with mistaken beliefs that we grew up with. These beliefs are what we should be emptying our minds of if we want to practice personal finance well.
In the Philippines, we have the tradition of preparing food during fiestas. In some parts of the country, people’s 13th-month pay, which is normally received from November to December, is already borrowed against as early as the summer months of April and May when fiestas abound. This practice of borrowing just to have food prepared during fiestas has become so prevalent that there are cooperatives formally offering fiesta loans. So who gets to enjoy the food more? The guests. Who ends up footing the bill and paying the loan interest? The host.
Preparing a lot of food also happens during the New Year. There is a belief that whatever you have on New Year’s Day will be what you will have for the rest of the year. So, if you can serve a lot of food on January 1, this will be your lot for the rest of the year. In particular, there are the practices of serving 12 round fruits for prosperity during each of the 12 months of the year and of hanging inverted umbrellas to catch the blessings of the New Year.
Well guess what: only the fruit vendors become prosperous. And as for the inverted umbrellas, we did that when I was still a teenager. Lo and behold, we ended up with umbrellas full of holes as all they caught were the embers from falling fireworks. And by the way, I also tried jumping on New Year’s Day to get taller. To this day, I am still not a six-footer.
The beliefs that we should empty our mind of are not limited to fiestas and holidays. Putting too much money in our pockets on any day just to feel good and confident is courting the pickpocket. The pickpocket’s motto is “Kapag may isinuksok, may madudukot” (loosely translated: If people put something in their pockets, the pickpocket will have something to steal). And the pickpocket here is no other than us.
If we give ourselves easy access to our money, we will take it, especially when the temptation to spend is right before us. With technology, that easy access refers to the ATM payroll card, which not only makes withdrawing money a breeze but also allows for purchases just by swiping the card at POS (point of sale/service) machines at the cashier.
Once our mind is empty of beliefs that wreak havoc on our finances, we can now internalize the water part of master Bruce’s message, namely the right practices in achieving financial freedom.
Personal finance lessons may seem soft at first like idle water. But when water gathers strength, it can carve rock just like what it did with the Grand Canyon. Many cable TV shows now even feature machines that use water jets to precisely cut metal.
A financial planner will not bombard his client with heavy tasks at the onset. A lot in personal finance has to do with financial discipline that has to become second nature to us, much like the wrong beliefs that we now need to get rid of. And the best way to make financial discipline second nature to us is to practice small lessons repeatedly. The operative word here is repeatedly.
Have you heard of TWAHCD? It means Thoughts become words; Words turn into action; Action becomes a habit; that Habit becomes character; and Character leads to Destiny. In instilling financial discipline, personal finance focuses on the action that is made into a habit. For example, if you had invested annually in an equity mutual fund or unit investment trust fund for the last five years ending in 2011, you could have made upwards of 15 percent in terms of annual compounded returns.
Financial planners talk all the time about having small amounts automatically deducted from payroll and saved away or even invested. Behavioral finance has found that it is easier for people to live on 90 percent of their income than to save 10 percent of it. While the two options are seemingly the same, living on 90 percent of income means we don’t get to see the 10 percent balance as it is automatically taken away from us. On the other hand, saving 10 percent of income means that we would still need to do the actual saving. Now we all know that funny things can happen on our way to the bank to save that 10 percent.
There is much more ground to cover on personal finance practices than one column will allow. We will try to discuss those in other columns. For now, if you want to get started on practicing personal finance, empty your mind first, then start imbibing the seemingly soft lessons of financial planning. You may also want to download the country’s first free personal finance mobile app called Ya!man from www.personalfinance.ph.
Ya!man provides simple tools on doing a week of budgeting, computing the effective interest on loans (whether they are on diminishing balance, add-on-rate or 5-6), determining the appropriate amount of life insurance coverage given a particular financial situation, computing for the future cost of children’s college education and computing for the future cost of retirement. Each computation produces a brief analysis and allows the user to ask for tips from a personal finance expert. And all of these are for free.
“Be water my friend.”
(Efren Ll. Cruz is a registered financial planner of RFP Philippines, personal finance coach, seasoned investment adviser and bestselling author. Questions about the article may be sent by SMS to 0917-5050709 or e-mailed to firstname.lastname@example.org. To learn more about the RFP program, visit www.rfp.ph or e-mail email@example.com.)