The guaranteed feast

Question: As a full-time real estate broker, I am always on a feast-and-famine cycle. No matter how much I budget, I can’t seem to stretch my income until the next sale. I managed to invest in a taxi that’s now fully paid, but the daily income is not enough to pay bills, especially with two kids to send to school. Do you know of a financial program or investment scheme I can avail myself of where there is feast so that I avoid famine—something like a salary or regular income from investment?—Submitted via Facebook

Answer: There are investment schemes that can provide guaranteed income.  But let me also tell you that “feast,” like beauty, is in the eye of the beholder. Whether a particular level of income is seen as “feast” varies from household to household. So here is what you should do first to find out if these investment schemes can be classified as a “feast” for your household.

Simulate the filing of your income tax return (ITR) using your current level of gross annual income. You can get the MS Excel file of BIR Form 1701 from www.bir.gov.ph/birforms/form_itr.htm#1701 (i.e. the annual ITR for self-employed individuals) and use it as a guide. When you have computed your tax liability, add that to whatever tax-deductible expenses you have indicated in your simulated ITR. For instance, you may want to use as a tax-deductible expense the optional standard deduction of 40 percent of gross sales/receipts/revenues/fees.

Your gross annual income minus your computed tax liability and minus your tax-deductible expenses (let’s call the answer your net take-home earnings) should be equal to your total annual personal (non-tax deductible) expenses. These personal expenses would include, among others, your cash flow needs for children’s education, food, clothing, shelter, utilities, entertainment, debt repayments, healthcare and your estimated required annual savings to fund future financial goals/obligations.

If your net take-home earnings are equal to or higher than your annual personal expenses, then you should be OK. But judging from your question, it looks like your annual personal expenses are higher. By doing trial-and-error computations, you can find out the level of gross annual income you will need to break even (i.e. your net take-home earnings will equal your annual personal expenses).

The difference then between your required and actual gross annual incomes is the additional income you need to earn to make ends meet. The target additional income, while significant, is oftentimes not taken into consideration when people look for ways to augment their income. That is why many will find out to their dismay that the business they entered into, even after doing their best, does not have the capacity to generate the additional income needed. Other times, they will find that the required investment (in time, money and effort) to break even is way beyond their reach.

Put a pin on target additional income first and let’s go back to investment schemes with guaranteed income. Since you probably want not only guaranteed income but also guaranteed repayment of principal, you are looking at no other than government securities (i.e. treasury bills and bonds). Government securities possess the lowest risk among investment instruments.

Based on the Jan. 14, 2013, results on www.pdex.com.ph, current interest rates on government securities range from 0.125 percent a year for a one-month maturity to 5.53 percent a year for a 25-year paper, and that’s gross of the 20 percent final withholding tax. With such low interest rates, you will be required to put up a huge amount of capital to produce your needed additional income.

If you need to earn say P200,000 more in a year, you will need to buy, depending on the maturity, anywhere from P4.5 million to P200 million in government securities. Why, with even just P4.5 million, you would probably have enough to invest in a business that could potentially bring you much more than the additional P200,000, and with risk-mitigating measures already installed.

Putting it all together, all businesses bear risk, real estate brokering included. The risk with investing in a business is oftentimes higher than that of investing in shares of stock. But you are on the right track in looking for another business that would mitigate the risk in being a real estate broker. This is called diversification or what farmers call inter-cropping. You just have to determine first what you need to earn more.

Once you have determined your target additional income, compare that to what you can invest with. If your target additional income is P200,000 and you can invest P1 million, then you would have to find an investment that can earn an average of 20 percent return a year (i.e. P200,000 divided by P1 million). Don’t forget that the higher the potential return, the higher the risk.

Looking at potential returns is not enough even if they are guaranteed.  One should also relate such returns to your target additional income and weigh in the risks. For example, a guaranteed gross return of even 5.539 percent per year on an investment of P1 million will not be a feast for someone who needs to earn P200,000 yearly; it will be, though, for someone who has a target additional income of only P55,000.

To get a better handle on investing in particular and personal finance in general, download Ya!man, the country’s first free personal finance mobile app from www.personalfinance.ph. Ya!man helps to track a week’s cash flow, compute the effective interest on loans (i.e. whether loans are on diminishing balance, add-on-rate or 5-6), determine the sufficient amount of life insurance for you based on your particular life situation, and compute the future cost of your child’s college education and your retirement. The fact that you can ask for personal finance tips directly from a personal finance expert will keep you addicted to Ya!man. And all of these are for free.

For more comprehensive and practical tips on personal finance, you may also attend the public run of EnRich on Feb. 16, 2013. Visit www.personalfinance.ph or call 2161541/3593094 for details.

So start with your target additional income first before plunging into investing. And if by chance your target additional income is unusually high, try to cut down your expenses.

(Efren Ll. Cruz is a registered financial planner of RFP Philippines, personal finance coach, investment adviser and author. Questions may be sent by SMS to 0917-5050709 or e-mailed to [email protected]. To learn more about the RFP program, visit www.rfp.ph or e-mail [email protected].)