Financial literacy 101 for working people
It is not bad to be born poor. It is bad to be still poor when you grow old. It is tragic to be old and poor at the same time. James Stowers, a financial independence guru wrote, “Regardless of how much you earn, only what you save is really yours. You can always spend what you save, but you can never save what you spend.”
For many generations now, the most common fear of working people is to be poor when they grow old. As we write, there are four generations at the workplace today – the traditionalists, baby boomers, generation X and generation Y. The generation Z (born 1995 to 2010) will soon join the workplace. The traditionalists and baby boomers are now the minority, but many of them have already secured their future.
The Gen X’ers and Gen Y’ers, mostly salaried employees, are probably living their dream. With their fixed income, they can make both ends meet and still have something to spare for occasional vacation and techie gadgets. The Gen Y’ers tend to move from one job, project, or company to another, without accumulating tenure that qualifies for retirement pay. Their favorite C’s are cash, car, condo, cell phone, and computer (lap top or tablet).Whether or not they will have money by the time they stop working is not an issue now. Or is it?
When you retire in the future, are you sure that you can live in comfort for the rest of your life? Your future will ultimately depend on what you do for yourself. You are financially independent after retirement when you continue to receive passive income and live your chosen lifestyle. This does not happen by sheer luck. It is something that you have to work at, if you truly want to achieve financial independence.
Many gurus tell you that financial independence ultimately comes from your investments. To make sure you have something to invest, start taking charge about your earning, saving, and spending. Here are a few steps usually suggested by financial experts:
ï Earn as much as you can. While young, work hard to earn much. Don’t feel guilty that you earn so much, provided what you do is legal and legitimate. You can have a day job, take some projects, have a hobby that makes money, engage in business that does not conflict with your work, and use your productive powers to earn as much. Know what you are worth in the market and get paid properly. Don’t settle for a measly fixed income in exchange for your time and talent. Remember, you can’t stay young and productive forever. Make hay while the sun shines.
ï Pay yourself first. Every time you earn, pay yourself first by setting aside a portion of what you earn. Do this even before paying your utilities bills. Start with a small percentage of your monthly income, but increase your self-payment as you earn more. When you receive a bonus, set aside most of it.
ï Save, save, save. Make it a habit to save for the future. If you can, force yourself to have as many savings accounts as possible – for emergencies, for something you really want in the future, for possible investments, and for other imaginable reasons to save. The idea is to spend below your means. Make sure that your expenses are always less than what you earn.
ï Buy only what you need -not what you want. Buy only what you intend to use. It’s wrong to buy something because of a big discount, even if you don’t intend to use it. Bargains are useless if you don’t use them. Learn to be frugal in life. Spend only for things that are absolutely necessary to live decently.
ï Don’t spend what you have saved. When you think you have saved enough, sometimes you will get tempted to spend some of it, lend it to needy friends or relatives, or occasionally splurge for self-gratification. Fight every temptation to get money from your savings. If you find it difficult to get money into your pocket, double that difficulty to get money out of your pocket.
ï Invest -make your money earn more money. There are two ways to invest. Make your money earn more money by yourself, by having a business. The other way is to let other people make your money grow, like investing in stocks, mutual funds, time deposit, etc. Not everybody can run a business. Not all investment options can guarantee best returns for your money. Be wise when investing.
ï Remember the value of time. Be careful where you invest. Most assets take time to grow. If somebody offers you an investment scheme that is too good to be true, it probably isn’t true. Time is very important. If you are reading this now and you want to know when is the best time to invest your money, I’d echo what financial gurus say, “The best time to invest is 20 years ago; the second best time is now.” If you start early, it will take you lesser money to achieve your financial goals when you grow old. If you start working on it after retirement, you’ll need more investment to achieve your goals. It was probably Benjamin Franklin who said that compound interest is man’s greatest invention. Take advantage of that invention.
ï Try to get your money’s worth every time. There is a right amount for anything you want to buy. Don’t pay more than you should. To pay a fair price, estimate what you believe you could sell it for if you owned the thing you want to buy. Also determine the actual value to you of anything you want to buy by canvassing.
Investing is a paradox to working people whose take home pay cannot even take them home. “How can I invest when I can’t even make both ends meet?” is a common complaint. But investing is the best way towards financial independence. Gurus advise that if you are truly interested in a brighter future, you can always find extra money to start off your journey towards financial freedom.
Here are some ways that I have tried myself:
ï Review your income and expenses. Determine where you can increase your take home pay. Stop taking additional loans that are payable through payroll deductions. Have a monthly budget and stick to it. When you increase your take home pay, you can have extra money for savings and investments.
ï Work harder and better. When you work better than expected by your bosses, you can give them a good reason to raise your pay. Most companies have an annual salary review that provides merit increases for great performers. Always do more than you get paid for. Soon you will get paid for more than you do.
ï Strive to do bigger jobs. Train yourself to be most effective in your present job. Learn new skills that will qualify you for bigger jobs. This is the best way to get promoted. To get higher pay, you must do bigger jobs. Don’t rely on longevity to get bigger pay. The value of jobs get higher when they require more knowledge and skills, are more complicated, and have more accountabilities. Bigger salaries will be given to those who have higher value jobs, not to those with more needs. That is why the CEO with no more dependent gets paid 30 times than the janitor with 10 kids to feed, clothe and send to school. The higher your pay, the more you can save money for investments.
ï Set aside your bonuses. It is pathetic to note that some working people have already mortgaged their 13th month pay as early as January. Bonuses should not be treated as part of regular income for budgeting purposes. Bonuses can be set aside and used to invest or start a small business.
ï Get extra jobs or projects. Find ways to make money on top of your day job. You must be good at something. Find your interests, inclinations, hobbies, or talents that can help you make more money. If you’re good at emceeing in your company programs, try emceeing at birthday parties or other affairs outside your company. Again, use the money you earn on the side to start your investments.
Capital for investing or business is not a major problem. The question is whether or not you want to be financially independent. Or you want to be poor and old? Be my guest!
(Ernie is the 2013 Executive Director and 1999 President of the People Management Association of the Philippines (PMAP); Chair of the AMCHAM Human Capital Committee; and Co-Chair of ECOP’s TWG on Labor Policy and Issues. He also chairs the Accreditation Council for the PMAP Society of Fellows in People Management. He is President and CEO of EC Business Solutions and Career Center. Contact him at [email protected])
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