Question: My family and I have long been practicing the rules that the growing number of financial planners in the country are espousing. For some reason, though, whenever we tally our finances by yearend, we find that we had barely moved from the start of the year. What do you think is the problem?—Asked at “Ask a Friend, Ask Efren” service at www.personalfinance.ph.
Answer: Honestly, I would have to take a closer look at your finances to see what is holding back your flight to financial freedom. But perhaps we can start with some process of elimination. Try to see if you have money vamps (short for vampires). Money vamps are those seemingly harmless behaviors and transactions that slowly but surely suck the life out of your finances. To be orderly about it, let’s use the cash, debt, risk and wealth (CD-RW) management pillars as our guide. The following guide is not comprehensive. But it is a good start nonetheless.
Cash vamps
Do you do a lot of interbank ATM transactions? Interbank ATM withdrawals can cost up to P15 per transaction. If you did just 5 of those, you would have already foregone the opportunity of enjoying a hefty fast food meal.
Are you aware of the actual cost of using your appliances? You will not find your closed room cool when you go back to it after leaving your electric fan running. A 16-inch electric fan left running for 8 hours a day, 7 days a week and 4 weeks will cost P196 in monthly electricity. In a year, that equates to P2,352. Now think of the many things you can spend P2,352 on.
Money that is intended for the college tuition of your children that is merely invested in time deposit will be eaten up by inflation. Assuming an average inflation rate for tuition of 5 percent a year and a time deposit rate of 1 percent a year, you are losing 4 percent a year (in simple terms). You will need to plunk in a much larger investment or higher periodic contributions toward your children’s college education.
Debt vamps
How much effective interest is charged by those dreaded 5-6 loans? The lender would say 20 percent because if you borrow P5 and repay it with P6, the additional P1 is 20 percent of the loan amount. But this computation does not take into consideration the duration of the loan nor the frequency of loan payments. Given a P1,000 loan repaid with P30 a day for 40 days, the equivalent effective interest rate is 332 percent a year!
How much interest is there on a one-year personal loan with quoted interest of 0.99 percent a month? Mind you, it is not 0.99 percent x 12 or 11.88 percent a year. The effective interest is 21 percent a year. How? Such loans are usually computed based on add-on-rate where principal is simply divided by the term and the monthly interest is always based on the original loan amount.
Risk vamps
Are you still buying life insurance out of pakikisama or friendship? Life insurance affords your loved ones the continuation of your level of lifestyle even without you. That cost of lifestyle does not only grow because of inflation but also because of changes in life situation.
If you don’t review your life insurance coverage periodically, you may be setting your family up for a disappointment if you are called early from this life.
Wealth vamps
Are you still investing in instruments that charge higher-than-average transaction fees (e.g. entry/exit and management fees)? Shop around.
Are you being unduly risky or risk adverse with your investments? How will you know? Get a financial planner to compute how much you need to earn from what you have now and what you can possibly add periodically to meet your long-term objectives. You can also use Ya!man™, the country’s first personal finance mobile app, to compute how much your total future obligation will cost, whether it is your child’s education or your own retirement. Ya!man™ is free for download to iOS, Android and Symbian 40 running mobile phones.
Finally, are you still fixated on returns since inception and 5-year returns that give too much weight to ultra-long term performance without really tackling consistency? Such performance measures can give unduly high numbers when they use a low base price that is way into the past. Try this: Apply the following 60 percent, 30 percent and 10 percent weights to a fund’s 5-year, 3-year and 1-year performance, respectively. Then compare funds side by side. This method will help balance out consistency with long-term return.
The foregoing are just some examples of money vamps. So what money vamps do you still have hovering over your finances?
Know more about personal finance by logging into www.personalfinance.ph. There is a wealth of free tools to allow you to hit the ground running with financial planning, whether you are a financial products consumer or a financial planner. If you are from Northern Luzon, you may also attend our Baguio EnRich™ on Jan. 3, 2015. Details can also be found in our website.
(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 efren@personalfinance.ph. To learn more about the RFP program, attend a FREE orientation on Nov. 13, 2014, 7 p.m. at the PSE Center. E-mail info@rfp.ph or text <name><e-mail><RFP> at 0917-3464126 to register.)