8 unusual personal finance tips

QUESTION: I have read just about every standard personal finance tip there is. Are there “off the beaten path” tips to learn? —asked at “Ask a friend, ask Efren” free service available at www.personalfinance.ph and Facebook.

Answer: Here are some unusual personal finance tips that you may not have read about yet and that would seem to turn personal finance on its head. But so that there is structure, I will arrange them according to our CD-RW (cash, debt, risk, wealth) management pillars of personal finance.

Cash management

Forget about emergency funds. This tip is only for the risk takers. Putting money in safe investments to serve as your emergency fund also lowers the overall return on your wealth portfolio. If you believe you have a better chance of earning much more elsewhere, just get a credit card with a credit limit equal to the amount of money you need to set up as emergency funds. The money that you would have kept in emergency funds can now be invested. Again, remember than when you need to tap into your emergency funds, you would either need to use your credit card (and perhaps end up paying interest) or liquidate your investments in an inopportune time.

Put mainly large and crisp bills in your wallet. Of course, the best advice is for you not to put too much cash in your wallet. But if you are that type of person who feels confident only if your wallet or purse has money, you better put mainly large and crisp bills in it. People have a tendency to spend loose change and keep the large bills, especially when they are new and crisp.

Debt management

Be afraid of the term of the loan, not just the interest— Debt is not bad especially if it is used to acquire (not through 100 percent financing) earning assets. But you should be able to liquidate the debt whenever you want. In fact, Article 137 of the Consumer Act of the Philippines states that “The person to whom credit is extended may prepay in full or in part, at any time without penalty, the unpaid balance of any consumer credit transaction.” Unfortunately, lenders have found a work-around solution to ensure that borrowers stick to the full period of the loan. They re-named the pre-payment penalty processing fee!

Zero interest can be cheaper. If you are buying gadgets, appliances, furniture and the like, you will find that retailers normally offer zero interest financing as bait. Paying in cash is always the most affordable way. But if the retailer allows you to finance your purchase through straight charge, three months installment or zero interest over a given period (i.e. typically 12 months and based on the suggested retail price that is higher than the cash price), the zero interest rate can come out to be the cheapest among the financing options. Remember though to compute the effective interest rate on Ya!man, the country’s first and only free personal finance mobile app. Also ask yourself first if you truly need the item. Zero is the most powerful number in consumer finance that can easily lure you into unnecessary purchases.

Risk management

Let your children pay their own premiums. While life insurance premiums are cheaper the younger a person is, paying for your children’s life insurance premiums will do them more harm than good. Letting your children pay for their own premiums will give them a liberating feeling and sense of accomplishment. Your role as parent is simply to teach them the value of being insured.

Wealth

Do not run after the best performing fund. The best performing fund will not stay best performing. Running after the best performing fund can lead you to unnecessary switching costs especially if you are looking at short-term performance. Moreover, the best performing fund may be taking on more risks than you can handle. Just go with the fund that has the best chance of meeting your target returns and within your level of risk.

Do not buy and hold. In a stock market like the Philippines where volatility is the new norm, it would be best if you were to engage in buying and selling stocks over the short-term. This strategy requires sizeable funds, expertise and time. If you lack even just one of those requirements, just do Peso cost averaging on a fund that engages in trading.

Choose the allocator over the picker. Studies have shown that performance is determined 92 percent of the time by asset allocation, 5 percent by security selection, 2 percent by timing and 1 percent by luck. Trading by simply reducing or increasing asset allocation will make more of a difference in returns than mere security selection.

To learn more about the CD-RW management pillars please visit www.personalfinance.ph. There are free tools there to help guide you. If you want to set up your own financial consultancy, join us at our Financial Planner’s Training program for the cities of Cebu, Cagayan de Oro, Davao, Mandaluyong and Baguio. Check our website for the details and on how you can potentially attend for free.

(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 0917-505-0709 or emailed to [email protected]. To learn more about computing for intrinsic value and value investing strategies, attend the globally recognized Accredited Financial Analyst (AFA) program on June 20 to July 25. For more details, inquire at [email protected] or text <name><email><AFA> at 0917-3464126.)