Question: We have a cash flow problem primarily because of our huge debt burden. Please help us manage our debts better, perhaps through refinancing at a lower rate and longer term? – asked at “Ask a friend, ask Efren” free service available at www.personalfinance.ph, Facebook and SMS.
Answer: You must always remember that personal finance is comprised of four pillars, that of: cash, debt, risk (insurance) and wealth management. And for people who are still building up their wealth, the process should be in the order that I listed the management precepts.
Do not dive into wealth management if you still have not protected your downside. You are creating wealth to share with your loved ones. But what happens to your family if, along the way, you are called from this life before you reach your wealth target?
There is no investment in the world that is fully guaranteed. I should know because I have been a fund manager for a very long time. So rather than taking the plunge in investing where nothing is fully guaranteed, cover your downside risks first by practicing risk management.
Risk management is nothing more than getting life insurance. As one of my lawyer partners puts it, life insurance is like an airbag in a car that suddenly inflates when the car figures in a major accident that can be life threatening. Unlike with investing where you make a bet on an investment paying off, life insurance policies actually do the betting. These policies bet on something that you actually hope will happen and that is that you will not move on to the next life early. But just in case you do, the life insurance company will cover your family for the face amount of your policy.
Yet, if you are burdened with so much debt now as you say, you will be prioritizing your debt payments over your life insurance premiums. You may end up just wasting your premium payments for fear that creditors may haul you to court. In this case, you would be wiser just surrendering your policies first and using what amount was allocated for premiums before to pare down your debts. You may even use the accumulated dividends or fund values for further debt reduction.
Still, why borrow in the first place if you do not have the budget for it. Remember that if the debt was contracted not for buying earning assets but for current consumption or even paying down other debts, you will still need to provide space in your budget to service such debts. With your income unchanged, you will definitely need to make sacrifices. So, budget wisely first before you even think of borrowing. And if you are to borrow, use the proceeds for buying more of earning assets.
Keep it simple. In budgeting, categorize cash outflows into must spends and may spends. Then if your budget is short, cut back first on the may spends. If your budget is still short, question now what you consider as may spends.
For instance, subscriptions to a video streaming service and cable TV are not must spends. In fact, with one of the more popular video streaming services, there is a hack so that you can subscribe for free. As for cable TV, you can just buy one of those inexpensive gadgets that allow you to watch free HDTV. For internet service, you can get those that offer built-in landline service as well. You even get a bonus of watching clips of some of your favorite shows and listening to music all for free, at faster speeds to boot.
I enumerated just some of the ways to save. But by now, you should see that budgeting is the foundation of personal finance. To budget is indeed to budge it.
But budgeting is not the end because for you to continuously create wealth for your growing family, you will need to level up to debt, risk and wealth management in that sequence.
How do you easily remember those four pillars of personal finance? At our company, we have branded them EnRich™ CD-RW!
(Efren Ll. Cruz is a Registered Financial Planner of RFP Philippines, personal finance coach, seasoned investment adviser and bestselling author. He can be reached at (0917) 505-0709 and enrich@personalfinance.ph. If you want further knowledge on personal finance, visit www.personalfinance.ph. To learn more about personal financial planning, attend the 75th RFP Program this April, 2019. To inquire, e-mail info@rfp.ph or text <name><e-mail> <RFP> at 0917-9689774.)