Question: I want to start planning for my financial future. But I am just an employee with a fixed pay. I don’t expect a salary increase anytime soon. I also do not have the time or the means to grow my finances through investing in the financial markets or in a side business. I am seemingly faced with a road block. What do I do?—Employee of one of the top 1,000 Philippine companies.
Answer: The Statement of Assets, Liabilities and Net Worth or SALN required of government employees and politicians is actually a good thing. In fact, everyone should prepare their own SALN. Take note, the critical word is “prepare.” I am not for legislating that SALN should be submitted by everyone.
SALN involves nothing more than coming up with your own balance sheet. And the knowledge of what you own (assets) vs what you owe (debts) can be a powerful thing. SALNs ask you to list as of today the market value of all of your assets vs the liquidation value of all of your outstanding debts. A good measure of the market value of assets is to see what they would be worth if you were to sell them today. Liquidation value, on the other hand, is the amount needed, including interest and penalties on past dues if any, to fully settle debts today.
In my training programs, I find that people are not always aware that they already own sizeable assets. I see smiles on their faces when, after listing their assets, I ask them if they knew beforehand that they owned such significant assets. However, some of them are quick to say that they also have debts. True enough, after listing their debts, some of the smiles stay while the others turn into frowns. Some are downright distraught because their debts come out larger than their assets. What I own minus what I owe results in my net worth. Those with debts larger than assets have negative net worth.
Then I simply ask them two questions. First, I ask them to figure out how they got to where they are now. This exercise brings a lot of learnings and “aha” moments to my participants. And these learnings are the reason why I encourage spouses to attend my training sessions together. Spouses are jointly responsible for their household’s financial decisions. Walang sisihan (You cannot blame each other).
Next I ask them if a positive net worth is enough. The answer is no, even if the resulting positive net worth is large. The best way to find out if assets and debts are managed properly is to apply some simple financial ratios. I will not go into those ratios in this article, for you can run the ratios yourself by doing a simple financial health check. Visit our web site, www.personalfinance.ph, and click on the free financial health check button in the home page.
What I will say is this: A household’s assets are acquired only through one of two means, debts or the household’s own money. Put another way, a household’s assets are owned by two groups, creditors and the household members themselves. If we were talking about your household, would you feel happy and at ease knowing that most of your assets are owned by creditors? Sure you would own a mansion of a house, flashy cars, the latest in fashion and the most high tech gadgets. But if most of them were funded by debt, you would actually be living a lie. Such assets are also what I call NPAs, or non-performing assets. Instead of adding income, they just bring about more expenses in the form of interest charges on your debt, which also reduce the money you can add to your net worth. Does the solution lie on looking for ways to increase income? Not necessarily!
You can immediately do things to correct the situation by revisiting your SALN and determining which things you can let go. Not only that, you can convert some of the NPAs into performing assets. Perhaps you can rent out that extra car or room in your house. That lot that you were planning to give to your children as inheritance can be the start of a lucrative build-and-sell business. You could start a trading business on your vast collection of watches, shoes and bags (and I am not just referring to the ladies). You can even build a mini-used bookstore business on those books that you are using now as a mere dust collector.
Your SALN, when done properly, gives you a clear picture of where you are now and what you can do to improve your lot. They say that one man’s garbage is another man’s treasure. I say one man’s garbage is also his treasure.
But what about those households with negative net worth? Is there still hope? Go to www.inquirer.net and search for my article entitled “Will I ever be a millionaire?” You will find the answer there. Better yet, attend one of our EnRich training programs to see how you could best manage your finances with what you already have. There is one scheduled on July 16, 2011.
Here’s to your healthy SALN.
(Efren Ll. Cruz is a registered financial planner of RFP Philippines, investment adviser and best-selling author. For questions about the article, text to 0917-505-0709 or e-mail to efren@personalfinance.ph. To learn more about the RFP program, visit www.rfp.ph or e-mail info@rfp.ph.)
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