Life for Sheldon, 26 and single, has never been this exciting. After a job as community educator for a property company, a few years as a marketing consultant, then a stint in several publications, he was hired by two Internet publishing companies to handle some of their projects. His income quadrupled almost overnight to P60,000 net of taxes. What would a 26-year old do with all that cash?
“I went crazy. I bought a P93,000 laptop and other techie gadgets. I bought a 350D camera and two lenses. I went out many times a week. I started traveling. Then I read MoneySmarts and I got very scared. I realize I was spending too much and I needed to be sober,” Sheldon said.
Sheldon doesn’t know it, but he is a financial planner’s dream client. He’s young and can therefore take advantage of the power of compounding, where interest on his money can earn more interest. He’s not lusting after designer clothes, fast cars and a condo of his own. He even bought a variable universal life insurance (VUL) for himself with a P1 million face amount – and that was before he started getting concerned about his finances.
His entertainment expenses are his biggest headaches, but even that may be solved with some nips and tucks. Financial planner Efren Ll. Cruz is not that worried. The important thing is, Sheldon wants to be sober and, unlike most of his generation, he is concerned about the future.
“This is very simple and you’ve heard this often, but it is still true. It’s not how much you make but how you spend it,” says Cruz.
Sheldon’s spending pattern is typical for a 26-year-old, but with some unique twists. He spends around P1,000 for “gimmick nights” four times a week on the average. He works at home, but blows around P5,600 every month on gas, maintenance and toll fees. He wants to budget around P20,000 this year for trips to Boracay, Bohol and Cebu.
The unique twist has to do with his credit card usage and contributions to home expenses. He has a P30,000 balance on his credit card that he is paying down monthly. And he has decided to put his card in deep freeze until he has paid it down. Sheldon also contributes P6,000 a month to home expenses for the maid and telephone bills.
For Money Makeover, Cruz said he would coach Sheldon how to come closer to his short-term financial objectives within a span of 12 months. When asked about what his financial objectives were, Sheldon gave his financial planner another pleasant surprise. Sheldon knew exactly what he wanted.
“I want to have P50,000 passive income every month and be able to save for a wedding in the next three years,” Sheldon said.
After the initial meeting, Cruz committed to creating a personal income statement for Sheldon and a strategy for reaching his goals. In the meantime, Sheldon was to track his spending rigourously for the next month. Off the cuff, Cruz said cutting entertainment expenses would immediately boost Sheldon’s savings by P16,000 a month. He also said Sheldon might be unduly scolding himself by mixing up his business and personal expenses.
“We will separate your business and personal needs like your laptop and cellphone expenses. We will also make a strategy so that you can have your emergency fund. After constructing your income statement, we will be able to see which are your discretionary expenses and we will focus on reducing that,” Cruz said.
(The next issues of Money Makeover, where volunteers are matched with financial planners who will coach them for one year so they can reach their financial goals, will talk about Sheldon’s personal income statement and Cruz’ recommended strategies. Through this series, MoneySmarts hopes to show how a good financial plan can change the course of people’s lives. People don’t need another Sermon on the Mount on financial planning. They need to see how financial planning can be done well. By the way, Sheldon is an alias to protect our volunteer’s identity.)
June 20th, 2007 at 5:29 pm
pinoy investor: pwede rin yumaman pag nag-artista ka! diba showbiz c hachiko? hehehe
June 20th, 2007 at 9:21 am
ryan, salve:
A piece of advice. Retirement is not synonymous to financial independence. You can be retired and poor. You’re more likely to be financially independent when working and earning. So continue working or start a business.
Investing is not a good way to financial independence unless investing is your business. I don’t know anybody who became rich by passively investing in mutual funds and off the shelf products. Those who make big money in stocks are professionals who trade stocks for a living, and big investors who put in huge sums and hold for a long time. But then if you have a huge sum, you’re financially independent to begin with.
Retirement is for the old and rich. Even professional investors and entrepreneurs are working, sometimes harder than employees. Of course the best strategy for financial independence is to get a wealthy spouse (di bale nang maganda basta mayaman)
June 20th, 2007 at 12:29 am
RYAN–
Hi! Retirement planning is a 2-phase program. The 1st phase is the cash accumulation phase & the 2nd one is the pay-out or pension phase. Just curious…what do u mean by retiring at 40 & cud u pls share w/ us how u plan to achieve this, i.e., what are ur accumulation & pay-out goals, & what steps have u taken or are now doing in order to reach those targets.
I had talked to some people like you who planned in retiring early & who believed thay had sizable investments but when I showed them the maths…one was shocked upon realizing that he would already be broke upon reaching age 60; another would have to delay his retirement by a few more years; one had to increase his annual investment; etc.
June 19th, 2007 at 9:40 pm
hi salve. yeah, thats the thing am not quite comfortable with: that is, that all of the financial adivisers that I do meet (and know of personally) are affiliated with certain companies … so in effect, they are not objective in their advise. also, they tend to push the products they favor, which will give them the most incentive. ultimately, they give advise that further their interests, not mine.
June 19th, 2007 at 9:02 pm
Hey Sheldon age 26 is nice perfect time to sober up and plan for a bright future! Do give yuppies the allowance to splurge at first, you won’t realize the folly of wasting 200 grand until, well, you actually waste 200 grand. If you’re already 60 and you haven’t sobered up a la Sheldon, now that’s a real problem!
My story isn’t perfect, either (below): I remember nice big paycheck went in part to shopping in Hong Kong, clothes, videocam and geeky gadgets that went obsolete in just a year. Thank God I found a good mutual fund for my P 300k savings, and the rest is history. BTW it’s now worth a cool P 1.52M, and still compounding!
http://www.inquirerbloggers.net/moneysmarts/2007/05/31/economy-on-a-roll/#comment-2436
http://www.inquirerbloggers.net/moneysmarts/2007/05/31/economy-on-a-roll/#comment-2458
http://www.inquirerbloggers.net/moneysmarts/2007/05/29/are-all-pre-need-products-worthless/#comment-2405
Hope my investment tips above give you an idea or two. Hmm, we’re about the same age, Sheldon, Ryan et moi, so Salve’s our ate hehehe
BTW Salve how’s the first money makeover couple w/ the negative cashflows - any improvements so far?
Ryan hmm is retirement at forty optional for you? Or is it to get out of the stresses of the rat race? Have enough savings myself to take it easy from now on, but why retire early if work is also going excellently? It’s much more fun planning things out and investing like I did if you’re more flexible about your future plans. Thanks.