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 22nd, 2007 at 12:04 pm
fun reading this thread.
i have a question. what do you think of the mutual fund price nowadays? would you say they’re expensive.
i’m planning to put some of my savings in my mutual fund now but i am not sure whether i’m buying high if i do it now.
advice anyone?
June 21st, 2007 at 1:01 am
Hi Hachiko!
“…it’s now worth a cool P 1.52M, and still compounding!”
Personally, I still believe that Mutual Funds shouldn’t be an illustration for compound interest because one could incur losses on his principal. I hope your MF investing is directed by a specific goal…not merely to see your money double or triple or get a tenfold return. W/o a specific goal & a plan, one wouldn’t know when to hold & when to sell & how much.
June 20th, 2007 at 9:12 pm
starter boy, hahaha! Gettin rich in showbiz is like a lottery. The chance comes to you and not the other way around. At sa hilig nilang magpatalbugan, aynaku, they don’t stay rich
My fund’s up again to P 1.54M (market’s doin real great!) and it must be more than what the rest get to save in their long careers!
I’d like to believe there are many ways to attain fin independence (just like skinnin’ a cat), one just needs to acquire a little of the many good skills and qualities bloggers have shared here! Lucrative jobs or businesses you have a passion for for active income. Financial acumen to tap mutual funds for passive income and to track where your money goes. And live within your means, of course!
mzkukuro, can you be more specific w/ details pls? work, income, future plans…
June 20th, 2007 at 8:30 pm
Ur right Pinoy Investor. That’s why i asked what Ryan meant by retiring at 40. I hope he didn’t mean totally not working at all coz it’s also not healthy. Well, maybe not anymore the kind of work one used to have when he had no choice but work real hard to earn a living…but working to keep one healthy & still useful or productive. I hope retirement to us is when we can already have a source of PASSIVE INCOME & not be forced to work anymore.
Just the other day, I reminded my 20’s client that his collective investment funds (VUL & MF) is only a way to make his money grow. Come retirement, he cannot fully rely on these same instruments as these would not necessarily bring him regular passive income. I introduced to him diversification through different asset classes & gave him some homework to now set specific goals & plans on how he could have passive income at retirement. For ex., he cud target a certain amt thru his equity funds so he cud have a 4-door apartment w/c cud then provide him rental income. He became excited so I told him I’d assist him in this exercise like do the maths for him. I said it’s not enuf for him to just want to make his money grow the best it cud…investing w/o a specific goal is dead, as well as having a goal w/o a plan.
He has been investing 1/3 of his income thru me for the past 2 yrs but I am guessing that after we do that execrise, he wud be investing a bigger chunk. What wud now be really fulfilling for him is not just seeing how his money had doubled or tripled…but seeing the fulfillment of specific life goals, one at a time…
June 20th, 2007 at 5:40 pm
hey guys, you seem to know a lot in personal finance… maybe you can help me out … ?