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 25th, 2007 at 9:11 am
Hi mzkukuro, Here r my own ideas, Salve & others may have better things to say, though.
Skip (b) educ plans! substitute it w/ bond funds (safe) or balanced funds (more aggressive), build it up for next 10 yrs or so, and keep it till your child gets to college. I recommend BDO to friends for UITF, and so far so good. Same strategy to get used to saving in UITF for other purposes e.g. retirement.
For (a) house F Colayco’s book suggests budgeting for 150% of your estimated costs, so you don’t get caught unprepared for those nasty expense overruns! Good you’re conservative, given that OFW income is uncertain, finance your house w/ savings plus however much Pag-ibig is willing to loan you.
Better ideas, anyone?
June 24th, 2007 at 7:48 pm
Hi AngieV, the typical illustration of guaranteed 12% compound interest for 40 yrs, and labeling it “compounded”, is really a creation of the human mind rather than reality. In the real world there is no certainty in investing. Stock and bond prices could fall, 10% bond coupons can be reinvested at just 3%, new taxes are proposed, governments collapse, etc. Compounding simply means rolling over past interest or capital gains and hoping for the best in the future! Your “specific goals” comments makes perfect sense, though.
One other good trait common to fin indep people: the willingness to understand and take risks in pursuit of better returns.
June 23rd, 2007 at 1:59 pm
hachiko. i’m an OCW since last year earning $5k net per month. future plans: a.build a house; b.get educational plan for my child; c.get a healthcare plan; d.buy a duplex real estate for rent (or something like that).
i dont have debts, but do have some amortization payments for lot and an insurance. i have started some investing: in mf and coop capital. i want to venture in stocks trading (but need to study on it first).
the problem i see is that i really want to accomplish building a house, but that will deplete my savings, which is what worries me coz as a contract worker, i’m not sure when my next contract will be or if i will ever get another contract. should i borrow money for the house? and invest my money instead?
help help! what do i have to do so i can accomplish my plans?
June 23rd, 2007 at 1:57 am
I am so happy for those people who can reture young because they started saving early on. For most of my working life, I have supported my family, paid off huge debts incurrent by dad who had a penchanbt of accumulating real estate in the provinces. Hence I only started saving when I was 32. I am 34 na… so 2 years ko pa lang na enjoy money ko and yet here I am a worry-wart for my future…. True there are whisps of regret in my statements but I am just thankful I am over paying all the debts and my family can now support themselves. Brother is now working and mom has a small stores which I put up for her… NOW it’s me time….
Since i was introduced to mutual funds, I have religiously invested… allloting strictly 20% of my net income. So far, I am very happy wirh the return.
I am just taking baby steps I know there a re a lot who are in the same boat as I am.
I guess the key is the desire to start, the nudge to go on and the courage to persist..
Ron
June 22nd, 2007 at 3:19 pm
edsmaya:
when i bought the index fund in 2004, psei was at 1700. the fund manager asked me, are you sure you want to buy? NAV is low and you’re the only one buying. i said i know that’s why i’m buying.
he said you know when the index was high, everybody was buying and they were all singing praises. now they’re all cursing us. i said don’t mind them, they’re just grouchy coz they lost their savings.
now the index is high and everybody’s singing praises again. i hope they won’t curse the poor fund manager.