(This piece is written by Bianca, one of the readers of MoneySmarts who has been chosen for the one-year Money Makeover challenge by INQUIRER.net. Bianca’s real identity is confidential, so that MoneySmarts can share her family’s financials and the lessons she has learned with the rest of the world. Read more about Money Makeover here.)

A financial planner (not Joe Ferreria) told us: sell your timeshare. My husband and I communicated silently the way old lovers do – with a look (or a glare, but that is another story) – and made a decision.

We will not.

I think he understood the hesitation and communicated to us his silent admonition. Insolent fools.

At the back of our minds, we had a suspicion that he was right. Not about the fool part (although we could be sometimes that too), but about our timeshare. After all, we had a strong opinion against timeshares in the beginning - a waste of money, will cause delusions of beaches along Belize, sun stroking our backs, while the Pacific mirrors our dreams.

Not that it’s a bad dream.

But believe you me, a timeshare costs an arm and a leg. It ranges from P250,000 to gazillions (think Disney timeshare - I could not even get a quote on how much that is), depending on the location of the rental, the season (red, white and blue), and how unwilling to bend the sales person is.

Think where that money could have gone – a downpayment for a new car, a new house, education….

But it does not end there. It gives birth to other expenses – yearly maintenance fees (which went up from P2,500 to P4,000 in the blink of an eye), RCI fees (S$150 annually –in Singapore dollars, but with the current exchange rate, it might as well be in US dollars), booking fees that could range from P2,500 (Asia) to almost P10,000 (outside of Asia). It does not include airfare, or the cost of food. The RCI hotels, although three or four stars, are almost always in the outskirts of the city – that means it is 30 minutes away from where the action is. With cab fares, we could have had a decent room at a city hotel with dancing lights, Prada and great food at our doorstep.

But it is not all bad, as we have found out in our two years of owning one.

With it, we only spend approximately P3,000 per night, and if the trip is stretched a week, the discount could be really substantial. Moreover, the accommodations are almost always one bedroom suites, and they say that if we are really kulit (translation: a charming prick) with the RCI agent at the other end of the line, or during low season (August to October), we could even be given a two-bedroom suite (good for 6 people). Match the hotel savings with really low airfare (through Clark, the other gateway to Hongkong, Malaysia, Singapore, Korea), it could satiate the wanderlust in anyone.

For our first trip, our family (hubby, daughter and myself) went to Malaysia and Singapore and spent P30,000 for five nights (four nights in Malaysia, one in Singapore), inclusive of airfare and food. We recently went to Hongkong and Macau (for 4 nights) and spent P40,000, also inclusive of airfare and food.

But do we recommend it?

We do not. Well, at least, not to everyone.

It certainly was not value for money to our parents, who had two timeshares. They paid approximately P700,000 for both and they got seven days at a one bedroom suite at the back of the Flamingo in Las Vegas, Nevada (the sign on the wall says $1,000 per night and that was a source of a little comfort) and seven days at a one-bedroom suite at a manor near Legoland in California. Sounds plush, but however I do the math, it is not P700,000. They tried to save up their weeks and were planning to go to Europe but travel was put off year after year after year because the kids got married, houses had to be built, the farm needed to be farmed and so forth. The timeshares expired and they never got to go.

A timeshare is a commitment. It is for people who love traveling with a passion, love to do research (for cheap airfare, great places, good food), and, at the onset, the temerity to haggle with the timeshare salesperson until that person buckles down and gives the lowest-value-for-money-price imaginable.

There will be hits and misses, we know. But we are passionately excited to see the rest of the world as a family, to hear the lyrical overtures of another language, introduce our daughter to life’s many wonders, and immerse ourselves in the magic of cultures so fascinatingly different from our own.

Our timeshare keeps the door – doors – open.

Yes. We are keeping it.

For those who are in been-there-done-that mode, you probably know how easily a dream home can turn into a nightmare. Johnny Noe Ravalo today tackles several issues that most homebuyers find out only after the move.

Do you build the home yourself, hoping to find a hassle-free contractor, or go for a house ready for its new occupants?

I don’t know about you, but the words hassle-free and contractor don’t exactly sound like they should go together. On the other hand, the problem with buying a house ready for occupancy is the likelihood that you’ll wake up the next rainy season with seepages in your walls, or some other surprises that will drive you mad.

Noet says there is no golden answer to this.

There is no golden answer. I know of one couple who took a mortgage to buy a home before getting married. They ended up with outlets that short circuited anything plugged into them, aircon outlets that didn’t work because there was no electrical wires attached, a fuse box that was underpowered for the house and a living room that were eight to ten inches deep when rains were heavy. Oh, did I also tell you that the kitchen sink refuse went straight out of a hole into the street so their neighbors literally knew what was cooking for the day?

Building a home isn’t any easier. If you don’t have any reliable contacts, hiring the labor is going to be a big problem. Would you or your spouse have the time to physically supervise the day-to-day build up of your dream home? More importantly, could you tell if something being dug, cemented or wired was not in order?

My own experience with contractors hasn’t been encouraging either. Again, even if you are physically present on site, you depend on the contractor to get several different things moving at the same time, working towards the same goal. Since contractors end up committing to several simultaneous projects, they often outsource jobs with contractual workers. This is a hit-or-miss situation since it is difficult to impose a quality standard. Besides, even if the contractor’s own employees do the work, individuals do the digging, cementing, cutting, welding, the wiring. It is impossible, and unproductive, to have someone second-guess each and every worker. In the end, there is a fair amount of trust — and luck — involved here.

Financing a home is equally tricky. Although interest rates are very friendly these days to homebuyers, there’s still the issue of whether to get fixed interest rates or not. In his column, Noet says fixed rates for 25 years is not a bad deal. But if you’re tempted to stretch the loan to 30 years to lower the mortgage to, say, P5,000 monthly, keep in mind that interest is paid on outstanding balance and not on declining balance.

Those who argue that a fixed rate loan prevents the borrower from taking advantage of falling rates lose sight of the fact that the borrower is protected from the repricing uncertainty. The borrower cannot be protected from repricing risk (both up and down) and still have the benefit of downward flexibility if rates fall.

Kamille, check the website of different banks, especially the housing loan calculators. This gives you a clear idea of the monthly amortization, depending on the amount to be borrowed and the term of the loan.

Going for a very long-term housing loan will not always be good. Remember that interest is paid on the outstanding balance and so the longer you maintain a loan the more you pay in interest. Choosing too short a term will also not work well because a higher monthly amount may be too much to bear. If something unexpected happens with Kamille’s income, the mortgage is in trouble.

As Noet pointed out, every homebuyer ends up with a unique house story. Even those who are satisfied renters have their own. I got swarmed with comments when I wrote “On my Christmas wishlist: a new house”. Check it out here.

So, what’s your story?

There’s difficulty on both sides of the table – when the income is rising or when it’s shrinking. When Dad gets a big jump in salary, he thinks of getting a faster car. When mom gets a big break in her home business, she thinks of getting a new condo.

What happens when the global economic slump hits Dad’s company or mom’s big break unexpectedly turns into a big heartbreak? The kids are not the only ones that find it very hard to get used to a smaller house and a less funky ride.

Today’s personal finance article “Learning to cope with a single income” is about a mom who decides to stay at home for the kids. It’s also about adjusting one’s lifestyle to a shrinking budget:

Question: I am a mom with two kids, ages three and one. Every time I go to work in the morning, I feel a pang of guilt leaving them with their yayas. My husband and I have decided that I give up my job and stay home to take care of the kids. I’m happy about that, but also nervous about making ends meet in the long run. I’m due to resign at the end of the year. Can you please give me advice on how we can live well on my husband’s income alone? – Annie

The advice below are crucial to her and her husband’s peace of mind:

1. Practice living on one income for the next seven months. This will help you assess your financial resources and adjust your lifestyles. Live as if you are already supported only by your husband’s income. No doubt this will be difficult, but practicing now will help you see how you can live simply. Start by cutting down on eating out. Bring baon to work. Start taking public transportation if you have been used to taking the car. Cut down on splurges, such as weekly home massages and trips to your favorite coffee shop. There are many ways to simplify lifestyle.
2. Save your income for the next seven months. Since you will be living on your husband’s income, put your income away as an emergency fund that can support you in times of crisis (e.g., illness, job loss, death). You will need this fund to dip into in emergency cases so you won’t have to borrow money and pay for the cost of borrowing. This fund may be placed in investment products that may potentially earn more interest, such as high-interest savings deposits, time deposits, bond funds or equities funds (from mutual funds or unit investment trust funds). Putting your money in such instruments will give you more interest than a regular savings account.

I like how Annie thought this through. She did not decide on the spur of the moment. Choosing to be a SAHM (stay-at-home-mom) by the end of the year gives her some leeway. Emotional moms who feel those pangs of guilt can easily quit, just like that. I know, as I’ve felt that urge many times in my working life.

So, since Annie knows when she will have to deal with a much-lower paycheck, she can prepare. Why wait for December to adjust? Start pretending to live on a single income right now and consistently set aside her salary in her buffer fund. Or at least start with a 50% savings, and make it a family challenge to stay within the budget for the next couple of months.

As always, careful preparation and delayed gratification is key.

Check out the rest of the article here.

Do you think she’s…

a) nuts
b) a miser
c) sensible
d) smart

With gas already at P50-something per liter, rice prices higher by more than P10 since the crisis began and everything else going north, I would be surprised if inflation hasn’t curbed spending for Mother’s Day. In fact, mothers were most likely the ones who discouraged lavish celebrations!

Read our personal finance article: Inflation cramps Mother’s Day celebrations.

Excerpt below:
Inflation cramps Mother’s Day celebrations

By Chupsie Medina
INQUIRER.net

With Mother’s Day fast approaching, searching for that ideal gift poses one big challenge. Skyrocketing inflation compounded by continued hikes in crude prices have turned cost into a major consideration.

Stores big and small are now enticing gift-hunters with just about anything – from the cute to the fabulous. Restaurants too are sprucing up.

For some Filipinos, cost hardly factors as an issue. Cecille Yap, a doting daughter, quips: “Mothers are priceless, so it doesn’t matter if times are hard.”

This year, as in previous years, she will still make time to buy something for her mother. She doesn’t mind purchasing something more expensive, thanks largely to a bigger disposable income.

Those who feel the constraints of rising fuel and food prices, however, are resorting to more creative gifts. Koni Macapagal, 28 and single, plans to stay the whole day at home with her mom.

“Time with her is something that I have not been giving lately. I’m like a boarder in the house,” she proffers with a guilty grin. She feels this gesture will be better appreciated than the unforgettable little things she had given in previous years.

Here are some ideas for financial and non-financial gifts for Moms, some of which are based on true stories:

1. Zero out or at least pay a portion of her credit card debt. (Based on a true story)
2. Buy her a good timeshare in a good company or hotel chain.
3. Placement in a mutual fund or unit investment trust fund
4. If she’s still in her 20s to 30s, shares in companies that are sound and secure. Retail treasury bonds are also an option.
5. If the budget is tight, breakfast in bed with toast, jam and freshly squeezed juice is always a hit.

One year to plan for another successful Mother’s Day.

All these talk about Meralco and the high cost of electricity has made me wonder what the average Filipino household’s power bill looks like.

To make the comparison fair, why don’t we divide our electricity bill with the number of persons living in the house, including babies. I think the little darlings consume a bigger amount of electricity compared with the average person (need for airconditioning etc.)

For April, I paid P805.88 per person.

How does that compare with yours?

***

Meralco shares went into a nosedive today after news of a possible investigation (good luck with making it look like a friendly Q&A) by Congress into how Meralco runs the show. If there’s anyone in the audience who doesn’t know that this is politically driven, raise your hand.

No hands?

If this entire hullabaloo actually brings down my electricity bill, goodie. But here’s a So What Chocnut snippet that people should not miss.

Exactly 20% of that electricity bill goes to Meralco. If you look at your bill, you will see the biggest portion is called generation charge, which goes to the independent power producers and the National Power Corp.

Yes, that means the government.

That simply means the power to bring down electricity rates is in the government’s hands. And that should make you wonder what the administration is trying to do. This early, the business community is already worried. Of course they are not buying the we-want-to-drive-down-electricity-costs-for-poor-Filipinos line. Former central bank governor and AIG’s standard bearer Joey Cuisia has already been interviewed on television saying, “After Meralco, who next?” Not good for business confidence.

People think they can invest P20,000 and grow that to a million if they are smart enough. That’s an urban legend. Truth is, you need money to attract money. Capital formation is very important.

– Augustus J.V. Ferreria, senior executive vide-president of Generali Pilipinas, in a MoneyMakeover session May 5, 2008.

The idea of investing is sexy. We are all in a hurry to do it. The more technical and highfaluting, the better. Stocks, bonds, forex, real estate – bring them on!

The wisdom of the wise tells us to make sure we have the “pisi” (rope) to invest and make money even during market fluctuations. Yes, even for supposedly–dummy-proof instruments like mutual funds. We must consider worst-case scenarios before we let excitement push us to jump without a chute.

Dr. Noet’s column today explains for example that even for assets we are planning to hold to maturity, we cannot just be fixated on the specific date in the future when we will get our principal plus the discount or minus the premium. We must also think about what will happen if worse comes to worst, we need to liquidate before that time.

A high income or extensive wealth will allow a select few the option of holding onto assets irrespective of market swings. Indifference is a clear clue that they have judged themselves to be liquid enough to either withstand the market spikes or remain focused only on the maturity date. This is the privilege of having a “mahabang pisi”.

For most retail investors though, our pisi is much shorter. We are much more prone to a liquidity squeeze and more likely to react when the day-to-day value of our long-term assets are fluctuating. The irony is that when investors sell when prices are already falling, values drop even further. Panic begets large losses and large losses beget further losses.

“But this opportunity comes only once!” the thought reverberates in my head.

“Nah,” reason sets in. That’s greed talking.

Conserve financial strength, build up capital, choose tradeable investments and only then invest. Breathe in, breathe out.

At the heart of the problem are Landbank’s feeble presence overseas and a ticklish issue on documentary requirements. You will find many examples of those concerns from MoneySmart readers in my previous posts on the LTNCDs here and here.

Joey Sale, a senior analyst at Landbank, said the bank has held meetings on these issues Monday afternoon, conscious of the difficulties the OFWs are facing.

He said Landbank’s overseas offices could process applications from OFWs who want to buy the LTNCDs themselves and not through relatives. There are offices in California, Italy, Singapore, Japan, Taiwan and three in the United Arab Emirates. (A full list with contact details can be found here.)

But with almost eight million OFWs scattered all over the globe, many would likely not be anywhere near those areas. HSBC would be their next option.

Since the LTNCDs are onshore instruments, it is still not clear whether HSBC can offer the instruments in branches outside the Philippines. However, Joey Sale said interested OFWs may ask HSBC branches if they can process the application. I guess it can’t hurt to ask.

Documentary requirements were also a major ticklish issue. There has been a clamor for Landbank to relax its requirement for a special power of attorney giving relatives of OFWs the authority to make the investment for them.

While Landbank is not likely to relax this requirement because of legal constraints, it is considering extending the deadline. However, OFWs may have to submit another legal document called “deed of undertaking” (don’t lawyers complicate our lives? Hehe, peace!) where the OFW promises to deliver the special power of attorney after a period of time.

This has not yet been finalized, though. (Just a heads up for all of you out there looking for a way to invest in the LTNCD.)

So far, there has been lukewarm response because of these access issues. As of Monday afternoon, availments have only reached P2.65 million. Landbank is waiting to see if the demand will snowball this week. There are also talks of a second offering, but nothing definite yet.

With inflation figures said to reach 8% this year, Joey said those who are looking at real effective interest rates and not just the nominal rate of return find the LTNCD returns low. “It’s true, that’s a concern. But you can’t get similar interest rate for a similar investment in other banks. Time deposits that give lower rates will require you to put in P50,000. The LTNCD’s minimum is just P13,698.91,” he said.

Joey Sale has agreed that I post the investment banking department’s phone numbers in MoneySmarts. I do hope calling these numbers will give you a better experience than the hotline or trunkline. Good luck!

Contact:
Joey Sale – 405-7228
James Saldana – 405-7732

More details on the LTNCD here.

(P.S. Done in the service of the OFW, NOT for Landbank.)

How do you prepare yourself for a loved one’s death?

Not exactly a peachy thought on a MoneySmart Monday, I know. But as they say, there’s no going around death and taxes. And while it may be easy to prepare for the loss of a loved one financially, the emotional part is something else again. Can you attache a peso sign to that?

This story from MoneySense about a widow’s journey from tragedy to triumph is worth the few minutes it will take to go through it from start to finish.

Very inspiring. Excerpt below:

I got the worst possible news that a wife could ever receive: a six-seater Cessna plane carrying a skydiving expedition crashed in Tanauan, Batangas. One of the four charred bodies they found belonged to my husband, Jimmy del Rosario II. Pilot error, I was told. On May 8, 2005, I felt that the world closed in all around me. I could not bring myself to go to the morgue to identify his body.

During the first year, I cried everyday. But I also knew that I had a little girl and her future to look after. It was a good thing that we had gotten her an educational plan. One of the provisions of her plan with Philam was a waiver of all the fees if the payor dies. My daughter automatically received the full coverage of the plan. I also received something from Philam, as well as an amount from the insurance coverage of the aircraft company.

One-woman show
I had the option of selling our businesses and going abroad, but I decided to tough it out despite offers to buy them. I knew that I could run the business, since Jimmy had taught me a lot over the years.

But I found out that I still had a lot to learn. Jimmy had very good social skills. He was very outgoing, while I was the quiet type who prefers to stay in the background. He was the salesman and I was the accountant. That was our teamwork. He handled employees who were getting out of line. The biggest part of our income came from Jimmy’s bulk sales of accessories, because he was the one who had a lot of contacts.

I took on all the challenges. I started talking more to people, especially our employees. I let them feel that they can come to me with their problems and that they were part of my family. This is an integral part of our business, because building a relationship with them helps us to trust each other.

We carry the latest accessories, such as LCDs and housings for the newest models. My technicians are constantly surfing the Internet to find out what is new. In this business, you always have to know what is popular or what the customers will ask for next. Filipinos, by nature, want their gadgets to be flashy and up to date. Our peak months are the “-ber” months when people have more money to spend.

Since my shops are scattered in malls across Metro Manila and outlying provinces such as Bulacan and Cavite, I run things from a central office, and a runner goes to the shops for me. I am very hands on; I work late if I have to, monitoring inventories and checking if everything is in order. I feel that I have to set an example for my employees. I cannot show them that I feel lazy or they will start to get lazy themselves. Running a business full-time can get stressful sometimes – to the point that my employees tease me and request that I comb my hair once in a while.

Slowly but surely
There are still consistent offers for the shops, but I politely turn them down. From six shops, we now have eight. We have also added new services: downloads for MP4s, MP3s and PSPs. These are added income for the stores.

There are times that I want to pinch myself. I cannot believe that I was able to handle this male-dominated business by myself. I cannot believe that slowly but surely, there has been growth and progress in my life.

There are few absolutes in financial planning. By absolutes, I mean things that work for the entire universe of persons wanting to have the money-smarts to be financially secure.

But one of that is protection. Savings, protection, investment. It can’t get as basic as that.

There are different ways to attack these absolutes but each one requires the ability to conquer the need for instant gratification and doing something as boring as preparing for something that will happen in the future.

Thanks for sharing your story, Maneth.

(P.S. No, I am not in the payroll of the insurance industry.)

In his blog post here, he says any OFW can do this by putting at least P13,699 in Landbank’s long-term negotiable certificate of deposit and investing P6,301 for any equities fund of his choice and voila – you have an equity-linked note or ELN. Sounds highfaluting, eh?

An ELN basically combines a zero-coupon note with an instrument that invests in more volatile (exciting) securities like stocks. As the zero-coupon returns 100% of the face value at maturity, any residual value of the stock portfolio becomes “gravy” at the concurrent reckoning date.

Here’s Jeff’s math:

Scenario 1: On the fifth year, stock market drops to ZERO

Scenario 2 : the stock market is flat (zero growth)

Scenario 3 : The stock market grows by an average of 8.00%

Jeff says:

Looking at the extremes, this portfolio will return 100% of your capital at the worst case scenario and enhance your return to 8.42% at a modest stock market growth, this could be a great opportunity for OFWs who are contemplating to invest in the stock market for the first time.

Here’s MoneySmart’s take: Good for investment beginners, which means most Filipinos, not just OFWs. If you are saving for something that will be happening 5.5 years from now, say you are sending your son or daughter to a university overseas or you will be needing a downpayment for a car or a small house — and you are positive that if you don’t set aside money NOW, there’s a chance you won’t be able to shell it out in the future, then lock in your money Jeff’s way. A 7% return is low but still much better than those offered by some pre-need companies and current time deposit rates.

Plus, I would rather put my money in a government bank that is less likely to fold up than some little-known investment company offering the moon and the stars. Hello PIPC, heh.

(In case you’re wondering, no I don’t have a deposit account in Landbank that will mysteriously grow sinfully big in the near future. Nope, this is not a paid advertisement.)

Before you invest, find out whether selling eventually will be a problem.

The possible earnings may be high based on the best guess-timates, but how do you cash in if no one is buying? Classic examples: time-share, real estate, jewelry, paintings, even certain bonds and stocks can be difficult to sell.

Check out his column today here. Here’s an excerpt:

When an investment opportunity comes our way, the main pitch is its rate of return. Those in the know often speak of “risk-adjusted” rates of returns to get a better reading of the “real” attractiveness of different instruments. A whole array of measures has been devised just for this purpose.

For retail investors like you and I, however, this language is too foreign and largely inaccessible. Even if we wanted to speak the language of risk adjustments, many of the required parameters are not publicly available. The best that we can get from our financial agents are terms like “indicative returns”, “estimated IRR” and perhaps “historical return” for instruments that are already selling in the market. For stocks, price-earnings ratios are often used as a guide for the future.

A great deal of caution about these terms is helpful. The term “indicative” translates to “best guess” and I have no clue how the financial agent got to his conclusion. IRR assumes an unchanging market condition so I really am not a believer of this parameter. History is good … except of course that it has this nasty habit of changing when you least expect it. As for P/E ratios, they would be helpful only if we had a good benchmark.

For these reasons, I personally place a very high premium on asset liquidity. I need the peace of mind that I have the option to sell my investment any time I need to do so. In addition to being “tradable”, I need to have a reasonable sense that I can liquidate my investment without having to take a huge loss by selling it at a firesale price.

These two conditions are the hallmarks of a liquid instrument. This is just being practical. What comfort can we take from an instrument that promised a high rate of return if we do not have the option to get back our funds when we may need them?