personal financial management
DESCRIPTION
a Presentation by Association of Bank Remittance Officers, Inc. (ABROI) at the BSP Regional Financial Literacy Campaign for OFWs in Cebu City, Philippines on February 28, 2006TRANSCRIPT
Personal Financial Management
Every person, rich or poor goes through stages of financial
difficulty. However financial freedom can be within
everyone’s reach.
When are you wealthy?
• Wealth cannot be equated to how much money you have in your pocket or in the bank
• Wealth is relative to your income as well as your lifestyle
• Your living expenses are Your living expenses are supported by the earnings of supported by the earnings of your assets and investmentsyour assets and investments
• Money working for you not you Money working for you not you working for money.working for money.
• Nagtratrabaho ka dahil gusto Nagtratrabaho ka dahil gusto mo; hindi dahil kailangan momo; hindi dahil kailangan mo
When are you wealthy?
Two types of income:Two types of income:
1. Active Income1. Active Income
2. Passive Income2. Passive Income
Paano ka kumikita?
Two types of income:Two types of income:
• Active IncomeActive Income
– Primary IncomePrimary Income• Salary• Commissions• Business
– Additional IncomeAdditional Income• OvertimeOvertime• SidelinesSidelines
Paano ka kumikita?
Role of Active Income
To Fund Needs
To Fund Savings and Investments
Paano ka kumikita?
Two types of income:Two types of income:
2. Passive Income2. Passive Income
– Investment IncomeInvestment Income
• Interest from Bank Accounts and Time Interest from Bank Accounts and Time DepositsDeposits
• StocksStocks
• Treasury BillsTreasury Bills
• Rent earned from propertiesRent earned from properties
Paano ka kumikita?
To achieve Financial Independence, you need Passive Income from Savings and Investments
Paano ka kumikita?
Active Income
80% to fund your needs and living expenses
20% to build your wealth
Passive Income
To further build your wealth and
Fund your wants
80 / 20 Rule
How do we create wealth?
Active Income
Keep what you earn!!
How do we create wealth?
Passive Income
Do more with what you keep!!
Developing a Personal Financial Strategy
Know where you are
•Determine your Personal Net Worth
•Determine your present income and expenses
Know where you want to go
•Determine your goals to achieve Financial Independence
What You Own
• Cash• House and Lot• Car• Jewelry• Investments
• Bank Deposits• Shares of stock• T-bills• Pension Plans
What You Owe
• Personal Debts• Bank Loans• Credit Cards• Payables
Net Worth: What you own less what you owe
Personal Net Worth
PERSONAL INCOME STATEMENT
Gross Monthly Income 35,90
0 R & R (Optional Expenses)
ACTIVE: - movies/pasyal2,00
0
Primary: Sahod30,00
0 - clothes/personal (etc)2,00
0
Additional: (sidelines) 5,600 Babasahin1,00
0
PASSIVE: SECONDARY Biglaan gastos (Gifts, etc)1,00
0
Interest Income 300 OPTIONAL EXPENSES 6,000
Other Income (Lupa) 0 House Amortization3,37
5
Less: Credit Cards1,66
0
Food Pamalengke at Groceries 9,000 Other personal debts
2,000
Renta sa bahay 0 Pension Plans1,88
0
Gastos sa bahay (ex. Gasul, etc) 1,000 OTHER CASH PAYMENTS 8,915
Pamasahe 1,500 TOTAL MONTHLY EXPENSES
32,915
Cellphone 1,500 Net Income 2,985
Kuryente 1,500
Tubig 500
Allowance "Baon ng mga bata" 2,000
Eskwelahan 1,000
LIVING EXPENSES 18,00
0
Obstacle
Inflation
•Loss of purchasing power due to inflation
•Gov’t estimate 5% pa for next 30 yrs
Solution
• Income growth (both passive and active) should be higher than inflation
•Avoid consuming items that have high inflation rates e.g. softdrinks, cigarettes
Obstacles to Financial Freedom
Beating Inflation
Comparative Growth Rates of Financial AssetsJan 1987 – Dec 2000
Ave After tax Value of PhP 10,000 % Return per yr at 31 Dec 2000
– T-Bills 12.22 49,885– $ Deposit 13.06 49,928– Savings Deposits 6.83 25,172– Time Deposits 10.23 38,850– Common Stocks 14.40 17,861 – INFLATION 9.34 34,703
• * Study of Prof. Roy Ybañez of the UP College of Business Administration on the RATES OF RETURN ON FINANCIAL ASSETS in the Philippines, 1987-2000.
Obstacle
Inflation
Procrastination
Solution
Obstacles to Financial Freedom
Obstacle
Procrastination
• Mamaya na
• Putting off for tomorrow what you can do today
Solution
• Start now!!
Obstacles to Financial Freedom
Jack & Jill
Jack
@ age 18 started to save P500 / mo. Or P6,000/yr
@ age 26 he stopped saving
Saved P48,000 only in 8 years
Jill
@ age 26 started to save P500 / mo. Or P6,000/yr
@ age 65 she stopped saving
Saved P240,000 in 40 years
At Age 65, who has more money?
Jack & Jill
Jack
@ age 18 started to save P500 / mo. Or P6,000/yr
@ age 26 he stopped saving
Saved P48,000 only in 8 years
FV: P3,245,366
Jill
@ age 26 started to save P500 / mo. Or P6,000/yr
@ age 65 she stopped saving
Saved P240,000 in 40 years
FV: P2,775,174
Obstacle
Inflation
Procrastination
Personal Behaviour
Solution
Obstacles to Financial Freedom
Obstacle
Personal Behaviour
• Fears
• Spending habits
Solution
•Failure and success are life partners
•Buy only what you need and not necessarily what you want
Obstacles to Financial Freedom
Obstacle
Inflation
Procrastination
Personal Behaviour
Cultural Issues
Solution
Obstacles to Financial Freedom
Obstacle
Cultural Issues• Fiesta when OFW comes home
•Everyone asking for more money
Solution
Talk it over with family members with regards to financial goals
Obstacles to Financial Freedom
Obstacle
Inflation
Procrastination
Personal Behaviour
Cultural Issues
Taxes
Solution
Obstacles to Financial Freedom
Obstacle
Taxes
Solution
Know the tax implications of every purchase and investment
Obstacles to Financial Freedom
1. Time
• Great Equalizer
2. Compound Interest
Tools to Financial Freedom
Value of P1 / day @ 10% per year
10 20 30 40
Number of Years
0
50
100
150
200Thousa
nds
Am
ou
nt
of
Savin
gs
5.820.9
60.0
161.5
1. Time
• Great Equalizer
2. Compound Interest
• Trust the power of Compound Interest
3. Leverage
• Good debt vs Bad debt
Tools to Financial Freedom
Work Smarter Not Harder
Working Harder
Save P500/mo for 30 yrs.
@ 7% interest = P609,985
Save P1,000/mo for 30 yrs.
@ 7% interest = P1,291,971
Working Smarter
Save P500/mo for 30 yrs.
@ 10% interest = P1,130,243
@ 12% interest = P1,747,482
3 x
Journey to Wealth Generation
• Set your financial goal (Plan your net worth)
• Save
• Invest wisely and regularly
• Leave your money alone
Net Worth Planning
Assumptions:
You are 35 years old today.You are earning P360,000/yr or P30,000/moAve inflation is 5% per year
How much should you be earning 30 years from now?
Answer: P1,555,899/yr
P 129,658/mo
If I have to earn P1,555,899 per year 30 years from now, how much earning assets should I have at that time?
Answer:
@ 7% - P22,227,132
@ 10% - P15,558,990
@ 12% - P12,965,827
Net Worth Planning
Target Net Worth P15.5 Million in 30 years
P 6,880/mo. @ 10%/yr
10 20 25 30
Years
0.00
5.00
10.00
15.00
20.00
Mil
lio
ns
Am
ou
nt
of
Sa
vin
gs
1.4
5.2
9.1
15.5
Net Worth Planning
How to Look at Savings
Savings EquationSavings Equation
Savings EquationSavings Equation
How to Look at Savings
Savings EquationSavings Equation
How to Look at Savings
Savings EquationSavings Equation
How to Look at Savings
Savings EquationSavings Equation
How to Look at Savings
Savings EquationSavings Equation
How to Look at Savings
Start Your Journey
Your first source of capital
Pay yourself first
Spending means you pay others first.
Pay Yourself First
Savings is your first source of Capital
• Save to build cash reserves 1st
• Save to protect life and health
• Save to start wealth generation
SAVINGS IS AN EXPENSE.
IT IS AN EXPENSE TO BUY YOUR FUTURE!!!
Savings is not enough
Be a
Passive Entrepreneur
Active vs Passive Income
Earning P360,000/yr @ 5% increase per year20% savings earning 10% per year interest rate
YearActive Income
Passive Income
Annual savings
Monthly Savings
Total Savings
1 360,000 3,770 72,000 6,000 72,000
2 378,000 11,892 75,600 6,300 151,370
10 558,478 136,231 111,696 9,308 1,356,846
15 712,775 305,002 142,555 11,880 2,984,017
20 909,702 605,021 181,940 15,162 5,868,866
25 1,161,036 1,127,158 232,207 19,351 10,880,353
26 1,219,088 1,270,109 243,818 20,318 12,251,328
27 1,280,042 1,429,275 256,008 21,334 13,777,446
28 1,344,044 1,606,416 268,809 22,401 15,475,529
29 1,411,246 1,803,481 282,249 23,521 17,364,195
30 1,481,809 2,022,623 296,362 24,697 19,464,037
Active vs Passive Income
12
34
56
78
910
1112
1314
1516
1718
1920
2122
2324
2526
2728
2930
X-Axis
0
500
1,000
1,500
2,000
2,500
Th
ou
san
ds
Am
ou
nt
Passive Income
Basic Rules in Investing
• Avoid losses (Pyramiding and Scams)
• Be with winners (not always the peak performer)
• Invest only based on your own financial goals (Investments are made for specific purposes)
Basic Rules in Investing
• Cash reserves demand liquidity
• Capital growth demands track record
• All investments have risks and benefits
Types of Investments
Fundamentals of Investing
Ownership Investment (LT)
Speculative (ST) Lending Investment (ST/MT/LT)
Fundamentals of Investing
Fundamentals of Investing
Risk/Safety
Liquidity Rate of Return/Yield
Capital RequirementInvestor Risk Profile Term of InvestmentTax Investment ExpertiseTiming
Wealth Generation Products
• Bank Products : Savings, Time Deposits, Foreign Currency Deposits, CTFs
• Government : T-Bills, T-Notes, ROP’s, RTB’s
• Private : CP’s, Corporate Bonds, Money Market
• Equity : Stocks
• Mutual Funds : Equity / Fixed Income / Balanced
• Small Business
• Franchise Business
Financial Intelligence
is not about Money
It is about mind set
Everytime you spend, always ask yourself the question…
will it bring me closer to my desired networth?
We cannot control the wind
But we can certainly adjust our sails
“All we have been talking about are things that money can
buy…
But in our journey to financial independence, let us not lose
sight of those that money cannot buy …