Personal Financial Management

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 …