Essential guide to financial planning for Pinoys

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Financial planning is bringing your future goals to the present so you can do something about it. As important as it is towards creating a fulfilling, financially-free future, it is sad that most Pinoys do not know its importance.

What is financial planning?

Financial planning is all about optimizing the way that you manage your money so that you can live a decent lifestyle while you’re working on achieving your personal goals. It is a list of action plans that you put in place that can bridge the gap between your current circumstances and what you want to be in the future.

As you may already noted, it requires that you are aware of your present situation and you have a vision of a future that you want to achieve. In a way, it guides you through tips, strategies, and other information so you are conscious and instill discipline in terms of managing your finances, keeping track of your spending, and having long-term thinking.

Why is it important to have a financial plan?

However, financial planning isn’t something that is taught at school and unless you are surrounded with good role models like parents who are financially literate, most of us just figure out how to do it as we go along. There is of course a need for better education on personal finance in the country because the statistics below are sobering.

  • Only 1 out of 4 Pinoys are financially literate according to a 2015 study conducted by Standard and Poor.
  • Three out of four Pinoy do not have any financial account.
  • 78% of our population lives below the poverty line.
  • 3.1 million Pinoys said to have experienced hunger.
  • Only 1% of us have investments in stocks, depriving the 99% of a vehicle to earn passive income and to take part in riding the momentum of our economy.
  • National Economic and Development Authority estimated that 87% of us don’t have retirement plans, and that three out of four elderly people today are poor. 
  • More than half of us has to pay out of our pockets for any emergencies.

Talking about the structural changes that we need as a nation is way beyond the scope of this article. Instead, it is going to focus on the things that you can control.

Benefits of financial planning

What are the advantages of having and sticking to a financial plan? There are many benefits including:

  • Helps you stay disciplined and in control in terms of earning and spending money in order to live a decent standard of living while you are working for your goals
  • Gives you ideas and helps you on how you can achieve short-, medium-, and long-term plans
  • Shows ways to manage debts
  • Provides various options on how you can accelerate your savings in building wealth
  • Prepares you with the safety nets during rainy days when life gets tough such as emergency, accident, etc.

The next sections are going to spell out what is involved when you plan out your financial future. Keep in mind that these are general guidelines, you definitely can tweak them depending on your needs.

1. Do the math: know the cost and schedule of your goals

The first step is to define your financial goals. You have to sit down and think really hard what it is in life that you want and try to put a price tag on things that have cost. It is okay that you come up with an estimate on these things, although of course having a realistic cost is better. See the table below as an example.

GoalsYearsCostAnnual savings
Retirement305,000,000 166,667
House103,000,000 300,000
Child’s education181,000,000 55,556
Vehicle4750,000 187,500
Business capital3150,000 50,000
Vacation2100,000 50,000
Total10,000,000 809,722

As you can see, the table contains specific objectives such as preparing for retirement, acquiring a dream home, purchasing a car, etc. And then there is a column that states the number of years that these goals are expected to be achieved. The last two columns, as you can see, are the estimated cost and how much it’s going to require from you every year if you want to save for them. (The annual cost is the result of dividing the cost with the number of years.)

For a more detailed discussion, see the three easy steps to determine your financial goals.

2. Look at your current financial status.

The next step is to check your present situation by knowing your financial status. This is important because you have to know whether your current level of income exceeds, is enough or can be optimized so that you can reach your goals. It is also a chance to see whether you’re accumulating the right assets in building your wealth in your way towards your envisioned future.

So the first thing is to look at your cashflow, the money that you earn versus the money that you end up spending. Of course, the difference between the two would be your savings, that part of your income that you can commit to pay for the goals that you’ve set. Also, determine pressure points such as recurring bills payment, debts, mortgages, and other expenses. And then you can see whether you’re able to sustain the lifestyle that you have and have the capability to achieve your goals.

3. Start working for your goals.

This is the very heart of financial planning. You begin by comparing your level of income and the required capital so your dreams can come true. Looking at the table earlier, you can see that if you want to achieve all of the goals mentioned therein, you need to save annually ‎₱759,722. (The effect of inflation is disregarded as this is only an example.) And if that is expressed in monthly savings, that’s going to be ₱63,314.

Out from this magic number, you can decide your next step. There are three possible scenarios:

Staying the course. Your savings can address your goals, so you just want to maintain current standard of living, and you may be more interested on how to protect your level of income and assets through building up your emergency fund, getting insurance policy, . You might also want to fill your days with activities that give meaning to your existence, such as playing a sport, donating to charity, collecting artworks, etc.

Philanthropy. Your income exceeds your goals, and you are willing to sacrifice in order to give to people you love or to the less fortunate. Your financial planning no longer revolves around your needs. Instead, it is going to be concerned about how to best take care of the people who means a lot to you, such as leaving behind a sizable estate to your heirs or donating to your favorite charity.

Rags to riches. You want to improve present standard of living. This where most of us fall under. Your strategy is more on acquiring assets that will eventually earn you passive income, getting out of debt quickly, and increasing current earnings to sustain a more comfortable life and attain the goals that you’ve set for yourself.

Pay yourself first

Most of us would fall under the third scenario, where our current income is not adequate to get us to where we want. And this is where paying yourself first would mean a lot. You need to change the way you think of saving. Most of us think that it is what you have left after all your spending, which is:

Income – Expenses = Savings

But that’s the old formula. It also makes your savings the last priority, and in a way you’re more likely to excuse your expenses. A smarter way to go about it is to determine your savings before all expenditures.

Income – Savings = Expenses

The big difference is that it changes your mindset about managing your money. Instead of waiting at the end of each month to know how much you have ended up saving, you turn the idea upside down by ensuring the exact amount that you will save and then controlling how much goes to your spending.

And this is going to lead you to the next step, which is how you can increase your savings. There are two ways to do this. You can lessen your expenses by sticking to a budget, augment your income, or do both.

Stick to a budget

A budget is an estimate of your daily living that you can live by. It should look a lot like your cashflow analysis. The difference is that while cashflow is a historical record of past income and expenses, a budget is an estimate of your future.

Remember, planning is bringing the future to the present so you can do something about it. And budgeting achieves exactly that. It allows you to take control of your present life by approximating your living expenses and sticking to it, so that you will have enough to spare to make your goals a reality. Regardless of your income, start the habit of saving. Your budget must be designed around your ability to set aside spare cash every month. If it doesn’t, make sure to go back to it and determine ways for you to save.

Decide on lifestyle changes. It is also important that you make a decision around how you are going to stick to your budget. This is a critical aspect of financial planning because this involves the idea of ‘sacrifice’, which is giving up some of the things that you are currently enjoying in favor of a bigger purpose later on. You might have to:

  • Prioritize needs over wants.
  • Be mindful in the use of utilities so you can lower your recurring bills such as power, gas, internet, mobile communication, etc.
  • Check if you can also let go of subscriptions such as streaming platforms, cable TV, etc.
  • Look for necessary products at discounted/bargain prices
  • Let go of luxuries and stick with the essentials without feeling that you’re depriving yourself.
  • Learn to redefine a standard, decent lifestyle.
  • Change present lifestyle by spending less in order to save more.
  • Substitute expensive preferences (fashion, hobbies, etc.) for affordable alternatives.
  • Sell assets that are no longer needed in order to increase cash available for saving
  • Reduce inheritance for heirs
  • Pay debts with higher interest, or avoid paying interest on purchases

Augment your income

You might be in a situation where, no matter how much you rein in your spending and live frugally, you still don’t have enough money to go around. Look for ways to increase the money coming in by augmenting your income. Several ways come to mind.

  • work harder to get  a promotion
  • change to high-paying job
  • get a part-time job
  • work for project-based income streams such as hosting gigs, being a wedding singer, etc.
  • learn new marketable skills
  • engage in small business
  • acquire assets that can earn passive income
  • invest

4. Accelerate your savings

You work to earn money. It is time that you need to know the strategies of making it work for you. Learn many ways of earning such as investing in relatively safe assets such as time deposits and money market accounts. You can also learn to invest more aggressively and get higher potential for returns in equities and direct shares. For a more details, you can check this list of best investment options in the Philippines.

But why invest? Investing is a way to accelerate your savings. If you put your spare cash in a piggy bank, it doesn’t earn passive income in the form of interest. Going back to the goals stated in the table earlier, you’d need to save ever year to fulfill all of them.

Now if you put your money in an investment that earns, say, 4% or 8% or 12% every year, the required amount that you need to set aside is lesser. That’s because you can take advantage of compound interest, where the returns and your savings keep piling up. So instead of saving ₱759,722 each year, you can actually just save each year ₱592,757 (4%), ₱477,617 (8%) and ₱397,879 (12%).

GoalsAnnual savings4%8%12%
Retirement166,667 85,722 40,868 18,498
House200,000 160,175 127,832 101,757
Child’s education55,556 37,494 24,724 16,015
Vehicle187,500 169,825 154,112 140,112
Business capital100,000 92,408 85,565 79,379
Vacation50,000 47,134 44,516 42,116
Total759,722 592,757 477,617 397,879

So the question is, where to put your money so you can take advantage of the opportunity to earn more? What are the risks involved and how can you manage them? You may read a more detailed discussions in the ultimate investing guide for Pinoy.

Next step: build a strong financial foundation

Developing a plan is really about ensuring that your goals are included in your daily reality. But what can you do to protect your plan? What happens when there are emergency situations and you would need to use your savings? What can you do to protect your goals and ensure that you are still on track even when unexpected, untimely emergencies occur?

That is what the next steps in financial planning are for. They build a safety net should life gets tough. Read the basic guide that explains the importance of insurance, the value of having an emergency fund, and the effective ways that you can reduce and pay your debts to manageable levels.

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