Friday, August 24, 2007
YSK: The Wealth We Need
"We all deserve the best." - ANON.
YSK stands for the Filipino words “Yamang Sapat sa Kailangan” or “wealth according to our needs” in English. Our advocacy calls not for amassing wealth for its sake, but for aiming for a little more than what we need. The “little more” is a strategy for stretch to cover unforeseen events or unprogrammed needs.
The Amount Desired and When Needed
After having identified our top priority or priorities (all of them become priorities when they are due!), it’s now time to establish the absolute amount we need for that priority and when we need the fund. As the amount is relative, in the same way our financial capacities vary individually, we shall try to establish the minimum level required to cover the need or needs.
For our purpose, the amount we will establish shall be expressed in Philippine pesos with equivalent conversion in US dollars based on a rounded exchange level of 1:50. (Exchange rate as of December 2006 is 1:49.03)
We will assume that an emergency fund (at least three months of income to cover against sudden illness, accident, or loss of job) is a given, considering that it is the first level of savings. We will attempt to establish our YSK to cover three universal financial needs which we identify here as the foremost, most driving, most motivating foundational needs of a productive human being.
1. Money for you,
2. Money for your children’s education,
3. Money for your family, whatever happens.
Which of these is your top priority right now?
Money For You
Let’s talk about you and your money. You are probably presently earning, and therefore, you have money. The “money for you” we refer to here is the money you will need to keep you intact when you stop working, or earning, for whatever reason. For most of the situations, this is retirement money. How much would you need when you retire?
We used an assumption earlier based on an arbitrary choice of P20,000 monthly for one person. Let’s validate that amount with details of possible minimum monthly expenses: food at P10,000; transportation at P3,000; utilities at P2,000; medicines and supplements at P4,000; clothing at P1,000. All bare essentials. No frills, no extras. Just enough to survive, based on costs at the present time.
If we input inflation, this P20,000 may well become P40,000 after 18 years at an average 4% inflation rate.
Let’s forget inflation for a while, since we all individually represent different ages. At P20,000 a month, how much would we need in lump sum to allow us that continuous stream of monthly income? At 10% interest rate, we need a principal of P2,400,000!
Question: Do you have this amount already?
If you have, you are one among the three (3) persons out of 1000, as per Central Bank statistics, who are already in an enviable “second enough” situation. But remember that, at 4% inflation, what you have is only one-half of what you will need.
If you don’t have this amount yet, how much have you got for this purpose? The closest preparation we can find for this future financial need would be a company retirement benefit for employed individuals, or a pension pre-need plan or endowment insurance plan purchased by professionals and businessmen. The difference between P2.4M and what you have is the object of your quest, and depending on your present earning capacity, you may set up your retirement program right away, or set it up gradually, little by little, according to your resources, until you are able to grow your fund into the size big enough to give you your desired income stream.
Money For The Children’s Education
Education is a universal need. We don’t have to belabor the importance of education to life, to individuals, to families, to nations. In fact, education may even occupy a more pre-eminent position in the needs hierarchy than retirement. But because education is relevant only to persons with children, which is a lesser universe, we have put retirement as the first item of choice for future preparation.
There is no disputing that education pre-determines the future, to a great extent. Between a person who has a degree and one without, certainly in more than just majority of the situations, the one with the degree is more successful.
In the Philippines, education is a top priority. Next to need for subsistence, education will battle for priority with clothing and shelter and win! With a great majority of the population at the CDE economic level, parents will sacrifice other needs just to give their children the best education they can find.
Under normal conditions, it will take, more or less, eighteen (18) regular study years to finish a five-year college course. But since there are at least three economic levels of education - namely public, private and exclusive – the amount needed to complete a full study will vary according to the choices made. Besides, since preparation requires time, the pre-college schooling (pre-school, gradeschool, highschool) are usually overtaken by the present time that it will be almost futile if not extremely difficult to prepare for them. Hence, our preparation may be limited to college study, for practical reasons.
Roughly, the amounts needed for the three levels, based on 2006 costs, are:
Public – P25t/year; Private Nonexclusive – P70t/year; Exclusive – P150t/year
How well are you doing in this regard?
Money For The Family, Whatever Happens
Our premise in wealth accumulation is that we want to make the most and the best of our lives while we are alive. Hence, our earlier preparations for our present comfort, then for our children’s education, then for our own retirement, all run along this spirit. And that is to say, the most and the best of our lives do not mean a life lived alone but one lived with our loved ones, our family. Our family is as much a part of our enjoyment as life itself. And certainly, our concern for their welfare goes beyond our lifetime.
We care for them and we care enough about what will happen to them should anything happen to us. Certainly, we want them to continue the kind of life they live even after we are gone. Which literally means we need to provide a contingency fund that will take over our income-generating capacity when we go.
And the only way we can conveniently provide for this eventuality, which is a certainty as to occurrence but not as to time, is to have a life insurance cover enough to keep them as they are or as we want them to be.
How Much Are You Worth To Your Family?
The rule of thumb that most insurance professionals use is human life value: your total valuation based on your income-generating capacity during your productive period. (This value flows from the reasoning that your family is entitled to the income you generate in your lifetime.) For most people, this is present annual income multiplied by the productive time to retirement. If you are 30 years old, with two children aged 4 and 6, and are earning P600,000 a year, your human life value is P21M.
This means that if you have this cover right now and you passed away yesterday, your family would have been assured of continuous income as if you have not left at all!
But because of the cost of putting up that cover, it is not unusual to use another fingertip formula based on ten times your annual income, flowing from the logic that that amount will allow your family to survive for the next ten years and be able to establish an alternative income source before the insurance amount dissipates. On that basis, the amount needed is 600,000 x 10 or P6M.
The 3 Moneys for YSK
Based on our model age, let’s summarize the 3 money needs to establish our YSK:
Money for you ---------P 2.4 M, cash accumulation upon retirement
Money for your children’s education ----------- P 1.0 M, cash and cover, beginning at age 16 of each child
Money for your family, whatever happens ----- P6.0 M, insurance coverage
Question: How do we set up an accumulation program that will give us all the above benefits at the least outlay?
Assuming that the seed money is not a problem, we can have several options made available by putting together two or more wealth forms. For example, we can have one educational plan for each of the kids, one pension plan from a pre-need company for our retirement and one insurance plan for the contingency of death. Or we can have just one plan covering all three needs.
But if you have to squeeze from a tight budget, we can either adjust our program amounts according to our affordability, or start with our topmost priority, then work up towards completion as our finances improve later.
Affordability
The key to a successful start is really our affordability. How much are we willing to set aside, in lumpsum or regularly, to get our accumulation program started?
Our affordability has a range, let’s admit it. It ranges from the “must” to the “want”. Where we decide to be in that range is a matter resolved by our economic situation and the importance and urgency of the object of our decision.
Where are you now?
(Author's Note: Inquiries and comments regarding this post and other posts may be sent to orlygjavier@yahoo.com.)
Wednesday, August 22, 2007
Enter The Trigon: Setting Up Your Wealth Program
“There is much more to life than just accumulating possessions.”
- Donald Curtis
The image that makes up our wealth accumulation program does not immediately involve the details of where we put our extra money or how much our money earns. Like in the house of our dreams, we see ourselves viewing from a distance and immensely appreciating the perfect finish of the mediterranean house of our choice that we feel fairly represents our taste, experiences, personality and needs.
In the same vein, the initial image we have of our wealth program is one where we see ourselves enjoying the fruits of our efforts at the exact time that we planned it, in the way that we want it. We are visualizing a wealth structure that is basically durable, lasting and self-sustaining, and therefore, we must be sure that the design, the construction and the finish of the structure can withstand the tests of nature, man and time.
Considering that time is the most crucial element of a wealth program, its construction may be likened to putting up that physical structure, where we start from the base and move up to the size and height that we want. Of course, we won’t proceed unless we have a design of the structure we want to build.
The Trigon Model
The trigon, a triangular pyramid with triangular base, is the strongest of all such structures. The pyramids of Egypt, though of the tetrahedron type (square base) to provide for a wider space for the tombs, exemplify the strength and durability of the pyramidal structure against the test of nature and time.
As a model for wealth accumulation, the layers of the trigon, from the base to the apex, represent our evolving financial needs from the most basic to the most psychic, from needs to wants (Trigon A).
The layers also represent (Trigon B) the arrangement of the wealth forms with which we fund our financial needs and how we deploy and marshal our resources for maximum return. We must note that wealth vehicles vary in yield, safety and liquidity, among other factors, and therefore, our deployment must consider the best mix of these variables according to our financial needs and our specific time frame.
Trigon A
HERITAGE
CHARITY
LEGACY/GIFTS
LEISURE/PERKS
TRAVEL
VACATION
HIGHER EDUCATION
ESTATE TAX FUND
DEBT LIQUIDATION
MOBILITY FUND
FAMILY HOME
DISABILITY INCOME FUND
MEDICAL FUND
PROPERTY COVER
RETIREMENT FUND
EDUCATION FUND
FAMILY INCOME
EMERGENCY FUND
Trigon B
NO TIME FRAME SPECULATIVE FUNDS
GROWTH HIGH RISK FUNDS
MEDIUMTERM BALANCED FUNDS
SHORTTERM SECURE FUNDS
FUNDS FOR CONTINGENCIES/PRIORITIES
Typically, as these financial needs occur chronologically, they will not differ much from person to person as to pattern or sequence, except in the level or in the degree they are pursued. What is important to consider at this point is that, in the realm of time, the needs and wants are in two dimensions: the present and the future. And these two dimensions, eventually, become one and the same. But when they become one, we are not the same! In the present, we are in charge, in the future, we are dependent. Unless we “will” not to be.
And we will not be! Following our trigon model of wealth accumulation, we will start from the base, according to our means, as early as we can, and slowly but surely, step by step, build up the financial structure that, when completed according to our time horizon, will ensure our future financial independence.
6 Steps to Wealth: P A S S I T
Successful wealth accumulation involves six (6) important steps:
1. Identifying the purpose or purposes
2. Determining the amount desired and when needed
3. Identifying the “seed” and the seed source or sources
4. Formulating the strategy or program for accumulation
5. Implementing the program
6. Tracking the program to completion
A great many accumulation programs fail even before they start because they were never intended for anything in the first place! How do most of us start saving? We work to earn, then spend what we earn. If something is left of it, it becomes our saving. In 997 out of 1000 cases, nothing’s left to save! But even if there is, the amount saved becomes of no consequence because it disappears as fast as the urge to spend comes.
The Purpose: What Am I Accumulating For?
The key is to identify a reason for saving, a purpose, a “why," an identity tag, a label, so that we do not surrender to the spending urge when it comes. You will certainly not withdraw and spend money you save for your retirement or for the education of your kids just to buy vacation tickets to Boracay!
The “purpose” then establishes the importance of our accumulation. Certainly, if the purpose is compromisable, or is not worth keeping, the accumulation stands to fail because it is spending-prone. The Trigon model enables us to establish our priorities based on needs, beginning from the most basic for our existence to the most trivial or peripheral or psychic.
In the order of their importance, the following are the needs/wants as we go through life:
1. Survival 10. Second Home
2. Emergency 11. Vacation House
3. Family income 12. Higher Education
4. Education of children 13. Leisure/Old Age Perks
5. Retirement 14. Travel
6. Health Maintenance 15. Hobby
7. Mobility 16. Charity
8. Home 17. Gifts
9. Other Contingencies 18. Legacy/Heritage
Note that as we go through the items in their descending order, the characteristics shift from need to want. These needs and wants are arranged in our Trigon model from the base to the apex, signifying that the more important ones occupy the base and must therefore be given the first priority in accumulation. This should also remind us of motivational psychologist Abraham Maslow suggesting the universality and pyramidal, hierarchical arrangement of human needs in his theory of human motivation.
Our Life Story
Let us encapsulize our story: We work to earn to live. In short, we work to eat. Then, we set aside something for emergencies, such as sickness or accident or loss of job. Then, we set aside something for the education of the kids and for our retirement. We insure against death, fire, accidents. We set up home. We buy a car. We go to higher school. We travel. We go on vacation. We seek leisure. We expand our possessions. We allocate some inheritance for the children when we go. We reserve something for our favorite charity. We aspire to be known as some responsible father, husband, businessman, philanthropist, citizen, creation of God…
Each one of these can be an accumulation purpose and can be addressed by our choice of one or more wealth forms. It is unusual for one person to set them up all at once, not only because they involve a tremendously large outlay, but more so because they happen within our lifetimes one after the other. For practical reasons, there only has to be an order of priority in setting them up (how about first come first served?) and arranged and pursued through a time-tested program of accumulation.
- Donald Curtis
The image that makes up our wealth accumulation program does not immediately involve the details of where we put our extra money or how much our money earns. Like in the house of our dreams, we see ourselves viewing from a distance and immensely appreciating the perfect finish of the mediterranean house of our choice that we feel fairly represents our taste, experiences, personality and needs.
In the same vein, the initial image we have of our wealth program is one where we see ourselves enjoying the fruits of our efforts at the exact time that we planned it, in the way that we want it. We are visualizing a wealth structure that is basically durable, lasting and self-sustaining, and therefore, we must be sure that the design, the construction and the finish of the structure can withstand the tests of nature, man and time.
Considering that time is the most crucial element of a wealth program, its construction may be likened to putting up that physical structure, where we start from the base and move up to the size and height that we want. Of course, we won’t proceed unless we have a design of the structure we want to build.
The Trigon Model
The trigon, a triangular pyramid with triangular base, is the strongest of all such structures. The pyramids of Egypt, though of the tetrahedron type (square base) to provide for a wider space for the tombs, exemplify the strength and durability of the pyramidal structure against the test of nature and time.
As a model for wealth accumulation, the layers of the trigon, from the base to the apex, represent our evolving financial needs from the most basic to the most psychic, from needs to wants (Trigon A).
The layers also represent (Trigon B) the arrangement of the wealth forms with which we fund our financial needs and how we deploy and marshal our resources for maximum return. We must note that wealth vehicles vary in yield, safety and liquidity, among other factors, and therefore, our deployment must consider the best mix of these variables according to our financial needs and our specific time frame.
Trigon A
HERITAGE
CHARITY
LEGACY/GIFTS
LEISURE/PERKS
TRAVEL
VACATION
HIGHER EDUCATION
ESTATE TAX FUND
DEBT LIQUIDATION
MOBILITY FUND
FAMILY HOME
DISABILITY INCOME FUND
MEDICAL FUND
PROPERTY COVER
RETIREMENT FUND
EDUCATION FUND
FAMILY INCOME
EMERGENCY FUND
Trigon B
NO TIME FRAME SPECULATIVE FUNDS
GROWTH HIGH RISK FUNDS
MEDIUMTERM BALANCED FUNDS
SHORTTERM SECURE FUNDS
FUNDS FOR CONTINGENCIES/PRIORITIES
Typically, as these financial needs occur chronologically, they will not differ much from person to person as to pattern or sequence, except in the level or in the degree they are pursued. What is important to consider at this point is that, in the realm of time, the needs and wants are in two dimensions: the present and the future. And these two dimensions, eventually, become one and the same. But when they become one, we are not the same! In the present, we are in charge, in the future, we are dependent. Unless we “will” not to be.
And we will not be! Following our trigon model of wealth accumulation, we will start from the base, according to our means, as early as we can, and slowly but surely, step by step, build up the financial structure that, when completed according to our time horizon, will ensure our future financial independence.
6 Steps to Wealth: P A S S I T
Successful wealth accumulation involves six (6) important steps:
1. Identifying the purpose or purposes
2. Determining the amount desired and when needed
3. Identifying the “seed” and the seed source or sources
4. Formulating the strategy or program for accumulation
5. Implementing the program
6. Tracking the program to completion
A great many accumulation programs fail even before they start because they were never intended for anything in the first place! How do most of us start saving? We work to earn, then spend what we earn. If something is left of it, it becomes our saving. In 997 out of 1000 cases, nothing’s left to save! But even if there is, the amount saved becomes of no consequence because it disappears as fast as the urge to spend comes.
The Purpose: What Am I Accumulating For?
The key is to identify a reason for saving, a purpose, a “why," an identity tag, a label, so that we do not surrender to the spending urge when it comes. You will certainly not withdraw and spend money you save for your retirement or for the education of your kids just to buy vacation tickets to Boracay!
The “purpose” then establishes the importance of our accumulation. Certainly, if the purpose is compromisable, or is not worth keeping, the accumulation stands to fail because it is spending-prone. The Trigon model enables us to establish our priorities based on needs, beginning from the most basic for our existence to the most trivial or peripheral or psychic.
In the order of their importance, the following are the needs/wants as we go through life:
1. Survival 10. Second Home
2. Emergency 11. Vacation House
3. Family income 12. Higher Education
4. Education of children 13. Leisure/Old Age Perks
5. Retirement 14. Travel
6. Health Maintenance 15. Hobby
7. Mobility 16. Charity
8. Home 17. Gifts
9. Other Contingencies 18. Legacy/Heritage
Note that as we go through the items in their descending order, the characteristics shift from need to want. These needs and wants are arranged in our Trigon model from the base to the apex, signifying that the more important ones occupy the base and must therefore be given the first priority in accumulation. This should also remind us of motivational psychologist Abraham Maslow suggesting the universality and pyramidal, hierarchical arrangement of human needs in his theory of human motivation.
Our Life Story
Let us encapsulize our story: We work to earn to live. In short, we work to eat. Then, we set aside something for emergencies, such as sickness or accident or loss of job. Then, we set aside something for the education of the kids and for our retirement. We insure against death, fire, accidents. We set up home. We buy a car. We go to higher school. We travel. We go on vacation. We seek leisure. We expand our possessions. We allocate some inheritance for the children when we go. We reserve something for our favorite charity. We aspire to be known as some responsible father, husband, businessman, philanthropist, citizen, creation of God…
Each one of these can be an accumulation purpose and can be addressed by our choice of one or more wealth forms. It is unusual for one person to set them up all at once, not only because they involve a tremendously large outlay, but more so because they happen within our lifetimes one after the other. For practical reasons, there only has to be an order of priority in setting them up (how about first come first served?) and arranged and pursued through a time-tested program of accumulation.
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