Majority of people would be earning incomes during their productive years (ages 22-60) and it is rather ironic as it is lamentable that when they reach their retirement time, only a handful (3 out of 20 people, according to some statistics) of people would have money to support a decent retirement. Professional planners would have known the reason or reasons for this unfortunate situation: it is not a matter of the presence of money but of how that money is spent.
Sieving through the core ideas from various literature on financial planning, here are five essential steps to help people manage their finances effectively.
1. Spend only what you earn (SOWYE). Professional financial managers consider this step as the most important challenge to your money management effort. It means you must limit your spending to the amount of your earnings. You must use your credit cards sparingly wisely. It means you must not buy on impulse. It means that your spending is based on a well-thought out budgeting process. It means that your spending must result clearly in a benefit. Spending what you earn is living within your means. This must be the framework of your financial planning.
2. Save at least 10% of your gross income. According to financial experts, saving early and saving at least 10% of your gross income as if it were a bill you are paying can make wonders on your accumulation program. A $200-a-month savings at age 30 may not mean much by itself but overtime, the total amount can most likely lend some decency to old age living.
3. Begin with an emergency savings account. Now, this is IMPORTANT: Label this account as such – Emergency Savings Account – so that you do not touch it unless you have an emergency. When you have accumulated enough to cover three months salary, open another account and label it My Wealth Accumulation (MWA) program. This account shall be your mother account that should fund all your life insurance, savings, investments and other accumulation strategies in the future.
4. Develop an investment portfolio. As you grow in your career or business, your knowledge and skills in financial management should follow to a point where your strategies form into a well-organized portfolio of investments. This means that you are not only looking at life insurance and banks but also at other alternative instruments that are safe yet potentially growing. You may for example have, aside from your life insurance and emergency account, a portfolio composed of equities, bonds, real estate or mutual funds, selected according to your situation and temperament.
5. Have a distribution plan. Money management is not all accumulation, for in the end, what you accumulate will not go with you. You must have a well-thought out distribution plan so that your loved ones get the chunks of your legacy according to their individual suitability.
Your financial plan must not burden you so much as to remove your enjoyment of life. You must enjoy your work and your earnings, by yourself and with your family. Just remember that you only live once but got all the chances in your lifetime to make it grand.
-----Orlando G. Javier LUTCF is a past president of the Life Underwriters Association of the Philippines and a Fellow of the American College. He is a strong advocate of financial wellness and has conducted trainings on the advocacy for the last ten years. As a consultant, he conducts financial wellness analyses for free as a public service.
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