Article from BusinessMirror.com.ph
MONDAY, 05 MARCH 2012 21:05 KENDRICK CHUA / PERSONAL FINANCE
WE’RE heading toward the final leg of the first quarter. It’s not a bad idea to start evaluating our finances so we won’t fall behind the targets we have set. For us to even go further, we need to rectify some of the overlooked mistakes that are wrecking our wealth inconspicuously. The sooner we rectify them, the better it is for us.
Wealth-wrecking Way # 1: Always pay yourself first
Financial advisors (myself included) have always been harping about the importance of paying yourself first. “Take 20 percent off your net income and just live on the 80 percent”, we say. Being disciplined in savings is your cornerstone for financial success. This has been tried and tested by the Chinese after all. You have been working hard (I hope you have) and you do deserve to be rewarded once somebody pays you for it.
However, this conventional thinking does not work all of the time. This works best only if you do not carry any huge consumer debt, (also known as, credit card debt) because chances are the gains you receive from your deposit or investment is paltry compared to the interest the bank charges you!
The bank pays you only less than 1 percent per annum for savings deposit. Another 3 or 4 percent if it’s a time deposit. Then they lend you the same money you lend them and they charge you a whopping 42 percent a year for on your balance excluding all the other fees. It’s really a no contest!
You’re making yourself poorer while making others richer, much richer. It should be the other way around. Appropriate more for debt repayment and after you wiped off your balanced, or at least bring it to a manageable level; then you can start paying yourself already.
Wealth-wrecking way # 2: You think enough is really enough
Sadly, most of the time, enough is not really enough. Baby boomers who are now starting to retire find themselves in a conundrum. The meager pension benefits from the government and the retirement benefits from the company they worked for can only last them for so long. All too often, retirees outlive their retirement benefits.
A friend of mine regularly purchases investment policies because she cannot bear to be in the same precarious position as her parents are in. Her parents rely on government pension and their little savings, which they thought would be enough to last them for the rest of their lives. Unfortunately, reality has a nasty way of showing us we are wrong—when it’s all too late already.
And this is kind of thinking that gets us into a whole lot of trouble. Life insurance policies are in the same footing. I met people who believe they are fully insured. But here’s an interesting exercise I learned from a seminar: sum up the face amount of all your life insurance policies; then remove the last four digits of your answer. Let’s say you have a P2 million-coverage; remove the last four zeroes and you’ll be left with P200.
Now comes the tough question: Can your family subsist on P200 a day? P200 is half of the minimum wage in Metro Manila, and this is the interest income your family will receive when they put that in a time deposit earning a meager 4 percent a year. Most likely, this is a resounding “no”.
Don’t just settle for enough. Overshoot your target so that even if you come up short, at least you have “enough”.
Wealth-wrecking way 3: You work harder than your money; and not the other way around
All of us work hard to earn money. Some even have to work harder. And some of the richest men today work the hardest. That is why there is absolutely no reason why our money should slack off and take it easy. Our money should work twice as hard, or at the very least, work as hard as we do.
Let’s say at the end of the year you earned an additional 15 percent from your salary increase and bonuses. But since you were too busy working, you weren’t able to have time to manage your investments and so you just decided to put that in a time deposit. A year later, you realize that your money only grew by 4 percent, and after the government has taken its share of 20 percent, you’re left with a little over 3 percent. You earned 15 percent while your money earned only three percent.
Not only did your money not work hard, it was in fact lazy. Your returns were only one-fifth of what your increases are. Make money work harder than us. This is the key in attaining financial freedom.
We all wish we could turn back time and rectify our mistakes. Things don’t work that way though. We live with the memories of our blunders; but these mistakes, however painful, allow us to become savvier and better in managing our finances, and closer to our goals.
Article from BusinessMirror.com.ph
