EXPERT ADVICE>FINANCIAL PLANNER

By Henry Ong, RFP®

Tax-Advantaged Investments

The more infamous four-letter words in our vocabulary are those that cannot be uttered in front of children. But there are also four-letter words and acronyms that deserve to be mentioned especially in front of children. Yet, they are commonly disregarded when it comes to personal finance. The first two are CTRP and PERA.

CTRP stands for the Comprehensive Tax Reform Package that was put into law and incorporated in the 1997 Tax Code. PERA on the other hand stands for the Personal Equity Retirement Account, a recently enacted law, implementing rules and regulations of which are currently being drafted.

Under Section 24(B)(1) of the National Internal Revenue Code of 1997 “A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements;…Provided, further, That interest income from long term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by the certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:

Four (4) years to less than five (5) years — 5%

Three (3) years to less than four (4) years — 12%; and

Less than three (3) years — 20%”

This exemption is reiterated in Section 25(A)(2) of the 1997 Tax Code. Section 25(FF) of the same Tax Code defines long term deposit or investment as “…certificate of time deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments with a maturity period of not less than five (5) years, the form of which shall be prescribed by the Bangko Sentral ng Pilipinas (BSP) and issued by banks only (not by non-bank financial intermediaries and finance companies) to individuals in denominations of Ten thousand pesos (P10,000) and other denominations may be prescribed by the BSP.”

Together with provisions in the Manual of Regulations for Banks of the BSP, the above tax exemption is taken to apply to individuals investing in bank deposits or security issuances that are at least five years in tenor and are held by the investments for the same amount of time. The tax exemption also applies to bond issues of non-banks provided the investments are coursed through individual trust or investment management accounts that are held for at least five years.  There are certain nuances to this tax exemption and as such, it is best to consult a financial adviser, like a Registered Financial Planner, or your favorite banker.

On the other hand, PERA, or the Personal Equity and Retirement Account Act of 2008, seeks to provide the following salient benefits, among others, to individuals setting aside money for their own retirement:

1. tax credit of 5% based on all contributions to an individual’s PERA provided that the maximum contribution per individual per year is Php100,000 provided further that if the individual is an OFW, the maximum contribution per year is P200,000;
2. tax exemption on investment income-related taxes; and
3. tax exemption on withdrawals from the PERA upon retirement.

A cursory look at both laws shows that while what is exempted under the CTRP is the tax on interest income, PERA extends tax exemption on all investment income plus gives a tax credit of 5% per year. Clearly, for the average investor who does not have much funds and who is not out to do active trading, PERA is more advantageous. Nonetheless, this should not stop an individual from using both to his advantage as PERA has limits on the tax-exempt investments per year.

So what is the third four-letter word? It is nothing but SAVE. Regardless of the tax exemption, such a benefit will never be enjoyed if we don’t start saving. So save now and periodically, come hell or high water, so that you will have enough to invest and become not only financially free but also tax free.

Cheers to the Pinoy!

[PULL QUOTE]

“Regardless of the tax exemption, such a benefit will never be enjoyed if we don’t start saving.”

[PROFILE]

Henry Ong, RFP is the founder of the Philippine chapter of the Registered Financial Planner Institute of USA. He is also the President of the Association of Registered Financial Planners of the Philippines (ARFPP), the premiere professional body of practicing financial planners in the country. For more information about RFP Philippines, visit www.rfp-philippines.com.

EASY MONEY>WORKSHEET

Calculating How Much Life Insurance You Need

Your typical insurance agent will urge you to cover eight to 10 times your annual income. A more accurate way of determining exactly how much life insurance you need is to run the numbers yourself.

Step 1: Determine what your family needs if you die suddenly

Number one is your daily expenses. For that you need your household budget. How much do you spend regularly every month? If your spouse isn’t working, then enter the entire household budget. Otherwise, deduct the expenses that your spouse can cover. Multiply by 12 to get the annual figure (and add other annual expenses). Assume a reasonable investment return and using the future value formula of Microsoft Excel, you will come up with a replacement fund, which when invested will produce the income needed to pay for your family’s daily requirements. That represents the bulk of your protection needs. One more item: your children’s educational fund. Estimate the tuition of each child from grade school to college and forecast the future value.

Step 2: List down all your debt

You don’t want to leave your family with loans, so include the balance of all your debt, including credit cards, personal loans, car loan, and the mortgage.

Step 3: Compute final expenses related to your death

There are expenses your family has to pay for before and when you pass away, such as your hospital bill, funeral expenses, and estate tax, among others. Obviously these aren’t part of your regular budget, so you need to allot for these. Add the total of your replacement fund, education fund, debt, and final expenses to come up with your total protection needs. Staggering isn’t it?

Step 4: Add up your existing insurance policies and other sources of funding

You may have an existing insurance policy. Perhaps you bought variable unit linked insurance and an endowment plan for investment purposes. Your employer may have purchased group insurance for employees. If you have a mortgage, you definitely have term insurance tied to your loan called mortgage redemption insurance (MRI). Maybe you have a pre-need pension plan with free term insurance coverage. Add up all the coverage amounts. If you have assets like cash, deposits, mutual funds, and other placements that can fund the needs of your family, add those. As an option (since your family may opt not to sell), add the market value of your family home and other real estate properties. Sum everything up to get your total protection sources.

Step 5: Get the shortfall

Deduct your total protection sources from your total protection needs and you’ll determine your total protection surplus – or more likely, shortfall. That’s how much additional insurance

EASY MONEY>MONEY MATH

Invest Lump Sum or Frequently?

Three managers working at a real estate company decided to invest in the stock market. All of them had P120,000 to invest, but they disagree on how often and when they should buy shares of stock. Juan wanted to invest the lump sum at the beginning of the year. Manny would rather spread his investments equally every month while Troy plans to invest P30,000 every quarter.

In the course of the year, Juan bought stocks of Company ABC (which was quite volatile due to merger rumors) during the first trading day in January. Manny invested also in the same stock at the same time, but only P10,000 and then placed the same amount on the first day of each succeeding month thereafter. Troy invested P30,000 in the same stock the same day in January and P30,000 each on the first trading day of April, July, and October.

The stock prices of Company of ABC during the first trading day of each month were as follows: P120 (Jan), P105 (Feb), P95 (Mar), P120 (Apr), P70 (May), P75 (June), P100 (July), P90 (Aug), P95 (Sep), P115 (Oct), P130 (Nov), and P150 (Dec).

Then they all decided to sell all their shares the following month when the stock price was at P175. Which among the three made the most money (ignoring taxes, commissions, board lots, and other factors)?

1. Juan
2. Manny
3. Troy

Answer: Manny

Juan bought 1,000 shares of Company ABC at P120. When he sells at P175, he nets P55,000 from his investment. Troy’s P30,000 every quarter buys him different number of shares – 250 in January, 250 again in April, 300 in July, and 261 in October. All told, he was able to accumulate 1,061 shares, which he sold for P185,652 for a profit of P65,652. In other words, he was able to buy more shares particularly in July and October when the stock prices were low.

But Manny made the most money. His P10,000 a month allowed him to buy more shares as he captured more lower prices throughout the year (especially in March, May, June, August, and September, which Troy failed to capture), or a total of 1,190 shares. Selling everything for P208,299, he nets a cool P88,299, or 61% more than Juan and 34% more than Troy. That’s the advantage of frequent investing at smaller amounts, or what is known as peso cost averaging.

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EASY MONEY>BOOKSHELF

Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence: Revised and Updated for the 21st Century

By Vicki Robin and Joe Dominguez

The big idea: The common reason it’s difficult for people to make ends meet is that we live in a consumer culture that just can’t have enough. The key, aside from old-fashioned frugality, is to understand your relationship with money in order to achieve what the authors call FI. Once you develop Financial Intelligence and Financial Integrity, Financial Independence will follow.

What’s good: The original idea you can take from this classic personal finance book is the concept of life energy, which is what we trade in terms of our time for money. That’s how much we really make per hour when we consider the cost of making money (commuting, work clothes, office lunch, etc.). It also calculates the hours we spend at work, preparing for work, and recovering from work, which is an eye-opening way of figuring out if it’s worth the hundreds of hours (or life energy) we give up to buy a new gadget. There’s also solid advice about contentment, frugality, and generating passive income.

What’s bad: It can be long-winded and a little New Age-y, plus the original recommendation (when the book was first released in the mid-90’s) of investing in just Treasury bonds is old. This updated version does introduce index funds but it remains a very conservative approach to investing.

Web site: www.yourmoneyoryourlife.org

Recommendation: Buy it

Fight For Your Money: How to Stop Getting Ripped Off and Save a Fortune

By David Bach

The big idea: Corporations are out to rip us off with hidden charges, late fees, deceptive advertising, and sneaky tactics. The way to fight back and keep our money is to be an informed consumer.

What’s good: Unlike his Finish Rich and Automatic Millionaire book series, this one is totally different, so it wouldn’t read like yet another David Bach book. In terms of scope, it covers a wide range of topics including automobiles, telecommunications, travel, healthcare, and other daily expenses and transactions we face.

What’s bad: It’s very long and there’s no one big original idea (although there are a lot of practical tips, which you can also find online). If you like the breezy style of his previous books, you won’t be able to finish this in one seating.

Web site: www.finishrich.com

Recommendation: Browse it

The Anti 9-to-5 Guide: Practical Career Advice for Women Who Think Outside the Cube

By Michelle Goodman

The big idea: If you’re tired working full-time as an employee, the solo life of an entrepreneur, part-timer worker, or freelancer is a fulfilling albeit sometimes challenging alternative. To make it work, you have to take it slow, consider all the factors, and be flexible when necessary.

What’s good: It’s an easy read and it’s written in a way that shows the author really understands the ups and downs of self-employment. She’s frank about the problems you’ll face but also cheers you on. The career advice, which ranges from being productive to handling paperwork, applies to men as well.

What’s bad: Not much, except perhaps it gives the impression that if you want to be self-employed, give up the idea of becoming rich, and just expect to make a decent living.

Web site: www.anti9to5guide.com

Recommendation: Buy it
The Ten Roads to Riches: The Ways the Wealthy Got There (And How You Can Too!)

By Ken Fisher

The big idea: There are only ten legally ways to get mega-rich, according to billionaire investment manager and author Ken Fisher. The best way is to start your own business, but there are other ways, like becoming a CEO, riding along a CEO, becoming a celebrity, marrying money, becoming a plaintiff lawyer, using other people’s money, becoming an inventor, investing in real estate, and the slow-but-sure saving and living frugally.

What’s good: It’s fun to read and Fisher can be pretty nasty. You’ll find some pretty good advice. For instance, being a celebrity is a good way to get rich, but it’s the producer and media mogul that are super-rich. And some chapters like “Marry Well, Really Well” are simply a riot.

What’s bad: He (and his co-writer) can’t possibly be an authority on all ten ways, so take some advice with a grain of salt.

Web site: www.10roads.com

Recommendation: Buy it

[Best Sellers logo] All these titles are available at NBS BestSellers Robinson’s Galleria branch at Level 4, Main Mall Robinson Galleria, Edsa corner Ortigas Avenue, Quezon City with tel. no. 638-2046.

The Difference: How Anyone Can Prosper in Even the Toughest Times

By Jean Chatzky

The big idea: There are 20 main traits that separate the wealthy and financially comfortable from those living paycheck-to-paycheck and going further in debt. The Difference has to do with these particular attitudes (such as confidence, competitiveness, and optimism) and goals (such as knowing what you want to do, aiming to accumulate a million dollars, wanting to own a home) as well as financial (like saving for emergencies, investing for retirement, and reducing debt) and non-financial behaviors (like socializing once a week, exercising two to three times a week, being married), which in combination increase the chances of finding prosperity.

What’s good: With her financial journalist background, the extensive survey of 5,000 respondents, and interviews with the well-to-do and academics specializing in behavioral finance, Jean Chatzky presents 20 factors that contribute to wealth, not based on opinion but on solid research. Some of the findings are nothing new, but the study at least reinforced conventional wisdom. A few – such as being happy and exercising three times a week – are a little surprising.

What’s bad: The research recalls the work of Thomas Stanley but the book does not have the same ground-breaking impact of “The Millionaire Next Door” perhaps because many of the findings are nothing new. The prescription offered by Chatzky, while sensible, is also nothing new.

Web site: www.jeanchatzky.com

Recommendation: Browse it

Enough: True Measures of Money, Business, and Life

By John C. Bogle

The big idea: America (and by extension developed nations) has increasingly become dominated by the financial sector. Unfortunately, it has been marked by greed in terms of excesses in fees, salaries, complexity, speculation, etc. Society, driven by a consumer culture and a desire for material success, has not learned when enough is enough.

What’s good: When John Bogle, founder of the Vanguard Group and creator of index funds, speaks, people listen. For decades, he has been the conscience of American finance, extolling the virtues of low fees and simple investing (admittedly a little self-serving) and reprimanding mutual funds, investment banks, and hedge funds about the dangers of complex financial instruments and the disadvantage of investors paying too much in fees. So this small book, expressed in righteous indignation balanced by thoughtful insights, is relevant and needed in the aftermath of the global financial crisis.

What’s bad: There’s a lot of self-patting on the back on the part of Bogle, although he does balances it out with healthy self-deprecation. And it’s his way of leading and teaching by his own example.

Web site: www.johnboglemedia.com

Recommendation: Buy it

Nudge: Improving Decisions About Health, Wealth, and Happiness

By Richard H. Thaler and Cass R. Sunstein

The big idea: People are bombarded with too many choices and succumb to all sorts of biases almost automatically that they tend to make mistakes. To get people to make better choices about their health, money, and well-being, it may be necessary to nudge them, i.e. subtly influence, to the right direction using certain principles of behavioral economics and group psychology.

What’s good: If the inventor of behavioral economics writes a book, you better grab a copy. If you’re new to this fascinating area of human study, you will find Nudge an eye-opener, because you are as guilty as the many examples offered in the book. Better yet, if you’re in any way responsible for influencing others (as the authors call it, a choice architect), the book will give you a treasure trove of tricks to do a better job at making people make better choices.

What’s bad: The examples can be quite lengthy, but if not for the need to rest from all the reading, you won’t put the book down.

Web site: www.nudges.org

Recommendation: Buy it

The Ascent of Money: A Financial History of the World

By Niall Ferguson

The big idea: History repeats itself, and if we want to avoid another financial meltdown, it is wise to look back not just decades but centuries to understand how bubbles form and greed creates wreckage.

What’s good: If you like history and finance, this is a must-read book, which explains the origin and growth of money and credit and the financial markets throughout history. It’s an easy and entertaining read, and offers a fresh perspective of the world’s history with money as a backdrop.

What’s bad: Don’t expect a complete and detailed finance history lesson because you won’t get it – just sample selections of colorful tales from the past to make a point across. Sometimes it reads a little disjointed and rushed.

Web site: www.pbs.org/wnet/ascentofmoney/

Recommendation: Browse it

[Best Sellers logo] All these titles are available at NBS BestSellers Robinson’s Galleria branch at Level 4, Main Mall Robinson Galleria, Edsa corner Ortigas Avenue, Quezon City with tel. no. 638-2046.