EASY MONEY> 5 TIPS

Simplify Your Financial Life

Five credit cards, three savings accounts, four time deposits, two checking accounts, three mutual funds, six insurance policies – how can you possible keep track of them all? Unfortunately, many of us fall into the trap of “the more, the messier.”  How do you keep your financial life simple, easy, and manageable?

1. Consolidate your deposit accounts. Do you really need all those bank accounts? You’ll end up with a truck load of bank statements, passbooks, ATM cards, and certificates of deposits. Not only can it be confusing, you’re setting yourself up for overdraft fees, dormancy charges, below-minimum penalties, and lower interest income. Keep your payroll account (or primary savings deposit account) and link it to a checking account for bills payment. Stay with one bank for transactional purposes (paying bills) and with another, if necessary, for investing purposes (higher-rate time deposits).

2. Stick to two credit cards. It’s too easy to say yes to pre-approved credit cards. Well, it’s time to learn to say no. More cards can lead to late fees, high charges on minimum payments, and the road to debt perdition. Instead, keep one card (with a relatively small credit limit, so it wouldn’t hurt as much if it gets stolen) in your wallet for everyday purchases, and store another (with a higher limit) for international travel, high-ticket purchases, and financial emergencies.

3. Avoid complex financial products. Complexity is what caused the recent global financial crisis, and if you like to complicate your financial life, you could also end up with your own little crisis. So if you need life insurance, stick to term insurance. If you want to have a diversified investment portfolio, go for one balanced fund or one stock fund and one bond fund.

4. Set up a bills calendar. Too many bills, too little time, right? If you want to avoid the misery of paying unnecessary fees and charges, you have to be on top of your bills payment schedule. For that, you need to set up a bills calendar, whether it’s a paper calendar on your desk or an electronic one in your computer or mobile phone. Being alerted to due dates is crucial.  An alternative is to pay only once or twice a month on a fixed day, say every 15^th and 30^th, regardless of the actual due dates, so you don’t even have to try remembering them anymore.

5. Automate it. If you can make your financial transactions automatic, the fewer mistakes you make. If you can enroll all your utility bills and insurance premiums to your credit card, do it. If your mutual fund or UITF can automatically debit your savings account on a regular basis, set it up. If you can have your savings deposit set aside a fixed amount every month to a higher-rate account, do it. If your bank lets you automatically transfer funds to your checking account when necessary, let them.

HERE’S A FINAL TIP

Sailing into Blue Ocean

By Prof. W. Chan Kim

Competing in existing market space, beating the competition, exploiting current demand, making the value-cost trade off, and aligning the whole system of a firm’s activities with its strategic choice of differentiation or low cost – these are the collective strategy used by all industries in existence today – the red oceans as we define them.

There is still a largely untapped strategy to consider, especially this time of global economic and financial crisis: a strategy to create uncontested market space, make the competition irrelevant, focus on non-customers, create and capture new demand, break the value-cost trade off by seeking greater value to customers and low cost simultaneously, and align the whole system of a firm’s activities in pursuit of differentiation and low cost – these are the collective blue ocean strategy (BOS).

*To further understand what BOS is, and how a company or individual can apply BOS to get out of the red ocean of competition:

Create demand. To start, red ocean strategists focus on dividing up the red ocean, thus limiting growth. Blue ocean strategists think that extra demand is out there, largely untapped. BOS requires attention from supply to demand, from competing to creating innovative value, achieved via the simultaneous pursuit of differentiation and low-cost. Competition in the old game is therefore rendered irrelevant. By expanding the demand side of the economy new wealth is created. Such a strategy therefore allows firms to largely play a non-zero-sum game, with high payoff possibilities.

Out-compete rivals. Red oceans will always matter and will always be a fact of business life. It will always be important to swim successfully in the red ocean by out-competing rivals. Companies need to go beyond competing. To seize new profit and growth opportunities they also need to create blue oceans.  A better balance must be struck across red ocean and blue ocean initiatives.

Unlock innovative value. Innovation goes up while the economy goes down. Despite the pain, recessions are historically times of enormous creativity and breakthrough business launches. Microsoft, General Electric, FedEx, CNN, and Apple are among the hundreds of companies that created blue oceans during an economic downturn. Our experience though further suggests that, first, companies in these industries tend to view their businesses as commodity businesses with little room to offer innovative value.  The more these companies view their businesses as commodities, the more they treat their businesses as such. Second, the more removed companies are from the final customer, the more levers there are to unlock innovative value as every company in that chain can be viewed as a customer.  If a company can’t see an opportunity to unlock innovative value for the next direct customer in that chain, there are still opportunities to unlock innovative value for that customer’s customers, and so forth.

Make the right strategic moves. We found that blue oceans were created by both industry incumbents and new entrants, challenging the lore that start-ups have natural advantages over established companies in creating new market space. The blue oceans made by incumbents were usually within their core businesses. In fact, most blue oceans are created from within, not beyond, red oceans of existing industries. This challenges the view that new markets are in distant waters. Blue oceans are right next to you in every industry. Companies that understand what drives good strategic moves—incumbents or start-ups—will be well placed to create multiple blue oceans over time, thereby continuing to deliver high growth and profits over a sustained period. The creation of blue oceans, in other words, is a product of strategy and as such is very much a product of managerial action, not the size or age of the firm.

*Excerpted from the Q8A with Kim and Renée Mauborgne, authors of the international bestseller, Blue Ocean Strategy, with notes from the exclusive press conference and presentation of Kim during the Philippine Blue Ocean Strategy Day on March 12, 2009.

PROF. W. CHAN KIM is the recipient of the Nobels Colloquia Prize for Leadership on Business and Economic Thinking 2008 and a winner of the Eldridge Haynes Prize by the Academy of International Business and the Eldridge Haynes Memorial Trust of Business International. A fellow of the World Economic Forum, Kim is also co-director of the INSEAD Blue Ocean Strategy Institute and the Boston Consulting Group Bruce D. Henderson chair professor of Strategy and International Management at INSEAD, France (the second largest business school).

EXPERT ADVICE>RFP MONEY MAKEOVER

The Billion Peso Couple

The high-earning, high-living couple does not have problems with accumulating wealth. Their problem is how to protect it

By Hazel Ann Acuña

Ernesto Gotanchan, 58, is a businessman and owner of many commercial and residential real estate properties while his wife Elizabeth, 40, works in an offshore bank as head of the corporate loans department. Ernesto has five children, the eldest—his 24 years old daughter—with his first wife, who passed away, and four sons with Elizabeth, with ages ranging from four to 13.

The couple has gross earnings of P5,000,000 a month, mostly from rentals of the commercial and residential properties of Ernesto. His total collections every month is a minimum of P4,500,000 from his properties in Makati, Mandaluyong, Quezon City, Laguna, Cavite, Tacloban and Cebu. Elizabeth earns a monthly salary of P500,000.

The Gotanchan family is living the good life, with a residence in Forbes Park in Makati, membership in the Yacht Club, and an almost unlimited budget for cars, clothes, and casinos.

They have a net worth of more than half a billion (see Table 1: Net Worth Statement).

Table 1: Net Worth Statement

Ernest’s income-generating real estate holdings include commercial buildings, apartments, condominium units, house and lots, warehouses, boarding houses, and vacation houses, constituting the bulk of their assets. Nevertheless, the couple own deposits, stocks, offshore investments, etc., managed by top private banks, which provide diversification across asset classes.

However, their non-real estate assets show that their risk tolerance is conservative. The couple mentioned that the types of investments they are comfortable with are low-risk investments because of their upbringing and fear of getting into scams.

They don’t have a problem with debt, since their debt-income ratio is manageable: 18.68 for Ernesto and 3.06 for Elizabeth.

Their idle funds are intended for their retirement. Ernesto wants to retire when he turns 65, preferably in Europe to enjoy the museums and art galleries in his old age. He also wants to transfer and donate a portion of his investments, particularly his properties that generate rental collections, to his only daughter who will be 31 by then. Elizabeth on the other hand wants to retire at 60 and spend her golden years donating to foundations and charities.

The high life

Ernesto’s eldest daughter, who lives on her own, gets an allowance of at least P50,000 a month and capital for her three businesses. His first wife died from heart disease. His younger children study in exclusive schools and are expected to take advanced degrees in London.

Indeed, they are living a charmed life. With their current monthly income of P3,400,000 net of taxes, they spend as much as P2,860,000, for an expense-income ratio of 0.90 (meaning they only save 10% of their income). While it’s a positive cash flow of P540,000, they obviously are living in the here and now (see Table 2: Cash Flow Analysis).

The rental income is substantial, but there’s always a risk of collection problems and bad debts, which is in fact something that is already happening at some their properties. This can affect their cash flow, and may even force them to dip into their savings.

One way to mitigate this risk is to set up an emergency fund equivalent to at least two months of expenses, which is around P68,640,000. The other thing they need to do is decrease their discretionary expenses, which is already 45% of their income after tax. Specifically, they should cut down on their casino spending and gift giving, which comprise 70% of the total discretionary expenses. Doing these will not affect their lifestyle at all and should bring down their discretionary expenses by 20%.

TABLE 2: CASH FLOW ANALYSIS

SUMMARY

If there’s a will

Cutting down on discretionary expenses and boosting their investments should generate a higher net cash flow and help achieve Ernesto’s goal to have a billion peso net worth when they retire. What they haven’t planned enough for what will happen to their wealth when they’re gone.

The couple has no will. They plan to establish one right away with the help of their lawyers. Ernesto wants to copy what her mother did, which was to donate her properties to him while she was still alive. Because of that she was able to guide and help manage the properties well.

Ernesto has a pre-nuptial agreement with Elizabeth, in order to protect the interest of his only daughter. He also mentioned that his Cebu and Tacloban properties are assets of her first wife and must be given to his daughter. Aside from that he wants 50% of all his properties in Luzon to be given to his daughter. The other 50% will be divided to Elizabeth and their four sons. Two thirds of his other investments will also go to his daughter and only 25% will be given to Elizabeth and his sons.

To prepare their estate plan, the various tasks were assigned to their accountant, lawyer, and financial advisor, who will coordinate with the property appraisals, make the computations, and file the required documents.

There are three options available to the couple: pass on their properties upon death, in which case they pay a hefty estate tax; donate their properties while they’re living, which is Ernesto’s preferred route; or transfer their properties to a family corporation.

The first step is to compute their net estate (see Table 3: Net Taxable Estate) and resulting estate tax. Assuming that they use up all their savings and investments for retirement, that leaves only their real estate properties worth P361,000,000 that their children can inherit. The estate tax due after allowable deductions amounts to P69,665,000.

TABLE 3: NET TAXABLE ESTATE

ESTATE TAX DUE

The second option is to transfer their properties via donation, since the tax rates are lower (15% versus 20% for estate tax). They call also transfer over a number of years so that they can relinquish legal ownership gradually. Using a 10-year schedule of donations, based on P378,000,000 worth of properties, the couple will be able to save P17,925,000 in taxes, since they will pay a lower P51,740,000 in donor’s tax.

TABLE 4: DONORS TAX COMPUTATION

The third option is through incorporation of assets. If Ernesto converts all his real estate properties worth P378,000,000 into shares of stocks with par value of P500,000, he will receive 756 shares. Transferring his assets into a corporation is tax-free at the time of transfer. However, it only delays the payment of taxes since his resulting shares of stocks will still have to be part of his net taxable estate.

So the best strategy is through donation since it will save the couple P17,925,000 in taxes. Since the donation will be spread over 10 years, they will be able to schedule the tax payments for minimal impact to their cash flow.

EXPERT ADVICE>FINANCIAL PLANNER

By Henry Ong, RFP®

Financial Planning Helps Prevent Osteoporosis

As kids, we were taught by our parents to have good posture. While the immediate reason given is so that our friends would not laugh at us for having hunched backs, one of the real reasons is so that we would not have bone problems as in osteoporosis.

Osteoporosis is a disease that makes the bone prone to fractures. The key measures for preventing osteoporosis are a good diet, exercise and good posture. And believe it or not, sound financial planning helps promote good posture.

A heavy debt burden, inadequate savings, and low capacity for discretionary spending are but some of the financial problems that affect many. Such problems lead to incessant worrying about the future, a lack of self confidence and sometimes even desperation. With such a heavy load, who would not end up walking with drooped shoulders, sitting in a slouched position, and constantly tossing and turning in bed? All of these lead to bad posture.

Now imagine the opposite. A person’s debt is manageable if it’s non-existent. His savings are enough to tide his family over for at least half a year in case of a loss of job or a significant loss in the family business. There is more than enough savings to enjoy three square meals a day and then some. Walking through the mall on weekends, which is the national pastime, does not lead to excessive salivating because of the thought that there is capacity to spend. Yet because of the instilled discipline, there is restraint in spending, especially on the non-essentials. A person in this kind of financial situation would walk tall, chin up high, with a giant smile on his face. And not only him; his whole family would also feel the confidence as they go through life with minimal money worries.

Are these all textbook theories? Not at all! Countless families have gone through this amazing transformation from walking with their heads down low to being a shining beacon of financial freedom. If you want proof, just sit in one corridor of a mall and observe people as they pass by. With your focus sharpened, you would begin to see who is financially free and who is not just by their posture. Why, you could even observe your co-workers. Body language speaks volumes. You would be surprised that even those who don’t appear to be well off will be happy and financially free just by looking at their posture.

This brings me to another point. Notice that what I cited as the cause for bad posture are a heavy debt burden, inadequate savings, and low capacity for discretionary spending. I didn’t mention inadequate income as the cause. Most of the time, it never is. I have done a talk for janitors of a school and to my excitement, I found one of them as an example of how income is not an issue.

One of the janitors had a house, a car, and children sent to college. This is all because he followed the financial planning equation of “INCOME minus SAVINGS equals EXPENSES.” Savings always came ahead of spending. It was this philosophy that carried him and his family through, in good times and in bad, even with a modest income. As the saying goes, “It’s not what you got but how you use it.”

One last thing, savings is a great start. Sometimes, though, simply saving may not be enough. This is the time when we have to boost our savings by investing them. Investing is quite complicated and ALWAYS involves risks. But done properly, investing can help achieve our financial goals easier and faster. Now how would you go about investing properly?

The first step is to determine what your goals are. Do not just dive into investing especially if you are not familiar with it. Many say that investing in the stock market is gambling. I agree, if you get into it without adequate preparation.

Next would be to see what returns you will need to get to reach your goals but always tempered by the investment risks (e.g. loss of income and even principal) that you are willing to take. We are a nation of “time deposit-minded” investors. What I mean by this is that we are so used to getting a guaranteed fixed return over a fixed period. In normal times, such would only bring low income, which would sometimes not even be enough to cover inflation. On the other hand, once approached with an offer of stellar returns, we jump at it without consideration for the risk involved. Higher returns invariably mean higher risks.

The third step is to look at what is out there. There are lots of investment options available to Filipinos. You just have to ask around. And mind you, investing can range from financial securities to businesses to real estate and even to art and jewelries.

The fourth step is to form a portfolio of investments. What this means is that you should not put all of your money in one investment outlet. If that goes belly up, so does all of your funds. Diversification is the key.

Lastly, you need to periodically review your performance relative to your targets and risk parameters. How often? Perhaps, initially, every month. Then, as you grow accustomed to investing, every quarter.

Now, if you find the five steps above pretty daunting, the simple solution is to get a financial planner. As I have mentioned in previous articles, there are Registered Financial Planners (RFPs) out there who are experts in this area. They are specifically trained to assist their clients in handling their finances. For more on RFPs, log on to www.rfp-philippines.com.

Here’s to your good posture!

[PULL QUOTE]

“Body language speaks volumes. You would be surprised that even those who don’t appear to be well off will be happy and financially free just by looking at their posture.”

[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

Getting Ready For Your Summer Vacation

It’s time for fun in the sun. But before you pack your bags, set your budget so your great vacation won’t turn into a bad trip

Step 1: Determine how much you can afford. There are three ways you can pay for your vacation – with your savings, using your credit card, or a combination of both. Regardless of how you fund your trip, set a realistic budget, because that will determine your destination, length of stay, and activities.

Step 2: List down all possible expenses. Make four major categories – transportation, accommodations, food, entertainment, and miscellaneous. Make sure to include little things like airport tax, tips, tickets, etc.

Step 3: Estimate the cost per item. It’s easy to find out the cost of most expenses, like airfare, hotel room, tours, and admission tickets. Just check the Web sites of the airline, hotel, amusement parks, tourist attractions, tour operators, and the like. You can also get the typical cost of fares, tips, meals, Internet access, etc. from travel books and sites. As for the rest, just plug in a reasonable estimate.

Step 4: Compute the number of passengers and days. If you’re traveling as a family, you obviously have to multiply many of these expenses by how many you are, including fares, meals, tickets, and tours. For certain items, like food and accommodations, you also need to multiply by the number of days you’ll be on vacation.

Step 5:  Make the necessary adjustments. After summing up your initial estimates, you may find yourself over budget. This is when you should make adjustments. Since accommodations take up a third of your total cost, a good way to work within your budget is to cut down your length of your stay or choose a cheaper alternative. You can also lower your expenses further by choosing a different date and time for your departure and arrival. You would also have to shortlist the places you want to see and scale back on expenses you can live without. But don’t cut your budget to the bone; leave some buffer for the unexpected.