By Mabel Ena G. Hermeno, RFP
Maria Alexa Geronimo (not her real name) is a 32- year-old part-time teacher, part-time book writer, part-time thesis consultant, and an aspiring entrepreneur. She finished her bachelor and masters’ degree in full scholarship and has an on-hold doctoral degree.
She is still single and lives alone. She earns an average occupational income of P18,166 a month. She also has a nine month old tutorial/review center business that isn’t earning yet. Her personal expenses amount to around P10,250 per month.
Ms. Geronimo dreams of someday managing her own time by concentrating on her business while lessening her workloads of part-time jobs as a teacher in three schools. She aims to finish her Philosophical Degree on Education by finalizing her thesis. Meanwhile, she continues to send financial support to her family as much as she could and in any way she can.
She acknowledges the importance of having time for herself and allowing for spiritual and emotional growth. Thus, she also enjoys being with a lot of people whether they be friends, co-workers, or family members.
Currently, Ms. Geronimo has debts amounting to P25,000 owed to friends and P120,000 from an uncle with pay-when able terms. She used the borrowed money to help start up her business. Although she has two bank accounts, both only have minimum balances. She does not have any kind of insurance policy and has no intentions of working abroad.
Upon discussion with Ms. Geronimo, she confides the following financial goals:
- Retire at age fifty-five (55) with P10,000,000 to her name
- Get married in two to three years’ time
- Acquire a second hand car worth P130,000 in four years
- Finish her PhD by 2014
- Own a generics pharmacy in five to 10 years
- Tour a country or two in Europe when she reaches 40 years old
Based on the information provided by Ms. Geronimo, her personal cash flow statement has a total cash inflow of P218,000 per annum and a yearly total cash out of P101,000 which leaves her with P117,000 cash availability in a year. She admits that she doesn’t keep a record of her expenses and easily loses track of where her extra cash goes. It can be safely assumed that some of her money was used in times of emergencies or to pay off her debt.
Still, the total cash outflow is almost half of her total income which indicates the client’s tendency to spend almost half (46 percent) of her total income for her immediate needs and wants. This figure provides a distressing wake up call to one’s financial situation and aids to efficiently manage the act of spending.
Expenses should be determined as the difference between income and savings (Income – Savings = Expenses) and not the other way around (Income – Expenses = Savings). Consequently, savings in any other form is strongly suggested to be prior to spending to be able to have a more secure financial life and to fund for future needs.
On the other hand, the figures in Ms. Geronimo’s tutorial/review center business’ financial statement vary per month. A loss in the statement does not entail a negative effect every time it appears. For an average of eight months, it is safe to assume that there are months without a negative result and that the losses are minimal. This minimal loss is an indication that the company is starting to pick up its pace and would later on reach break even status soon and that the profit stage may occur within the year or the next six months.
Given the above-mentioned goals, all those things need financing and this is where investment planning is recommended to provide for her future needs. At the same time, being family-oriented and providing support to her parents means she needs to insure their financial security if in case anything happens to her. Alternatives such as insurance, budget allocation and a savings plan could help her out. Likewise, a retirement plan is also suggested for the P10 million fund that she needs when she turns 55 years old.
Here are a set of options created for Ms. Geronimo to contemplate in consideration of her capability to tolerate risks, utilize opportunities and prioritize goals.
Her lack of initiative to save or to protect herself from risks indicates Ms. Geronimo’s lack of fear in confronting any kind of setbacks she may encounter. Thus, one could conclude that she had the backbone to start her business alone as it takes a lot of guts to do this by herself. However, although being a sole proprietor has its advantages, Ms. Geronimo should still be prepared for the consequences she might encounter in the future. Thus, the following might serve her well if chosen properly, performed efficiently, and monitored effectively:
Insurance – Ms. Geronimo took risks when she started her business independently. She expressed doubts about the performance of insurance plans in the country and is reserved in having one to protect herself and to lessen the risk not only for her business but for herself as well. Still, it is recommended that she avails of one because she provides financial support to her parents who are both retired and have no pension to support them. A high yield and low risk insurance plan with a cheaper premium is best suited for her.
However, in view of the fact that her parents do not solely depend on her, since she still has brothers who help with their parents’ financial support, an insurance plan is not a necessity for now. She could probably avail of one after she gets married and has kids or if one or two of her brothers stop providing allowance for their parents.
Budget and Savings – Ms. Geronimo could provide security for herself by having an effective budget for her present needs, a savings account for her future, and by allocating efficiently for her present and future immediate needs. For instance, her goal to acquire a second hand car four years from now would have a different value by then because of the theory of time value of money. The future value of a P130,000 car with an assumed inflation rate of six percent in four years’ time would be P164,122.
Likewise, an allocated budget is beneficial for the client to enhance discipline on her spending and smoothly oversee all her financial transactions. She could even allocate some of her income into a savings account and/or investment funding.
Retirement Analysis – People feel assured if their future needs are already accounted for. These needs usually include debts and expenditures they assume to have in the future. In Ms. Geronimo’s case, she has a liability amounting to P145,000 from friends and family, with no interest attached and no deadlines. This, of course, will be included in future debts if she still fails to pay it off before retirement. She also estimates that the P10 million worth of cash would suffice for her future expenditures for the next 25 years after she retires.
For her to get the financing she needs for these, it is recommended that she gets a high yielding savings account and/or a passive investment fund. Furthermore, the time value of money must be taken into consideration. At the present value of P10 million, she must save at least P13,685.14 every month or P164,221.69 every year with at least an eight percent interest rate or more for 23 years through an effective savings account or fund account.
Now, if we convert it into the future value and take into consideration an assumed inflation rate of six percent, these would be the following figures:
Given a six percent inflation rate, Ms. Geronimo will not need a P10 million retirement fund but a P38 million one in a plausible economy. Therefore, she has to save at least P67,732.07 every month or P812,784.85 annually to have her desired retirement fund in the next 23 years.
Retirement allocation is very crucial in a retirement plan and one should take into account the amount of money to be spent every year after retirement and how to distribute it to the expected expenditures in those retirement years. This would lessen the probability of running out of funds before the estimated period is encountered.
Investment Analysis – Not all of Ms. Geronimo’s goals could be solely financed by a savings account as most of the savings options in the Philippine have very low yields or low interest rates. Hence, it is advised that she allocates some of her extra income to passive investment alternatives since she already has an established company. This would help her focus more on the growth and development of her business while generating extra income to save, invest, or spend.
Diversification is an option to broaden her chances to earn more from less. She can pick out two or as many portfolios as she likes and have the power to distribute percentages on where she would put her assets into such as corporate bonds, stocks, treasury bills, equity funds, etc.
The options given are not as accurate as the actual portfolios available in the market. The financial planner only used speculative diagrams to avoid comparing different company portfolios with the benefits that they could give and solely to clarify that some of these programs might be suitable for some, and not for other clients.
The decisions made on which portfolios to choose still rely on the client, not with the planner. In addition, the implementation of said decisions would still be in the client’s hands alongside the guidance and support of the planner. Every quarter of the year, an evaluation would be conducted if Ms. Geronimo has tended to her responsibilities (budget, savings, and investments) and if the plan she picked out has gained desirable results or not.
The planner’s responsibility does not end with this plan alone. The proposal is adjustable depending on the circumstances that the client would have in the coming years such as getting married and having her own family. Her goals may change over time and so are her priorities and values.
|Years to save 23|
|Interest Rate 8 percent|
|Rate of inflation (assumed) 6 percent|
|Present Value||Future Value|
|Desired cash for retirement||P 10,000,000.00||P 38,197,496.62|
|Savings Payment for every year||P 164,221.69||P 812,784.85|
|Savings Payment for every month||P 13,685.14||P 67,732.07|