By Apollo Agcaoili , RFP Candidate (Batch 25)
The Baron family consists of Andy (a new ophthalmologist aged 34), Tricia (an HR professional aged 35), and their two young children Chip (9) and Cindy (7).* Except for Andy’s medical tools, they have little in the way of assets. Their income is insufficient for their current, and admittedly modest, lifestyle but they are disciplined enough to stay clear of debt.
The Baron family has a very promising future with their earnings potential. At the moment though, they need to implement some very basic financial planning steps:
- Establish a three-month emergency fund
- Establish an easy-to-manage budget system
- Purchase term insurance
- Increase income
- Achieve full tax compliance as soon as possible
When their net worth increases, we can revise this financial plan accordingly.
Andy has just completed his residency at a hospital in Metro Manila. He is now preparing for his Diplomate which he plans to attempt this year. Meanwhile, he holds clinics in Pasig and Antipolo where he makes about P420,000 a year. Unfortunately, much of his earnings are offset by travel and clinic rental expenses. Although a doctor who has large future earnings potentials, he is not yet making the right amount of money he wants for his family.
At the moment, Andy’s top priority is to get his Diplomate because then, he will be more likely to be considered for positions in major hospitals where the more lucrative procedures are performed. He expects to complete his Diplomate in 2012.
If he runs his own clinic, then he has to acquire some very specialized equipment in addition to the P393,000 worth of tools he already has:
The tools are arranged in order of priority. For reference, I indicated an estimate of how much new business he can generate with each tool. For example, with his current resources, he has the ability to treat 50% of ophthalmic cases possible; by purchasing a tonometer he will raise this to 55%.
For planning purposes, Andy intends to purchase one piece of equipment per year. As reflected in our projections, Andy can expect to expand his practice every year for the next five years. In addition, we assumed that revenue from his clinic will grow every year (at a rate that outpaces inflation) due to his increasingly expanding network of patients.
After the Diplomate, he plans for a Fellowship in Orbit Plastic Surgery for another two years of full-time unpaid apprenticeship. Upon completion, Andy will be qualified to conduct highlyspecialized, and lucrative, operations. While highly desirable professionally, the Fellowship will be a huge financial burden his family must be absolutely prepared for before he decides to push through with it. Thus, for the scope of this study, no timeline can be established to achieve this goal.
Tricia, on the other hand, finished academic requirements for Veterinary Medicine but, due to several reasons, stopped short of her thesis and board exams to find work to help sustain her family. At the moment, she works for a foreign nonprofit company’s human resources department which pays her around P410,000 a year. She dreams of pursuing her veterinary license someday and saving enough money to establish and run her own large-scale chicken growing and egg-producing farm.
To be an agribusiness owner, Tricia needs another three months of thesis preparation that’s incompatible with her current work schedule. She would have to either take a leave of absence or quit altogether so she could take the Veterinary Board exams or just go ahead and setup her farm. Bona-fide farm owners are exempted from taking board exams. Her ideal farm is a one-hectare property with water and electricity and is close to Metro Manila as possible. Startup costs are estimated at P2M to include a modern henhouse, staff training, initial stocks and feeds, plus a substantial revolving fund. Fortunately for her, she can get soft loans through her relatives as long as she can present a thoroughly convincing business plan.
However, the Barons must first reach stable financial footing before Tricia can undertake the farm project. She expects to complete her thesis in 2017 before becoming an entrepreneur. The facts that she can be her own veterinarian and knows how farms operate are big factors that will help the business succeed.
For the first three years in running the business, Tricia will remain an employee in her current job. This means a lower overall profit because she will pay extra for a fulltime administrator. In addition, she will have to fast track repayment of her business loan so that, whatever happens, her family would be free of this financial obligation. She can resign from employment in 2020 to concentrate on the farm so that it will really grow with her hands on management. During the Barons’ senior years, the farm and any other business they set up will provide for the bulk of their financial needs. This business-minded orientation will have a significant impact on their retirement planning.
The couple’s son, Chip, is a special child with a learning disability and who is also blind in one eye. Despite his disadvantaged condition, he remains sociable and willing to learn, and his parents believe that he can still develop a normal life. He has shown a remarkable talent for the visual arts and has expressed interest in becoming a chef. Just the same, he represents a significant motivation for his parents to establish a business that will survive them and can provide for the children even when they are taken out of the picture.
Cindy is a normal student in first grade. This early in her young life, she has already professed a desire to follow in her father’s footsteps by becoming a doctor.
The family currently lives month-to-month, spending everything they earn, and leaving nothing for savings and investment. After Andy finished his residency, his income started varying monthly and, for new doctors with no investible funds, the Barons could go through difficult years of relatively unimpressive incomes.
Andy needs to improve how he records his income and communicates this to his wife. After a thorough assessment, it was established that he earned an average of P35,000 per month in 2011. Based on his records he has to pay P47,000 in taxes by this year’s tax filing deadline. Tricia enjoys a tax-free status due to her company’s unique setup in the country.
Finally, there is the matter of the P100,800 in undocumented discretionary expenses. The couple tried budgeting their expenses last year and the year before, but failed to sustain the effort. By abandoning the budget, they adopted the “head in the sand” strategy that temporarily pushed the financial problem away into a dark corner, so to speak. As a result, husband and wife have no recollection where close to 13% of their combined income actually went.
The rest of the cash flow numbers reflect the family’s modest lifestyle. They live in a small extension house built next to Andy’s parents’ house. They drive a hand-me-down ten-year-old car that requires frequent repairs. The kids study in average private schools. Discretionary spending is minimal, if you ignore the undocumented expenses. In fact, except for the undocumented expenses, there is very little that can be cut at this time.
ASSETS AND LIABILITIES
The family’s assets stand at about half a million pesos. Of this, a little over P100,000 is disposable (though not easily) should an emergency arise. The rest – about P400,000 – represents the value of Andy’s instruments; therefore, while these can be used as collateral, he cannot sell these because doing so would prevent him from practicing his trade.
The vehicle they drive does not belong to them, and therefore cannot be sold except by the relative who loaned it to them. Andy and Tricia currently have about P43,000 in credit card debt. They say they are not revolvers, meaning to say they always pay off their credit cards in full. However, because they do not have a significant emergency fund, then any emergency expense at this point could result in the credit cards not being paid in full, thus starting them on to a path of credit card dependence. This represents a clear and present danger that can only be addressed by focusing on creating an emergency fund as their very first financial order of business.
Based on everything we know up to this point, Andy and Tricia must achieve four goals at the soonest possible time.
Establish Emergency Fund
– Andy and Tricia, while both full of future potential, currently find themselves in a financial position all too common to many families worldwide. They have less than one month’s expenses worth of cash, and are in constant danger of financial ruin in case of an unexpected expense such as prolonged sickness or accident. We agreed that the couple should ideally have liquid funds equivalent to approximately three months of expenses. To this end, for the next four years they shall set aside approximately 5% of their annual income in cash or near-cash instruments such as 30-day time deposits and money market accounts. At this rate, they should be able to reach their target emergency fund within four to five years.
– As far as budget goes, Andy and Tricia are not doing that bad, since they are not spending more than they earn. The fact that they tried to implement a budget in the past two years indicates both recognition of the need and willingness to do what’s necessary. They just need a manageable budget system that won’t overwhelm and make the entire effort seem hopeless.
For starters, we recommend a budget of P60,000 per month. This rounds up most of their average monthly expenses to the nearest thousand, for simplicity. For this budget, we left out “medical expenses” and “insurance premium” because we don’t know when sickness will strike, and insurance is an annual expense. In the future, these can be included. Also, we removed the miscellaneous expense category, because once this budget is in place and faithfully applied, then there shall be no more impulse buying and unaccounted outflows.
Although both Andy and Tricia are computer-proficient, we know that they already tried and failed implementing a budget using spreadsheets. Therefore, we recommend that they go back to a basic budgeting method – the Envelop System. They shall prepare twelve envelops – one per category such as “utilities”, “food”, “travel” etc. – into which they will place the budgeted amount every first day of the month. Any expense in excess of budget (or not within a budget category) must be discussed by, mutually agreed upon, and documented by both parties. Excess funds (between P5,000 to P6,000 under this plan) will automatically remain in a joint, non-ATM bank account, which will form the basis of their Emergency Fund.
Since Andy’s income is expected to grow substantially within the next five years, we committed to review and adjust this financial plan (the budget in particular) every January. The couple expressed their desire to purchase some big ticket items – house and cars – as soon as finances allow, and if their income grows as projected, then the budget must be quickly adjusted with these expenses in mind instead of simply spending on impulse.
Increase Clinic Revenue
– An income of P35,000 per month is too low for an ophthalmologist. 2012 will see a normalization of Noel’s monthly income to a more reasonable P50,000, as he will start practicing in his new clinic in front of a new SM location. In addition, his professional standing will markedly increase once he completes his Diplomate in 2012. He plans to continue investing in more ophthalmology equipment every year for the next five years, which will increase the scope of his practice as well as the income it brings.
Furthermore, he plans to drum up business through an innovative print and online marketing campaign that can attract more prospects looking for eye health-related information.
Establish Other Income Streams
– Andy and Tricia plan to augment their income through the publication of information products (eBooks and downloadable videos) related to their respective areas of expertise – Andy in eye health as it applies in the Philippine setting, and Tricia either in career advice for rankand- file employees or in chicken farming. Since Andy’s career is just starting out, this means that he will have time to create his eBooks and video products this very year. As a bonus, his publications can add to his prestige and reputation as the local expert in eye care, which would translate to more and more new patients seeking him out. Tricia’s time is more limited, so her publications will take more time.
We cannot project the maximum income these publications will bring, but even with a conservative P10,000 or P20,000 per month in sales and virtually zero publication costs, this amount can make a significant percentage increase in their disposable income, allowing them to start thinking about investments and property acquisition.
Although they have minimal assets, the Barons also enjoy relatively low debt. The biggest risk lies in their lack of an emergency fund and sufficient insurance, which means that in the event of a financial emergency, their life could suddenly become extremely difficult. They must immediately face these issues head-on by setting aside money in an emergency fund, and by purchasing sufficient life insurance.
Next is their lack of budgeting discipline and insufficient monthly income. They must address the former through an easy-to- follow envelop budgeting system, and the latter by purposefully increasing income. Andy can increase his income by gradually completing his ophthalmology equipment set, and complement this with an innovative internet marketing campaign. When they have enough funds, Tricia can invest in her chicken farm. In the short term, the Barons can generate additional income through eBook publishing on Amazon’s Kindle platform.
Andy must carefully consider his tax compliance strategy. While we recommend full compliance as soon as possible, he will probably gradually ease into full compliance within the next five years.
A more thorough investment plan and estate plan should be part of a comprehensive financial plan, but these are not tackled in this paper because of the Baron family’s low current net worth. These shall be tackled in due time.
This financial plan shall be reviewed on the 15th day of January of every year.
* Names have been changed to protect clients’ identities
By Apollo Agcaoili , RFP Candidate (Batch 25)