Ma na ging Your Pe r s ona l Fina nc e s

The bigger task of educating the young people is to equip them with knowledge, skills
and habits that will make them independent and responsible individuals. That is from
where you are now, a young person depending entirely on your parents' financial
resources into someone who will soon become independent, earning your own income
and supporting yourself.

The outlook is frightening for many but there is help in this training module. You will
learn how to manage the financial aspects of your life. By following this module, you are
taking the first step towards personal independence, which is to become a
financially independent individual. To make sound financial decisions, come up
with a plan to improve your income and spending habits, get yourself to commit
to some financial plans and learn tips on how to live within your means, how to
save, how to stretch your peso value, protect your gains, and get out of debts fast
and clean.

Remember that your goal is to become a financially independent individual who can
provide from your own resources, all the three major expense categories: housing, food,
and other living expenses.

Unit 1: The Road Towards Financial Independence

At the end of this lesson, the student can:

 List the components of Financial Stability

Framework
 Understand the importance of financial goals and
plan
 Identify the Four early Life-defining Financial
Decision Points
 Understand the need to acquire positive habits to
achieve financial independence

Framework for Financial Stability

We will start with a framework to achieve financial stability.

It is about goals in improving your income and
expenses, building your savings that will allow you to win
your accumulation goals. The accumulation goals are the
sum of your short, medium- and long-term financial goals
and you know that you have achieved them in terms of
accumulating assets like a car, house or stocks portfolio. While you are accumulating
assets, you need to protect them by managing returns of investment with accompanying
risks, protecting yourself against illness and other conditions that will bring about
loss of income, etc.

You can achieve financial independence when you learn how: to practice the discipline
of saving first before spending, to live within your means (budgeting), to fight impulse
shopping and consumerism in your spending habits, and to improve your income
continuously.

Your specific plans then should have some details on how to accomplish those goals
like for example, reducing unnecessary expenses, increasing one's employment
income, or investing in a business or in a real estate like a plot of land for your future
house including cost figures and time frames. The plan should be in writing and should
be reviewed regularly so it can be adjusted whenever there is a big change in one of the
assumptions/projections you made like when you get a big increase in income.

Towards Financially Independent Individuals

You make many decisions over the course of your lifetime. Many of the decisions you
make are small and are insignificant, but some are very important and could have
significant consequences. Life-defining decisions such as

1). choosing a career,

2). moving out from your parent's house,

3). getting married and having children,

4). buying a house, starting to save and invest - have a big impact on your future
financial security, including retirement.

The good news is you can take steps to ensure a smoother journey and a more secure
financial future. This course will help you make wiser financial decisions by
understanding the rules of the road so you can avoid life's financial potholes and dead

ends.
Let's start with some tips that you can use in your journey towards financial
independence:

1. Gain control of your financial situation. Save before you spend.

2. Start planning and saving now for long-term goals, such as buying a house,
marriage, paying for your children's education, and ensuring a comfortable
retirement.
3. Get a job - a job with good benefits and make the most out of them.
4. Keep actively involved in all life-defining financial decision points.
5. Avoid accumulating credit-card debt and other expensive short-term debts and
find the lowest interest rates on your car and house loans.
6. Learn the rules of investing and saving and make a financial plan to ensure that
your life savings will get you to your financial/accumulation goals and last you
through retirement.
7. Explore the options for protecting yourself and your family by having adequate
hospitalization, life, health, and long-term care insurance.
8. And if you cannot decide on a difficult situation, don't be afraid to ask for
directions along the way!

Unit 2: Smart Spending

Objectives

At the end of this lesson, the student can:

 Understand how one's money is spent each month

 Plan of cutting down unnecessary expenses
 Make a shopping list
 Make a monthly spending plan
 Explain the effects of Consumerism to financial
condition of consumers

Keep Track of Your Daily Expenses

The first step to becoming financially independent,

that is to gain control of your financial situation,
starts with recognizing where your money goes.
Take a close look at your spending habits. Start by
writing down everything you spent money on
during a one-week period in a pocket notebook.
Be sure to write down everything you buy and how
much it costs. Include rent, jeepney or tricycle rides,
cellphone prepaid "load" payments, groceries, and
even small purchases like "softdrinks" or snacks.
Continue the habit of writing down your daily
expenses beyond the one-week exercise. Many people do this out of habit and are in a
better position to improve their spending habits than those who do not keep tab of their daily
expenses.

Use the Expense Tracker Worksheet to help you track your monthly expenses, download
the worksheet here by double clicking the underlined title.

Plus, Spending Leaks

Cut down on unnecessary expenses.

Now that you know exactly how you spend your money each
week, notice the areas where small amounts of money are
disappearing. These spending leaks include buying soft drinks
daily, renting at Internet café, eating lunch out every day, and
making impulse purchases. While it may not seem like you're
spending much at a time but these leaks can add up to quite a bit
of money over a month or year. Take a look of a typical day-to-
day spending of a Filipino teen here. A blank form for your daily
spending can be downloaded here.

Once you've identified your spending leaks, you can determine

ways to plug them by making small changes in your habits. For
example, if you're taking soft drinks every lunch at the cafeteria
every work day, you probably spend at least P10 each time. That
adds up to P50 a week, P200 a month, and P2,400 a year. If you
weren't spending this extra money on lunch and take water (not
bottled water!) instead, you could use it to help reach your financial goals, such as paying
for that personal computer or that bicycle which could in turn save you some more money
compared to renting at Internet cafe or riding a tricycle for those short trips. Make a plan for
controlling unnecessary spending with the Plug Spending Leaks Worksheet.

Shop Smarter

Shop smarter

Yes, you can stretch your money by shopping smarter. Here are some tips to help you
stretch your money.
 The best way to stretch your money is to plan ahead. Make a list of what you need to
buy and avoid impulse buys by sticking to the list. Just because an item is on sale
doesn't necessarily mean it is a good deal for your family. If you won't use it, don't
buy it.
 Try to keep a mental count of what you have in the house so you won't stack up on
items you should not stack up. You could use the money better on other necessities.
 Buy items before you run out of them. Buy at clearance or sale price instead of
regular price when you must have the item. Buying from your nearby sari-sari store
is more expensive than from the grocery store.
  Your emotions affect your shopping. Be careful of the "I deserve it" mentality and
avoid the expensive brands and the so-called lifestyle products.

Be wary of the power of advertising

Consumerism (the relentless effort of producers and

advertising company to equate personal
consumption to happiness, thus more consumption
means more happiness) is on the rise and some
words should be said about its most important tool -
Advertising. Advertising companies have known for
years that the average consumer is like a zombie
when it comes to buying products. They know what
buttons to push to create a mindless consumer.
They are very good at taking your money or shaping
your buying habits. The idea is to get you to buy
anything whether you need it or not. More sales
create more profits.

Get into the habit of thinking of what the advertiser is trying to sell to you with the
advertisements. Buy the products or services because you need them and not for what the
advertising company framed your mind that you need it. Note that to sell a product at a
higher price is to sell it as a part of a certain lifestyle, or for services as experience. This
technique works almost all of the time so be very wary about anything sold as lifestyle or as
experience. So take away the name brand, the catchy slogan and the showbiz
endorser, and ask yourself if you need that product.

Stop reading magazines covered with advertisements for things they want you to buy or
articles about shopping and the latest fashions, gadgets, cosmetics, etc. you should have.
Or at least stop believing that you really need these things or that they will make you happy.
Realize that you probably already have all that you need to live a happy life and if things
need changing, shopping is not going to help in the long term. When you do go shopping,
take some time beforehand to make a list of what you want, then narrow them to what you
really need, then cross out the things you can do without for a while or can be borrowed
from a friend then go shopping - and stick to your list!

Look at these advertisements and ask yourself how the

advertisements shape your decision to buy the
advertised products:

Poor: Saving on my daily expenses is too small to make

a dent.
Better: Keep track of your daily expenses and plug the
spending leaks.
Coffee: The coffee experience.
Cigarettes: You are macho if you smoke one
 Cellphone: Everyone should have a cellphone and there is one for your lifestyle
Jeans: You are "Cool" and "In" if you wear this brand. This brand has become a status
symbol for the one wearing.

Unit 3: Saving and Investing

Objectives

At the end of this lesson, the student is able to:

 Calculate personal emergency fund

 Calculate monthly personal savings amount based on
the 10% rule
 Explain the four choices with money
 Identify ways to invest money on
 Explain the risks related to investing and saving
 Understand the effect of compounding interest to debts
and savings/investments

Pay Yourself First. The 10% Rule

Lack of savings is the biggest reason why people are

having financial troubles today. Make sure you avoid
this problem that has affected many people of your age
and even many mature people as well. Save first and
then live within your means. A simple formula that best
describes the virtue of financial responsibility.

Saving money is not easy, but it's essential to achieving

financial independence and to securing your future. Every
time you receive your salary, save at least 10% of that
money before spending money on anything else. You
then learn to live on 90% of your income and you can start
by working out a spending plan based on the 90% salary. 

You can start now by setting aside some money of your

income and start building up for your short- and medium-term goals. If you receive salary on
an ATM account, you may choose to draw out only the 90% of your salary and leave the
10% as your savings. In this way, the money never hits your pocket, so you won't spend it.
As you accumulate your monthly savings in your ATM, move the money to another bank
account that offers some interest.

Save For What?

You should think about the money you save as falling into three categories: money for an
emergency fund, money for short-term purchases, and money for long-term goals.

Saving for an Emergency. The first savings goal you should establish is setting aside
enough money to cover your basic living expenses for three to six months. This money
should be kept in an easily accessible savings account in a reputable bank with a branch
close to where you live or work and not in a long-term investment asset like real estate. Use
this money only in the event of an emergency, such as receiving unexpected medical bills
or losing your job.

To calculate how much you'll need to save for your

emergency fund, download the Emergency Fund Worksheet.

Once you've established an emergency fund, you can begin

saving money to reach other goals, such as buying a personal
computer or other household appliance, acquiring your dream
house or a new car, getting married, funding your child's
education, or establishing a retirement fund. To learn how to
set and achieve financial goals, move on to the next
module: Setting Financial Goals.

Other ways to make saving money easier include putting away raises, bonuses, and tax
refunds.
Poor: Spend first and then save whatever is left.
Better: Save first and spend what is left.

THE FOUR CHOICES WITH MONEY

When you have money at hand, you have basically four choices
on what to do with the money:
1). Save (for emergency fund and to finance your short,
medium, and long-term goals);
2). Spend (this is the money that you are planning to spend
soon).
3). Donate (to your favorite charity that promotes the common
good but start by helping your parents and siblings first,
especially to help them finish their studies);
4). Invest (to gain interest and grow wealth in the long term).

Investment is the ownership of real estate and financial assets. Examples of financial
assets are Treasury Bonds, stock certificates, etc.

 When these assets are purchased, risks are assumed in exchange for anticipated
returns.
  These assets must mature or be sold to realize returns or capital gains.
 Interest: The time value of money

SAVING AND INVESTMENT INSTRUMENTS

Two ways that allow your saved money to grow over time.

COMMON SAVING INSTRUMENTS:

1. Regular Savings Account
It is money deposited in a financial institution, like a bank, that earns interest.
• Liquid depositors can withdraw money when needed
• Used by most savers for short-term needs
• Earns almost nothing
from interest (at 0.5% p.a. compounded quarterly).

2. Checking Accounts
These are combined features of a regular savings account with features of a
checking account.
These accounts, which may also be called money market savings accounts or MMSAs,
allow you to earn interest on your savings. You may also be able to write checks from your
account or access funds with an ATM or debit card.
Pros
 Money market accounts can offer better rates than other types of bank savings accounts.
 You may be able to write checks from your account or access your money using a debit or
ATM card.
 You can open money market accounts at traditional banks or online banks.
Cons
 A higher minimum deposit may be required to open a money market account.
 Interest rates may be tiered, meaning you’ll need a higher balance to earn the best rates.
 Banks may charge a monthly fee for money market accounts.

3. Term Deposit Account

It is time deposits wherein you agree to leave your money in the account for a set
period.
• Offers above-average interest rates for savers pursuing short- or longer-term goals.
• Withdrawing before its maturity date may trigger an early withdrawal penalty.

4. High-yield savings accounts

It is typically found at nonbanks, quasi banks, and online credit unions—are savings
accounts that offer a higher Annual Percentage Yield compared to regular savings
accounts.
• This type of savings account may be appealing if you’re comfortable managing your
account via website or mobile banking.
• This account typically has lower minimum deposit requirements to open an account.
• You may or may not have access to your money via ATM, depending on the bank.
COMMON INVESTMENT INSTRUMENTS:
1. Stocks
A stock is an investment in a specific company. When you purchase a stock, you’re buying
a share, or a small piece, of that company’s earnings and assets. Companies sell shares of
stock in their businesses to raise cash. Investors can then buy and sell those shares among
themselves. Stocks sometimes earn high returns but also come with more risk than other
investments. Companies can lose value or go out of business.
How investors make money: Stock investors make money when the value of the stock
they own goes up and they’re able to sell that stock for a profit. Some stocks also pay
dividends, which are regular distributions of a company’s earnings to investors.

 2. Bonds
A bond is a loan you make to a company or government. When you purchase a bond,
you’re allowing the bond issuer to borrow your money and pay you back with interest.
Bonds are generally considered less risky than stocks, but they also may offer lower
returns. The primary risk, as with any loan, is that the issuer could default.
How investors make money: Bonds are a fixed-income investment because investors
expect regular income payments. Interest is generally paid to investors in regular
installments, typically once or twice a year, and the total principal is paid off at the bond’s
maturity date.

3. Mutual funds
If the idea of picking and choosing individual bonds and stocks doesn't appeal to you, you’re
not alone. In fact, there’s an investment designed just for people like you: the mutual fund.
Mutual funds allow you to purchase many investments in a single transaction. These funds
pool money from many investors, then employ a professional manager to invest that money
in stocks, bonds, or other assets.
Mutual funds follow a set strategy. A fund might invest in a specific type of stocks or bonds,
like international stocks or government bonds. Some funds invest in both stocks and bonds.
How risky the mutual fund is will depend on the investments within the fund. 
How investors make money: When a mutual fund earns money, through stock dividends
or bond interest, for example, it distributes a proportion of that to investors. When
investments in the fund go up in value, the value of the fund increases as well, which means
you could sell it for a profit. Note that you’ll pay an annual fee, called an expense ratio, to
invest in a mutual fund.

Savings and investments can produce income from interest and dividend payments.
These payments become income and are tracked on a person's budget worksheet. The
money is "working" and earning income. The additional income allows the person to
increase savings.

Wealth-creating assets grow in value as market prices rise. Until the asset is sold, the
increased value does not affect a person's income; thus, it does not impact the budget
worksheet. However, the higher value adds to a person's wealth by increasing the asset
side of the balance sheet.

Manage Risk
The reward of interest or growth of value is accompanied by risk. Risk is the
possibility that savings or investments will lose value over time rather than gain
value. There are four known risks related to savings and investments: risk of default,
risk of falling market price, risk of lost purchasing power, and risk of liquidity.

 Risk of default. If the institution or agency fails to repay the original amount of the
investment, the entire amount can be lost.
 Risk of falling market price. When the asset is bought and sold in an open market,
the price can go up or down.
 Risk of lost purchasing power. If savings do not grow more quickly than the rate of
inflation, the saver is harmed.
o Inflation is the rate of increase in prices over a given period of time.
 Risk of liquidity. The difficulty to be
 able to convert the investment quickly or easily to cash by selling the asset.
 Generally, the higher the risk of losing money, the higher the expected return. For less
risk, an investor will expect a smaller return.

Unit 4: Setting Financial Goals

Objectives
At the end of this lesson, the student is able to:

 Create a list of goals in 3 categories: Short-term, Medium-

term, and Long-term Goals
 Understand investing options to support long-term goals

Set Financial Goals

You have already read about financial goals earlier in this course
and we now go into developing one. You start with a list of things
you want to get (goals). Maybe buying a personal computer, or a
used car perhaps. Whatever goals you want to achieve, you have
to write them down as a list and label each of them in three
categories as short term, medium term, and long term.

 Short-term goals might include buying a new computer,

paying off a big debt of money you owe someone, or to
help send one of your siblings to school.
 Medium-term goals could be purchasing a car or going
back to school.
 Long-term goals might be to buy a house
and lot or retire with enough money to
live comfortably.
Be Smart About Your Goals
Try to set SMART goals, meaning goals that
are Specific, Measurable, Achievable, Realistic, and Time-bounded. Make sure you
prioritize your goals. Which ones are the most important to you? Work toward achieving
these goals first.

To help you set your goals, download the Smart Goals Worksheet.

Unit 5: Managing Debts

Objectives

At the end of this lesson, the student is able to:

 Understand what makes excessive consumer debts bad

 Differentiate long-term investment from consumer debts
 Calculate your maximum consumer loan monthly
repayment level
 Make a get-out-of-debt plan
 Determine the cheaper sources of quick loan

Be Wary of Consumer Debts

Most young people get into debts to buy gadgets, fashion

accessories or expensive clothes and there are all sorts of
offers to get those items on a loan basis payable by
monthly installments.  These are called consumer loans.
Often these loans are unsecured, and the credit company
charges above-average interest. Try to avoid this kind of loan
and consider saving the needed amount first and then buy the
item in cash. Consumer debts with young people easily pile up
and leave them with little money left from their salary.

Consumer debts should be avoided because the items you have

acquired won't increase in value over time. These include
balances you owe on credit cards and other personal loans. But
there are other types of debts like mortgages and student loans, which are considered more
favorable than others. That's because these loans potentially have long-term benefits, such
as eventually owning a house or working in a profession that requires a degree. Some
consumer debt may be necessary, but too much is bad to your financial future. As a rule of
thumb, your total loan repayments should not exceed 20% of your take home pay.
You have too much Consumer Debt if...

The list below can be used as warning signals

that you are already carrying (or close to) too
much consumer loans. If you find several items
from the list which describe your situation, then
you really have to try to reduce your debts:

 You spend more than 20% of your paycheck

to pay off car loans, credit cards, or other
types of consumer debt.
 You're borrowing to pay off other debts.
 You don't know how much money you owe.
 You make only minimum payments on each bill.
 You miss payments or you pay your bills late every month.
 Creditors are calling you.
 You're being refused an extended credit or additional credit.
 You use credit cards to pay other monthly bills.
 You write postdated checks.
 You must take an extra job to pay your bills.

Debt Recovery

Always keep in mind how much debts you have and at what level of interest they are. As
soon as you realize that you are carrying too much consumer debt, move to stop the
bleeding by making a get-out-of-debt plan and stick to it as best as you can.

To create a get-out-of-debt plan, use the Debt Recovery

Worksheet to help you organize your plan. Focus first to pay
off the loan with the highest interest faster and then move to
the next loan. Although every creditor must receive a
payment each month, put any extra cash toward the debt
with the highest interest rate.

Debt Management Ideas

By combining financial planning with debt management techniques, you can reduce your
debt with the following:

 Cut expenses. Try to identify a few things you could stop buying or buy less often.
For ideas, review Know Where Your Money Goes and Shop Smarter.
 Assess your ability to pay bills as you develop your get-out-of-debt plan and
then take the appropriate action.
o For example: If you bought a motorcycle and are having trouble making the
payments, it may be better to sell the motorcycle and pay off the loan rather
than let the creditor repossess the motorcycle. Repossession will hurt your
credit record.
 Try to increase income. Is it possible to get a second job or get paid overtime and
use the money to reduce debt? If you have family responsibilities, first consider what
effect could your absence have on the well-being of your family.
 When one debt is paid off, keep paying the same amount - just put it toward
another remaining debt.
 If you are keeping several credit cards, keep only one credit card. Cut off the
other cards and call the credit card companies to cancel the accounts. Keep the
remaining one at home (if they won't be used by anyone else). You can also
consider having the credit limits lowered.

To use your credit cards wisely, keep in mind these tips:

 Use only one card.

 Keep track of what you charge. This way,
you won't be shocked when the statement
arrives.
 Save money for big-ticket items instead of
putting them on a card. If you must borrow for
that item, less expensive loans usually are
available from banks and credit unions.
 Pay credit card bills as soon as they arrive to avoid late-payment fees. Always
pay more than the minimum balance due. If possible, pay off the entire balance each
month.
 If the balance begins to increase, quit using the card for a while.
 If you still use the card and the balance continues to mount, call the credit
card company and request to have the credit limit lowered.
 Use a low-interest-rate card, preferably with no annual fee. Take note that
Purchase Orders (P.O.) issued by department stores tend to charge the highest
interest rates.
  Be wary of cards that offer extremely low interest rates "for a limited time."
Frequently, when the "limited" time expires, a new interest rate is charged, and it
may be well above average.
Often, it is convenient to have a clear idea of where one can get a loan
for some specific needs that must be addressed immediately. A
compilation of various loan sources is included here. Pay attention to
the interest rate and the period to full payment required. Different loan channels charge
varying amount of interest rate and varying basis for period.  To properly compare the loan
interest rate, we will do an annualized percentage rate or "APR". The most expensive is
"Bombay" and the least expensive is the salary loan from SSS or Pag-ibig.

Sources of Filipino Loans

A comparison table of common sources of loans for Filipinos

Loan option/loan Time to

  Typical interest rate APR Some notes
window release
Payments collected
Bombay (1-10 20% per 2 months. 2 daily Popular
1 One day 120%
thousand pesos) months to pay among small-time
business people
Will require
4% first month,  6% jewelry or other
Pawnshop (up to 80% for succeeding valuables as pawn
2 instant 48%
of pawn item value) months. 1 to 4 months items. Pawned item
to pay will be foreclosed
after 6 months.
Open to
Credit Cooperatives 2% per month. 12
3 One day 24% cooperative
(Salary loan) months to pay
members only
Requires collateral
Lending Companies 10% per 2 months. 60
4 One day 60%
(salary loan) days to pay.
Usually ATM card
6% surcharge on
Credit card (cash 3.5% per month. 30
5 instant 42% due amount per
advance) days to pay.
month
14% per annum. 12 Requires guarantee
6 Bank (salary loan) Few days 14%
months to pay from employer
Requires minimum
SSS or PAG-IBIG 21% per 24months. 2 number of monthly
7 Few days 10.5%
(salary loan) years to pay payments. Usually
2 years.
Note: This table was compiled for the purpose of comparing various loan options. While
efforts were exerted to show accurate data, the figures presented here are not the official
rates of the institutions mentioned. Compiled: May 2009.