This is Day #25 of “25 Days to Healthier Finances”, a series of blog posts where Frugal Pinoy readers and myself work on 1 task a day to make our financial lives better. Here’s today’s installment and the concluding article of the series:

Today’s Task: Make a financial plan for your future

Your ability to succeed financially for the rest of your life will partly fall on your ability to mitigate large, life-defining expenses. The more aware you are of your possible expenses while you’re still young, the better prepared you’ll be for them. Once you’re debt free and have reached your goals for your emergency fund, it’s time to think of the following things:

• Wedding. This is for the unmarried Frugal Pinoy readers out there. Even if you think you’re not going to get married or that you’re going to have the simplest wedding in the history of the Philippines, you can’t know this for sure. This is especially true if you aren’t even engaged yet. Saving up for it is better than spending your honeymoon worried about debt before your marriage has even really begun.
• House. Most Filipinos dream of owning a home. If you think this is for you, start researching ballpark figures of houses that are similar to the one you want. You don’t have to save up for the complete amount, either (though it’s ideal). At the very least, start planning for the down payment.
• Vehicle.
• Travel. If I only knew how much I wanted to travel I would’ve saved up for it more, especially since I prefer 2-week trips to weekend getaways. Having a travel fund – even if you have to replenish it regularly – allows you to take advantage of discount fares and accommodations as the opportunity arises. This way, you can enjoy your trips without worrying about money, and you’ll have more options available to you.
• Additional education. Want to take up a second degree or pursue higher education? If you’re planning to do this within the next 3 years, then save up for it now – especially if you’re planning to study abroad, where the cost of living is generally more expensive.
• Supplementary income source. These could include investments, businesses, or rental properties. Ventures like these require capital upfront. This is especially important since it relates to your income, and you won’t have to be dependent on your paycheck.
• Children. I’m lucky enough to be in the position to plan for a child (my partner and I will adopt) so there are no “surprises” along the way. I’ve observed firsthand how expensive having children can be, even if they eat very little for the first few years of their lives. Baby formula is expensive, so are medical expenses, clothes, and education. Speaking of education, it’s smart to start planning for that even before your children are born.
• Retirement. A bank teller once laughed at me for having a retirement at the age of 24. It’s not a laughing matter if you consider compounding interest. The younger you are, the more important it is to start your retirement fund no matter how small. Even P500 per month can starting now can become hundreds of thousands of pesos down the road. Use this compound interest calculator to try it yourself (don’t mind the dollar sign and don’t forget to take inflation into account by subtracting it from your interest rates).

Now, if you’re not yet debt free or if you’re still waiting to complete your emergency fund it doesn’t mean you shouldn’t prepare yourself for the above expenses. It might help to work on your financial plan for at least one of the above items as well.

How to Make Your Financial Plan

Drafting your financial plan can take a few minutes to a few hours, depending on how detailed you want to be. Among the items listed above, I’m going to pick “House” to use as an example. Here are the steps I’d take to plan buying a house:

1) Find out how much it costs, total. For the house, this includes the house and lot itself, fees for the real estate agent (if necessary), moving expenses, and other relevant fees. If you want to buy an existing house, factor in what repairs and maintenance costs you could possibly have – but only if you already have a specific house in mind and can compute these things accurately. In the house example, let’s pretend that the total costs are P900,000 (I know it’s cheap for a Metro Manila home, but it’s just an example).

2) Know the month and year when you hope to finish saving up for it and make this your deadline. Let’s say I want to have a house by January 2013. Having a deadline like this will allow me to factor in inflation, as well as any changes in my regular income or expenses.

3) Compute how much you need to set aside each month to save up for the complete amount by the deadline. Since I want the house by January 2013, I need to set aside around P25,000/month to have the complete amount by then.

4) Figure out if your monthly budget allows for it. If it does, great! You’re all set. If not, then you need to take a cold hard look at your income and expenses to see where you can cut spending or increase your earnings. Investing your money, engaging in part-time work, or starting a business may help you with the earning part. After all, there are only so few expenses you can cut back on, especially if you’re frugal to begin with. Just remember that normally, if you’re saving up for something you want to have/do within the next 3 years, you should pick more conservative investments. But with things you’ll need 10 or 20 years down the road (such as retirement), you can be more aggressive.

What major expenses are coming your way within the next few years? How are you preparing for them?

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This is Day #24 of “25 Days to Healthier Finances”, a series of blog posts where Frugal Pinoy readers and myself work on 1 task a day to make our financial lives better. Please stay tuned for the final installment of this series, which will be up tomorrow. Here’s today’s installment:

In the income and expenses spreadsheet I use (which I also refer to as my budgeting spreadsheet, though that’s inaccurate), I include an extra sheet titled “Ideal”. This sheet contains my ideal expenses and income. While you don’t need to use a spreadsheet, I think it’s important that we all have a written record of our ideal income and expenses somewhere.

Today’s Task: Write down your ideal income and expenses.

The first thing to do is to grab a sheet of paper (or create a new document in your computer) and write down your ideal income. It’s not enough to write the amount itself, also note where the money will be coming from. How much will come from your job? A side business? Investments?

Then, it’s time to come up with your ideal expenses. First, trim down your expenses on the things you don’t care or need to spend on. For me, that’s cable TV, transportation (I work from home), and dining out. Then, add the expenses that you do want. For example, I want to travel more next year, so I’ll increase the monthly amount I’ll put in my travel fund. I also want to save up early for the holidays in 2010 so I’ll add that as well.

Now, the problem with this “Ideal Income and Expenses” exercise is that many people might have unrealistic expectations of where their finances can go. Here are some guidelines to keeping it real:

• Only include ideal income from things you can control. Winning the lottery, projected returns from stocks and mutual funds, or receiving inheritance do not count. These things come from external forces you can’t control so don’t expect any sure income from them.
• If you have recorded your expenses and income consistently for at least three months, you’ll be able to make more realistic projections because you know your habits, needs, and wants better.

Now, why is this exercise important?

• You have a firm goal to aspire to. “Making more money” and “spending less on unnecessary things” are no longer abstract goals. You know exactly what they mean.
• Working backwards is more specific. By listing your final goal in this way, you’ll know exactly what you want and can work backwards to get it. You’ll also know how much money you need exactly for your ideal lifestyle. This can help you make the right choices when it comes to getting additional income.
• By preparing both your ideal expenses and income, you’re working with both ends of the spectrum. Most people just have goals for one aspect of their financial lives. For example, they want a specific income each month (“Sana P400,000 per month ang sweldo ko”) or they want specific lifestyle changes (“I wish I could afford to travel more” or “Sana may mas naitatabi ako for savings each month”). By noting both your ideal income and expenses, you know that these two work hand in hand. Without additional income, you might not reach your ideal lifestyle. Also, without taking a closer look at your expenses, you won’t know if you already have the means to reach your ideal lifestyle.

So this is what I’ll be doing today – preparing my ideal income and expenses for 2010. I hope you try it too.

What changes do you want to make when it comes to your ideal income and expenses? How specific are these changes?

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This is Day #23 of “25 Days to Healthier Finances”, a series of blog posts where Frugal Pinoy readers and myself work on 1 task a day to make our financial lives better. Please stay tuned for the next installment of this series, which will be up tomorrow. Here’s today’s installment:

It’s nearing the end of 2009 so it’s just the right time to look back on the past year and review our experiences – whether they are positive or negative.

Today’s Task: Do a financial review of your year so far.

Collect your documents. These would be your latest bank and credit card statements, payslips, and other documents that are relevant to your finances. If you have a budget notebook or spreadsheet, take those out too.

Get a pen and paper or open a new document in your computer. You’ll need to write down your financial review so that it’s concrete, and you can review it next year to see how well you’ve improved.

Note the following information:

• Debt status. If you currently have outstanding loans and debt, look at your most recent statements and see how much you still owe. How much longer do you need to repay all your debt?
• Income. How much gross income did you earn this year? How much is it after deducting taxes? Apart from the pay you get from your regular job, don’t forget to include any subsidiary income you received such as money from side gigs, selling, or investments.
• Savings. Look at the statements from your savings accounts. How much did you end up with this 2009? How are you allocating these savings? (In other words, how much is for your emergency fund, retirement, or other items?)
• Spending. If you collect detailed expenses like I do, look back at all the information you gathered last year. What major expenses could’ve been avoided? Where did you succeed in minimizing expenses?
• Investments. If you invest any money in bonds, stocks, mutual funds, or businesses, how did your investments do by the end of this year?

Your financial review can be as simple or as detailed as you want. You don’t need to jot down your month-by-month activity if you don’t have to. Just start with the basics above, and if something seems wrong or if there’s a specific part you’d want to improve for next year, that’s when you can choose to be more detailed. Also: if there are certain aspects of your finances that you’re not too proud of, don’t dwell on it! Just make an action plan to avoid making the same mistakes next year. Let’s keep this exercise positive.

Have you reviewed your 2009 finances yet? Which areas did you do well in? Which ones need more improvement?

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This is Day #22 of “25 Days to Healthier Finances”, a series of blog posts where Frugal Pinoy readers and myself work on 1 task a day to make our financial lives better. Please stay tuned for the next installment of this series, which will be up tomorrow. Here’s today’s installment:

For most people, it’s taboo or bad manners to talk about money. But sometimes, not discussing money properly leads to even deeper problems. For example, married couples often disagree on their financial status. In one survey, 86% of couples admitted that they regularly fought over money. Another survey revealed that more than 2/3 of Americans learn about money management from home rather than school. Whether we like it or not, discussing money with others has a significant impact on how we perceive or handle it.

Today’s Task: Discuss finances with a friend or relative.

Your discussion doesn’t have to be deep or complex. Here are some examples of some simple starting points:

• Ask an older relative what they wish they started saving up on when they were your age.
• Give your kids glass jars where they can collect loose change and tell them why doing this is important.
• If you’re interested in starting your own business, you can ask advice from a friend who has done it before.
• Ask your parents what they wish their parents taught them about money.
• Go on your social networking sites (Facebook, Friendster, Multiply) and make a post about how you’re interested in learning how to manage your money, invest, or whatever aspect of personal finance you’re most interested in. Ask openly if your contacts have any books or blogs to recommend.

Of course, before you start any conversation about money, assess your relationship with the person first. How close are you? What do you expect to gain from the discussion? Have you discussed finances in the past? If you’re having trouble gauging their comfort level , keep these pointers in mind:

• People are more open to discussing things like cost of living (bills, rent, etc.) and budgeting/planning methods rather than specific price tags on purchases or how much their salary and savings are. Ask “how” rather than “how much”. “Do you know a cheaper grocery store or market nearby?” is better than “How much do you spend on groceries each month?”
• Friends and relatives in the finance sector tend to be more open about these kinds of discussions, so if you have a close friend who works in that field, talking to them is a good start.

Why is this important?

For me, talking about money – especially with my partner – is an exercise in getting real. It allows me to express and evaluate my ideas about what money is and how I treat it as a resource. Without my regular discussions with my partner, I might not be as disciplined about managing my money well. Also, doing this can be a learning experience. I have some friends that I ask financial tips and advice from. They allow me to see things in new ways that I haven’t explored before. It’s certainly much better than keeping all your thoughts and ideas inside without the input of others.

How often do you talk about money? What is your experience with talking to your spouse or parents about it?

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This is Day #21 of “25 Days to Healthier Finances”, a series of blog posts where Frugal Pinoy readers and myself work on 1 task a day to make our financial lives better. Please stay tuned for the next installment of this series, which will be up tomorrow. Here’s today’s installment:

By now you’re probably feeling the stress of spending for the holidays – if you’re most people, that is. I’m sorry to say that I’m one of those people. Here I was, saving up for my emergency fund and retirement and before I knew it, it’s Christmas already. As for me, my main issue is that I often feel guilty about forgetting to send greeting cards to friends and relatives abroad. By planning early, I hope to avoid that, among other things.

Today’s Task: Prepare for the holidays – for next year.

That’s right, next year. So that we’re not caught by surprise, as well as be sure that we can afford the celebrations we want to have. While the holidays need not be expensive, they are an added expense that you often don’t see reflected in your monthly budget. But if we plan early, we can have worry-free holidays next year without worrying financially.

First, we need to budget our expenses for gifts, food, donations, and other items relevant to the holidays. This includes your noche buena, media noche, any possible potluck contributions. Cash gifts for the mailman, garbage collectors, and other community workers should also be included (so that you always have something to put in those yearly white envelopes they send out). I usually don’t decorate my house, but if it’s something your family loves to do then factor that in as well. Itemize your list, especially if there are specific gifts you want to give, or if there’s a particular dish you want to make.

Then, figure out a payment plan for that. How much money each month can you set aside for your “holiday fund”? How feasible is it? If you find that you can’t afford all of it, look for ways you can trim down the expenses. As you go through 2010, you’ll probably find new deals and ideas that can help lower your holiday expenses if your “ideal budget” doesn’t match what you can afford.

After the holidays, it might also help to compare your prepared 2010 holiday budget with what you actually spent this year. This will allow you to make realistic adjustments, especially if you underestimated your spending.

Finally, think of other special occasions you like celebrating. Your list might include birthdays, Valentine’s day, anniversaries. Plan for them as well.

How well did you prepare for this year’s holidays? Are you going to prepare for it next year?

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This is Day #20 of “25 Days to Healthier Finances”, a series of blog posts where Frugal Pinoy readers and myself work on 1 task a day to make our financial lives better. Please stay tuned for the next installment of this series, which will be up tomorrow. Here’s today’s installment:

Today’s Task: Maximize customer loyalty programs.

If you frequent particular malls, grocery stores, and other establishments, chances are you have some kind of customer loyalty card (or were at least offered one). Some examples of these programs include the Laking National Card, Mercury Drug’s Suki Card, and the SM Advantage Card. If you already have a customer loyalty card or plan on signing up for one, it helps to learn about the following things:

• Any partner establishments which will allow you to earn and redeem points,
• Expiration dates for membership and unredeemed points,
• Discounts and freebies you get with your loyalty card, and
• The availability of any additional opt-in services. (For example, the SM Advantage card allows you to opt-in for life insurance with 20 of your points.)

Many customer loyalty programs have their own web site, so a simple Google search can pull up the information you need. If this isn’t the case, the next time you’re visiting the establishment, request a brochure or flyer that can give you more info.

Of course, doing this only makes sense if you frequently go to that establishment and its affiliates. Otherwise, it’s going to be a waste of time. For example, it makes sense for me to get an SM Advantage card because I frequently go to SaveMore grocery, Makro, and Ace Hardware. If I only visit these establishments once or twice a year, it’s not worth the hassle.

Are you a member of any customer loyalty programs? How do you take advantage of it?

This is Day #19 of “25 Days to Healthier Finances”, a series of blog posts where Frugal Pinoy readers and myself work on 1 task a day to make our financial lives better. Please stay tuned for the next installment of this series, which will be up tomorrow. Here’s today’s installment:

Today’s Task: Quit an expensive habit.

We all have habits. Some of them are healthy while others can be destructive if we do them mindlessly. The truth is that some habits have negative consequences on our finances. While we can live with most of these consequences, there are some cases where we can’t afford them. Here are some examples:

• That (almost) daily morning coffee.
• Smoking.
• Going shopping as therapy.
• Sending forwarded text messages to your entire contact list multiple times a day.
• Dining out with family or friends during payday.
• Buying lunch from fast food chains rather than bringing your own lunch.

But how do you quit a habit? The first thing you should try is to figure out how much it’s costing you. How much do you spend on that habit per week? Per month? Per year?

After doing the math, find out if your income allows for this kind of expense. For example, when I was still a student, I noticed that I bought bottled water and other drinks each day during lunch. This cost me P30 per day, and since I was usually at school 6 times a week, this seemingly minor daily expense cost me at least P700/month. At that time I was probably earning only P9,000/month since I was just starting out as a freelance writer. I was also the breadwinner, which meant that the P700/month was more than I could afford for something as simple as water. Realizing this, I just brought my own bottle to school every day and refilled it at the water fountain.

If your expensive habit is something you can’t give up completely, then consider simply cutting back. Instead of the daily cup of coffee, why not reduce it to three times a week? Even this simple change can give you a lot of “extra” money which you can funnel into your savings, emergency fund, or an item that matters more to you.

What expensive habits do you have? Can you afford to have them?

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This is Day #18 of “25 Days to Healthier Finances”, a series of blog posts where Frugal Pinoy readers and myself work on 1 task a day to make our financial lives better. Please stay tuned for the next installment of this series, which will be up tomorrow. Here’s today’s installment:

Let me start today’s task with some background information about my main source of income – writing. I started working as a writer when I was still in college. I needed money to support myself and pay for tuition, but also needed a flexible schedule so I could attend my classes. Writing was my favorite hobby, something I did non-stop since I learned how to do it. Ever since I was twelve I’ve been keeping journals and writing notebooks as a habit. This made me think that maybe I should start doing that for a living. Something I truly enjoy. Something I’m obsessed about. Something I was doing anyway.

So I started working as a freelance writer. This has been my major source of income and I’ve never had the need to apply for a regular office job because of it. It feeds and houses a family of four, keeps me debt free, and allows me to have a stable emergency fund. Plus, it’s personally fulfilling.

Not bad for something that was “just a hobby”.

Today’s Task: Pick a hobby you can monetize.

Hobbies. We all have them. They can provide relaxation and escape, or they can become a lifelong passion. If you plan it well enough, it can be a source of income too.

List your hobbies, every single one of them, no matter how trivial or insignificant some may seem. Cooking counts, even if most people can cook. Yes, riding a motorcycle counts too, so does drawing. If you’re obsessed with a certain genre of books/film/music, there might be opportunities there too. If you like to collect things such as stamps, dolls, etc., that counts as well.

Then, looking at your list of hobbies, pick two or three that you spend the most time on. Explore and jot down ideas on how you can possibly monetize them. Here are some examples:

• Sell products and services related to your hobby. If you like making jewelry, why not try to sell some of your work via eBay or Sulit? Alternatively you can supply materials related to your hobby if they are hard to buy locally. I have a friend who made thousands of pesos from just selling special  Magic: The Gathering cards.
• Write a blog about it. Many people are now monetizing their blogs. If done well, your blog can become a great source of additional income (see The Personal Blogging Degree for more information on making money from a blog.)
• Teach others how to do it. This can be in a form of a class, a book/ebook that people can pay for, or even just a lecture or speaking engagement.When I was young my mother made extra income by teaching a baking class from our home, and I once got paid to teach a summer art workshop for kids.

Your hobby doesn’t need to develop into a complete business, buy you need to entertain (and act on) any urge you may have of monetizing it. Even a few hundred pesos each month won’t hurt, especially if you’re doing something you love anyway. Not everything you start will be successful, but you can always do enough research/planning/practice/testing to minimize that risk.

Have you ever made money from a hobby? How did it turn out for you?

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This is Day #17 of “25 Days to Healthier Finances”, a series of blog posts where Frugal Pinoy readers and myself work on 1 task a day to make our financial lives better. Please stay tuned for the next installment of this series, which will be up tomorrow. Here’s today’s installment:

When it comes to time and money, we usually focus on the things we have to do. Paying the bills, finishing up that report, cleaning the house. While these things are important, we should be equally mindful of the things we shouldn’t do.

Today’s Task: Know the things that you don’t care to spend on.

It’s simple. Just jot down the expenses that really don’t matter to you. Here’s a short list of some things that don’t matter to me:

• Dining out
• Watching most films in the cinema
• Clothes and accessories (as a side effect of rarely going out)
• Cable TV
  

Things that matter to me:

• Books
• Good quality of food
• Maintaining a solid but beautiful house
• Hobbies such as woodworking and gardening

What does this mean? By making the list of the things that don’t matter to you, you’ll know what expense traps to avoid. For example, why would I spend P500 to try out a new restaurant when I can use that money to buy high-quality ingredients for a home cooked meal? Or, why would I spend P200 to watch a movie in a mall dahil wala lang akong magawa, when I can usually buy 5 books with that at my favorite used books store? It’s like building a list of “not-priorities”.

You can also do this exercise for a major purchase so that you won’t be distracted. When buying a new car, this may be your list of not-priorities:

• Color
• Exterior design
• Quality of speakers

By making this list before you look at cars to buy, you won’t be distracted by the bells and whistles that don’t matter to you. You won’t go “Shit, panget pala gas mileage nito, nadistract ako sa sleek, chromed-up design.” Conversely, if the exterior design matters to you the most, you won’t be distracted by sales pitches about payment terms or storage space.

When we have limited resources, we need to know the things we can “sacrifice”, and the things we don’t care about should be the first to go. That way, we know that we’re left with the things that matter.

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This is Day #16 of “25 Days to Healthier Finances”, a series of blog posts where Frugal Pinoy readers and myself work on 1 task a day to make our financial lives better. Please stay tuned for the next installment of this series, which will be up tomorrow. Here’s today’s installment:

If you performed the task for Day 11 (computing your net worth), you already know how much your debt is. Now it’s time to try and eliminate it. Of course, those without any debt can skip this task.

Today’s Task: Make a debt repayment plan.

You’ll need some pen and paper, a calculator, and any paperwork referring to your debt (credit card statements, loan agreements, etc.) If you’re using a budget, it may come in handy too.

The thing about repaying debt is that there are many different ways to do it. There’s no such thing as “The Solution”, there’s only what works for you. Here are some common methods you should think about:

The Highest-Interest Method

1. Make a list of all your debt including credit cards, mortgages, and other kinds of loans. Remember to include personal loans such as money lent to you by relatives or friends.
2. For every item on that list, write down the following: remaining repayment balance, current interest rate, and the minimum monthly payment.
3. Spot the debt with the highest interest rate, then rank the rest of your debt accordingly. (The one with the second-highest rate is #2, the third-highest rate is #3, and so on.)
   
4. Any extra money you save or earn each month should be channeled to repaying the debt with the highest interest first until it is fully paid. Keep paying your minimum payments to your other debts, but the extra cash should go to the one with the highest interest debt until you’ve eliminated it from your list.
   
5. Repeat as needed until you’ve repaid all your debts.
   

The benefit of this approach is that it tends to be faster. If you have the discipline to do this, you won’t accumulate more debt via large interest rates.

The Debt Snowball Method

This method, popularized by Dave Ramsey, is a more psychological approach to debt repayment. Instead of paying off the loan with the highest interest rate first, you start with the one with the smallest balance. By crossing out one debt from your list, you’ll get an emotional boost and hopefully become more inspired to get out of debt. Here are the steps to do it:

1. List all your debt in ascending order, with the smallest balance first.
2. Each month, commit to pay the minimum payment on all your debts while channeling extra saved/earned money to the debt with the lowest balance.
3. Once you’ve paid off the first debt, the money that used to go to that debt (at least the minimum payment) should now go to repaying the debt with the second smallest balance.
4. Repeat until you’ve repaid all your debts.

Usually, if your debt with the smallest balance isn’t the one with the highest interest, it may take you longer (and a bit more money) to pay it back. The math just doesn’t side with the debt snowball method. But if you know yourself well enough to know that you’ll need the inspirational boost to cross off one debt from your list, then this is the approach to take.

Variations of the Above Methods

You can do a combination of both of the above methods, of course. One way to do it is to “snowball” your first complete repayment – pay the one with the lowest balance first. Once you’ve repaid that, maybe you can pay the rest of your debts according to their interest rates. Whatever happens, you must make the minimum payment for each debt each month. Otherwise, you’ll usually incur more interest and additional fees.

If you’ve gotten out of debt (or stayed out of it to begin with, like I have), please share your story with other Frugal Pinoy readers by submitting a comment.