Create a Financial Plan in 1 Hour with a Money Map
For most people, financial planning means talking to a paid professional and getting this “expert” to tell them what to do with their money. Which is why most people don’t do financial planning. they believe that they can’t afford this expert, or they aren’t experts themselves.
But we can do financial planning. This doesn’t mean listing “wishes” and “hopes and dreams” and unrealistic budgets that you can’t follow. Let’s face it – we all have weaknesses. This is why we should set up automatic, hassle-free systems to work around these weaknesses. One way to do this is by creating a money map. The objectives of the money map are the following:
- Automation. If you’re employed, notice how your employer automatically deducts your tax payments and SSS payments? You can do that for your savings and bill payments as well. After setting this up, don’t have to think about setting aside money for savings, or for paying some of your bills.
- Simplicity. You don’t have to decide what happens to your income once it arrives. You’ve already pre-decided. Just make the necessary calculations everytime new money comes in and send them to the right accounts (15% goes to this, 25% goes to that, etc.).
I first encountered this idea from this article by Ramit Sethi in The 4-Hour Workweek Blog. Normally, I’d just point to the article and tell you to read it there, but a lot of the principles there don’t apply to the Philippine banking system.
Note: I am not affiliated with any of the banks, companies, or accounts I mention. These mentions are limited from my own experience, and I encourage you to add comments here about your favorite banks and banking solutions that are similar to the ones I mention.
I tried this exercise myself, and here’s the money map I came up with:
Click the image above to see a larger version in a new window
How do you make your own money map?
Read MoreDoes More Knowledge Mean More Money? Uhm, No.
The last informative article I wrote for Frugal Pinoy was published last October 2010. And the post before that was published February of the same year. Out of the 365 days last year I only published 10 posts. Because of this sporadic posting schedule, I’ve received a few comments and emails from readers about how I’m not posting enough for them. Some even step in and make excuses for me, like: “Hey, your last post was in February, maybe you’ve been busy.” But most people who write in let me know that they want more tips.
And this is where it gets tricky. Of course I want to give readers as much information as possible. I could even post something new twice a week here at Frugal Pinoy to keep readers coming back. This would be beneficial to me too – the more pages I have on this site, the higher my chances of getting paid for the ads I place here. I could even get better offers from advertisers and make more money.
So, posting more tips here at Frugal Pinoy sounds good for everyone involved, right? You get your tips and I may get more money if I play my cards right.
Well, no.
The truth is that it doesn’t matter whether I post once a year or once a day. What really matters is what you take away from whatever you find here. More importantly, have you acted on any of the financial tips you’ve read here or anywhere else? Which of the following tasks have you done:
- Have at least a 6-month emergency fund
- Start investing your money, even at least P5,000.
- Compute how much you need for retirement.
- Taken one concrete step towards one of your financial goals (such as starting a business, automating your savings, tracking your spending, etc.)
More Information ≠ Better
We often assume that the more we know about something, the better our decisions will be. This can be true to some extent – gaining more knowledge isn’t necessarily bad – but constantly accumulating information can have diminishing returns. Or even no returns at all, if you don’t act on it.
Most of the time, we feel like we have to know everything about something before we can get started. This seems to be especially true of money. To start investing, we think we need to stare at dozens of historical stock charts and watch Bloomberg or CNBC all day. To start saving, we think we need to study accounting or know the details of every type of account available in all the banks in the Philippines. We want to get things perfect. But if we do all these things, if we focus too hard on becoming an expert, all we’ll have is a collection of facts in our heads with nothing to show for it in our bank accounts.
I agree that we need to learn about money, but we don’t need to learn much to get started. We can start with the basics we already know about (“Don’t spend more than you earn” or “Pay yourself first”) and act NOW. When it comes to money, acting as early as possible is key. Usually, the earlier you start earning extra income, investing, or saving, the more money you’ll have in the long run.
Now that we’re well into 2011, past the hopeful irrationality brought by our unrealistic New Year’s Resolutions, let’s all strive to take concrete steps towards our financial goals. They don’t have to be big steps, they don’t have to be extraordinary. One simple step will do. Here are some examples:
- Automate your savings. Some banks allow you to automatically deduct funds monthly from your payroll account to a savings account. Ask your bank if they have a service like this. Since you don’t have to think about it too much, this automatic savings system can help you reach your savings goals faster.
- Take 10 minutes to evaluate your subscriptions. Note how much you are spending on newspaper subscriptions, gym memberships, a post-paid cellphone plan, and other similar subscriptions. Add up these monthly expenses to see how much you spend each year. If you’re spending more than you’d like, maybe it’s time to trim down these expenses.
- Put up a used item for sale on eBay or Sulit. This could be a used book, movie, gadget, or furniture.
These are just examples. If you pick just one from this list – especially from the first two – you would’ve made a dramatic change already. And getting either of these items done takes less time than reading all the Frugal Pinoy articles on saving.
So more information doesn’t necessarily mean more money. It’s our informed actions that will actually help us get rich.
In the past week, did you take any steps towards your financial goals? Share them with us.
Read MoreAre You Part of the Sandwich Generation?
The photo above may look yummy, but once you get behind the metaphor it isn’t so appealing anymore.
What is the sandwich generation? Basically it’s the people who are financially caring for their retired parents while they are also financially providing for their children. In other words, they are financially “sandwiched” between two generations that can’t provide for themselves. It’s a relatively new term, which just made its way to the Merriam-Webster Dictionary in 2006. Though the term originated in the US, it’s a common phenomenon here as well.
But how does this happen?
Read MoreThe Stages of Personal Finance
When you say you want to be better at handling your money, what does that mean? The answer to this question depends on the person. It could mean early retirement, higher income, more savings, and a variety of other things. But is financial improvement merely a numbers game? What do you aim for if you’re unclear about how a certain lifestyle will cost? Surely there must be other ways to measure improvement.
Because of this, I prefer to think of financial growth in stages. It doesn’t include a specific net worth amount, nor a minimum income level. After all, there’s no such thing as “one size fits all” when it comes to personal finance. What exists instead are different psychological and emotional stages, and the numbers corresponding to them vary from person to person. What I’m measuring in this case is one’s sense of comfort, freedom, and security which, frankly, is more telling than the numbers themselves.
So what are the different stages of personal finance?
Stage Zero: Ignorance
Why start with zero and not the number 1? Well, because zero is what’s going on here. The idea of handling money hardly makes a blip on your radar. Not to sound too harsh, but stage zero is the stage where you are ignorant about money. That’s okay, everyone starts here.
While you may know about saving or investing, you’re not really doing them. You feel like you should save or at least do something about your money, but this thought soon disappears as you go back to your daily life. You don’t know how much your monthly expenses are, either. If you’re unlucky, you’re already in financial trouble but are vaguely aware of it. If you’re lucky enough to avoid trouble, this is mostly because of chance. Any minor event such as a toothache or “therapeutic shopping” is bound to rock your financial boat.
Stage One: Awareness and Action
Finally, you’ve realized that it’s time to take control of your finances! You start asking around, reading books, and learning all you can about how to do things right. Then, you actually do something with this new information.
If you have debt, you’re creating plans to reduce or eliminate it. At this point you are also forming new habits such as getting your spending under control and managing your money. If a lot of damage has already been done, you may be far from financial stability – but at least you’re taking steps towards it.
Stage Two: Stability
By this time your actions have paid off and you’re taking consistent measures to keep it that way. You have no debt, or if you do, it’s completely under your control. You have an emergency fund that is suited to your needs, and you’re on track when saving or investing for retirement. Your income is also consistent and you spend less than you earn. You may even be sleeping easier.
Stage Three: Freedom
In this stage, you’re earning passive income that’s equal to or greater than your living expenses. You don’t have to rely on your job to live. Where are you getting this passive income? It could be from a business that you’ve invested in but don’t personally run, stock dividends, or the sale of information products (such as ebooks). The only downside is that because of the high level of knowledge, time, or capital needed for this stage, not everyone ends up here.
What stage of personal finance are you in right now? What stage do you hope to be in by the end of the year?
Read MoreDay#25: Make a financial plan for your future.
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:
Read MoreDay#24: Write down your ideal income and expenses.
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?
Read MoreHelp Iligan and CDO
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