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?

1. List the dates you get paid.

For employees who get paid twice a month, this is usually on the 15th and the 30th.

2. List all your utilities/bills and the payment due dates for each.

This depends on your utility providers. For example, Meralco’s deadline is usually on the 7th, PLDT is on the 30th, and Manila Water is on the 16th. Also, make some notes on their “rules”. Your list may look like the following:

• Meralco. Deadline: 7th. Notes: Must be paid asap, because they disconnect service if you haven’t paid for the month. Payments can’t be automated because you have to enter a code each time.
• Manila Water. Deadline: 16th. Notes: They disconnect if you don’t pay for 2 straight months. Payment amounts are variable but don’t exceed Php 200.
• PLDT. Deadline: 29th. Notes: They disconnect if you don’t pay for 2 straight months. Payments can be automated monthly from bank. Payment amounts are usually the same, unless I make overseas phonecalls.

Note: Don’t forget to include other regular payments you make, including rent, credit card payments, tuition, insurance, educational plans, homeowners’ association fees, memberships, etc.

3. Schedule utility/bill payments at least 2 to 5 days before the deadline.

You then use your bank’s online banking facility to make scheduled payments shortly after you’ve receive your last paycheck, but before the usual deadline. For example:

• Meralco. Payment Schedule: the 3rd day each month. Not automated.
• Manila Water. Payment Schedule: the 3rd day each month. Automated.
• PLDT. Payment Schedule: the 17th day each month. Automated.

4. List all the things you are saving up for, and how much you can afford to set aside for them each month.

For me, this includes long term savings such as my house+farm fund, retirement, and savings for when I have children. This also includes short term savings like my emergency fund, travel savings, Christmas savings, and driving lessons. Example:

• Travel. Can set aside P2,500 per month.
• Emergency fund. Can set aside P2,500 per month.
• Retirement (aside from SSS). Can set aside P5,000 each month.

5. Schedule automated savings payments 2 to 5 days after you get paid.

Philippine banks now offer automatic transfers from one of your accounts to another. This means that if you have a paycheck account and a savings account in one bank, you can easily schedule monthly automated transfers. You no longer have to actively think about saving. As long as your computations are right, you’d be able to stash away savings easily each month without thinking about it.

(Some examples: BPI has a product called “Save Up” that does this, and other banks like UnionBank let you schedule recurring funds transfers between your accounts.)

But, as far as I know, I haven’t seen banks that offer automated transfers to your accounts in other banks. This can be difficult for those who have their paycheck account in one bank, and a savings account in another bank. Here are some alternatives:

• You can consolidate all your accounts – savings, paycheck, credit cards, and extra savings accounts – in one bank. This is assuming that the bank is reliable, allows online banking, and has great customer service. (Let me know if you find a bank like that :p )
• You can settle for bank-to-bank transfers that aren’t automated. Just put the schedule in your phone or calendar and set a monthly reminder about the deposit. Unionbank’s EON account allows you to do bank-to-bank transfers online, though it’s not automated, and you have to enroll in the service first.

6. Separate your expense account from your savings accounts.

This is crucial. Make sure that your bank account for your emergency fund, retirement, and other savings is separate from your expense account. This “expense account” is for your guilt-free, not-necessary expenses for the month. Your expense account is for the following:

• Leisurely expenses like going out, dining out, etc.
• Groceries, both food and non-food items.
• Transportation expenses.
• Gifts, hobbies, and other unnecessary expenses.

This could be the same account that you use to pay your bills, but if you have a tendency to spend your money before you pay the bills, they should be separate too. (Huwag kayo mahiya. I have to keep my expense account separate from bills and savings. It’s okay to admit that we have low self-control for certain things and need to keep expenses completely separate. This helps us set up systems to work around this weakness – that’s what this article is for.)

7. Schedule your investments.

If you’ve started investing your money rather than just saving it – good for you. But you can schedule your investments as well, especially if you reinvest often or practice principles such like unit cost averaging (which basically means you reinvest a specific amount regularly, whether it’s monthly, quarterly, or yearly).

Note: Again, if you can’t make automatic, recurring payments from your paycheck or savings account to your investment accounts, then at least schedule a reminder for it on your phone, or use an email reminder service if you check your email daily. (I use Google Calendar or Followup.CC for this, but other reminder services include MemoToMe and FollowUpThen.) The same goes for any other payment you can’t automate – at least set automatic recurring reminders.

8. Put this money-map to work and set up the schedules with your banks.

Of course, a money map on a piece of paper is nothing but an idea. You need to bring this idea to reality by actually checking your accounts (usually online) and making the necessary payment schedules yourself. You need to ACT on the principles outlined in your map. Call up your bank and ask them if they have automated savings programs, or if you can make automated transfers from one bank to another.

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.

Image by juliaf from sxc.hu

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?

First, most retiring Filipinos aren’t financially independent. According to a recent study by Sun Life, 45% of retirees become a financial burden to their relatives, 30% are dependent on charity, and 22% continue to work even after retirement.

Our culture’s attitude doesn’t help either. We feel compelled to repay our “utang na loob” to our parents, even if it’s more than we can afford. It doesn’t stop at parents either – sometimes you will be socially pressured to help out your “less fortunate” relatives, even if some of them fell into misfortunes that they created for themselves (such as excessive gambling, lack of will to find employment, etc.)

At the same time, it’s you will have to provide for your own children. Everyone knows that raising children can be expensive, especially if you want to provide them with the best medical care or send them to the best schools.

Now, the sandwiched person may earn enough to pay for both the needs of their parents and their children, but there’s often a cost to this. Usually, they don’t earn enough to also set aside money for their own retirement. At this point, it becomes a cycle and their children are doomed to feel “sandwiched” too when they become adults.

Breaking the Cycle

Here’s the sad thing: I know that when I have children, I will be part of the sandwich generation. But I don’t want it to become a cycle. When they grow up, I want them to worry about their own needs and even have the money to enjoy themselves a little more. I do not want to burden them.

There’s little that a sandwiched person can do for their parents if they are already retired. Maybe you can improve their health care coverage and set up an emergency fund for them. But if they live long lives and have no money for retirement, they will be financially dependent on you for a decade or two.

As for your children, there are ways to prepare for them financially. My partner and I will be saving up a certain amount as a “children’s fund” for our future kids so that we can pay for all the financial emergencies that come up within the first two years of having children. These include visits to the doctor, immunization, diapers, clothes, and other needs.

There are also educational plans, insurance, and other available vehicles that will allow you to plan for your children better. By having the money for your children before they arrive, you’ll be saving yourself from debt and a whole lot of headaches.

In other words, the key is to make a financial plan before your parents retire and before your kids arrive. Create a spending plan and account for major expenses. This will put you in a better position that will equip you to handle expenses for both parties.

More importantly, you need to earn more. Only by increasing your income can you also set aside enough money for yourself when you retire. After all, who wants to have their children go through the same problems and unnecessary stress?

Are you part of the sandwich generation? Feel free to share your experiences with other readers in the comments.

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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?

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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 #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 #14 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:

Financial health isn’t just about the numbers, it’s also about organization. You need to keep your documents handy so that you can pull them out easily whenever you need to refer to them, rather than go on a week-long excavation.

Today’s Task: Organize Your Financial Paperwork

First, some general tips:

• You don’t need to buy accessories. Look for any old boxes, manila envelopes, and folders. You can start with those. My first financial document storage system was just my old collapsible folder from high school.
• If you don’t have the time to organize all your paperwork in one day, take baby steps. Taking even the smallest actions every day until you’re completely organized is better than putting off the activity forever.
• Be consistent. Once you start your system, stick with it. Don’t wait for bank statements and bills to accumulate. Store them properly as you’re done processing them. Doing this each time is better than going through half-organized, half-messy piles of documents later on.
• Purge regularly. Every two years or so, you can probably shred and throw away some of the documents such as bills, credit card statements, etc.
• In the end, do what works for you. Your organization system doesn’t have to be pretty, you just have to be able to pull out the right document in 2 seconds. Focus on what works rather than what looks neat or clean.

Here are some categories you can use to organize your files:

• Bills (you can organize them by company or by month)
• Bank statements and letters
• Home paperwork (title, deed of sale, real estate tax receipts, etc.)
• Receipt collection (if you’re tracking your monthly expenses this way)
• Investment paperwork (records of your investments, dividends paid, etc.)
• Credit card statements
• Insurance paperwork
• Tax-related documents
• Employment-related documents
• Paperwork for loans and other debts
• Family documents (wills, marriage certificates, birth certificates, etc.)
• Your IDs (passport, postal ID, etc.)
• Medical records

I only use some of these categories, but I keep all the documents in a single collapsible folder. Apart from the ease of finding documents, this will also make them easier to save during natural calamities and emergencies – I just have to grab one folder and I have all my important documents with me. The key, of course, is not to lose it. You should also keep photocopies of the most important documents (IDs, property titles, etc.) in a separate folder if you’re worried about losing the originals.

If you’ve already done this, feel free to share your tips and experiences in the comments section. Your suggestions may help other readers organize their own documents.

Image by yum from sxc.hu

Today’s Task: Compute your net worth.

Here’s the simple formula:

Total Assets – Total Liabilities = Net Worth

Now, let’s break it down a bit. Your total assets may include your home, car, and properties (if fully paid for). Your savings, cash, and investments also fall in this category. If you have expensive jewelry, artwork, and other valuables, you can include them as well.

You probably have some assets that are difficult to estimate. For your house, you can use the estimated worth listed in your real estate tax invoices (although these tend to be too low). For vehicles, you might use its possible second-hand resale price. It’s up to you how to estimate these things, but I lean towards choosing more conservative estimates so that I don’t get overconfident. Do what works for you.

Total liabilities on the other hand, are the things you owe. You can start with the simple things such as the current balance on your mortgage and other loans, your current credit card debt (including interest), and any amount you owe friends and family. Add up all these figures to come up with your total liabilities.

Once you’ve figured out both your total assets and total liabilities, use the formula above to compute your net worth.

If you want to do this automatically, you can use this online net worth calculator I made for FrugalPinoy readers. You can click “File > Download As > Excel” to save the calculator as an MSExcel file in your computer.

Why is your net worth important?

• It can be a great source of motivation. Trent of The Simple Dollar uses his net worth to watch his own progress and inspire himself to do better financially.
• It gives you a realistic picture of your finances. Since your net worth includes your income, savings, investments, expenses, and debts, it gives you a better idea of where you are financially. Instead of just looking at your income, you’re looking at the big picture.
• It allows you to make life plans based on your financial health. You may be fantasizing about retiring at 40, but it is realistic based on your current net worth? (The same goes for other major life plans such as starting a business, buying a house, getting married, etc.)

Remember that your net worth is dynamic. It changes over time. You can compute it as often (or as rarely) as you need. Although I have a spreadsheet that computes my net worth every time it changes, it’s not necessary for me to obsess about the number that often. Once or twice a year is enough for me. Just do what works for you.

If you’re young, don’t worry about having low net worth. As long as the number is positive, you shouldn’t stress over it. After all, you have a lifetime ahead of you to build it up. There might also be other reasons why your net worth is low – you put yourself through college, you send your siblings to school, you’ve just invested in a business, etc. These things might decrease your net worth a lot, but they give you a different, more intangible value in return (for now, at least).

Did you compute your net worth today? How do you feel about it?