Day#23: Do a financial review of your year so far.
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?
Read MoreDay#21: Prepare for the holidays – for next year.
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?
Read MoreDay#14: Organize Your Financial Paperwork
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.
Read MoreDay#11: Compute Your Net Worth
Here’s today’s installment:
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?
Read MoreDay#6: Identify Employment Benefits
Here’s today’s installment:
Today’s Task: Find out what your employment benefits are.
Most prospective employees often ask about the benefits before they accept a job offer. Not everyone knows the exact details of their employee benefits, however, so you may be overlooking something. It’s best to find out the exact benefits you’re entitled to. Here are some that you might already have:
- Overtime pay
- 13th month pay
- Food, clothing, and transportation allowances
- Medical and dental plans
- Expense accounts
- Allotted rest days
- Paid vacation leave and sick leave
- Lower interest rates on certain loans
- Any product discounts/freebies from the company or its affiliates (such as gym memberships, etc.)
Also, check this list of mandatory employee benefits in the Philippines and see if your employer covers them all.
Apart from the benefits themselves, find out if any relatives or other dependents are covered for some of them. This is usually true of medical benefits.
So that’s our task for today. Find out your exact employee benefits and write them down. That’s the only way you can maximize them.
(Since I’m self-employed this doesn’t really apply to me, but for some of my contracts I’m allowed to get reimbursements for any extra expenses I incur that’s related to my work. So I suppose my task is to find out the exact amount and what types of expenses are covered.)
Read MoreWhen listening to experts, use your brain
Did you know that whenever you’re receiving advice from an “expert” (real or otherwise), it’s likely that you’ve turned off your own ability to make decisions?
According to a recent study, research participants were asked to choose between receiving a sure amount of money or gambling on a riskier, yet higher paying lottery. Scans showed that the participants were activating the brain circuits that weighed risk vs. reward.
But, when an “expert” (actually a computer program) offered his advice, those brain circuits showed no activity. This means that when faced with seemingly expert opinion, our natural tendency is to stop weighing the decision ourselves.
“Most average people have this tendency to turn off their own capacity for making judgments when an expert comes into the picture,” says Gregory Berns, a neuroeconomist at Emory University in Atlanta.
Source: “Brain quirk could help explain financial crisis”, NewScientist.com
While I don’t think that this is solely to blame for the financial crisis, it explains why some people would make risky decisions without thinking twice about it.
So how do we prevent ourselves from relying too much on experts and making blind financial decisions? We need to do the research. In a previous post, I talked about how I only invest in things I understand well. If I don’t understand something yet I want to invest in it, I do the legwork and conduct research from multiple sources. I try to gain an above-average understanding about it. True, this limits the amount of things I can invest in, but at least I know what I’m doing and I don’t lose my money. Or my head.
With that said, I’d like to remind everyone that although I give advice here at Frugal Pinoy, I’ve always been an advocate of doing your own research. If you go back and read my previous posts, I always phrase my advice this way “…this is a personal choice for me, but do what’s right for you…” or “it depends on the situation”. I do this because I know that we all have different habits, priorities, and needs.
Don’t listen to anyone’s advice blindly – even mine. Because you should be the prime expert of your own finances.
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