In April, I ran a survey asking Frugal Pinoy readers “What is your #1 financial goal?”. Most of the answers were “financial freedom” or “to be financially free” or “financial independence”.

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While almost everyone in the world wants that, we all define it differently. To reach this “financial freedom” or “financial independence” that we’re talking about, we need to know how to objectively quantify it. And this will depend on your definition.

To make it easier, think of your definition as a checklist. What financial goals much you reach before you become financially free? Here are some questions to consider:

• How much should you have in emergency funds to not worry about financial emergencies?
• How much should you have stashed away in retirement investments? How much is their historical average growth? Do you think you’ll have enough to live comfortably when you retire?
• How much should you be earning each month to fulfill all your financial obligations? How much do you need to live comfortably and pursue all your hobbies and other leisure activities?
• Do you have any debt? If so, have you developed a plan to repay all of your debt and stay debt-free?
• Which stage of personal finance are you in? Which stage do you want to be in within 6 months? A year? How do you plan to accomplish this?

Don’t be afraid of being as specific as possible. Include numbers such as: “I must have at least P120,000 in emergency fund savings” or “I should be earning an additional P20,000 monthly from my side business”. The more specific you are, the easier it will be to know the steps you have to take to reach these goals.

So let me ask you again, “What is your #1 goal that will help you reach financial freedom?” Answer the completely anonymous survey below to share even just one criteria of how you define financial freedom.

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.

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Which would you rather get – P3,000 in three days, or P5,000 in three months?

Think about it for a while.

If you answered the P3,000, this usually means you are financially impulsive, since you’d be turning down an interest rate that is much better than what banks and most investments offer.

In a study conducted by researchers from the University College of London, nearly half of their respondents preferred the lower (but sooner) sum – and that these people also showed impulsiveness in other areas of their life. From the article (emphasis mine):

“…researchers suggest money savings or financial behaviors are linked to a set of other personal behaviors, rather than personal knowledge and experience with money.

…[they] discovered impulsive behaviors such as overeating, smoking and infidelity are associated with financial gullibility.”

This means that even if you know a lot about money, investing, and business, it doesn’t guarantee that you’ll be financially secure. What guarantees your financial success is your behavior. If you are consciously planning for the future and spend time evaluating your impulsive desires, then you have better chances of being financially successful – even better chances than someone who had formal training in finances, but doesn’t exhibit those behaviors. Perhaps this is why even the smartest people we know make stupid decisions regarding their money.

How do we use this information to our advantage?

1. Acknowledge that you don’t have to know everything to start fixing your finances. One of the obstacles that most people face when it comes to fixing their finances is inaction. They think “Oh I have to read more about saving before I can actually save” or “I need to know more tips before I can start”. Being good with money is not always about facts – it’s also about behavior. While we need to study some things – especially when investing – we don’t need to know much to get started.
2. Realize that managing money well is a habit. It’s something you have to cultivate and practice regularly. There is no one-off solution, magical budgeting program, or miracle investment that will save you. It takes regular, continuous work.
3. Know that changing impulsive financial behavior may mean changing other aspects of your life as well. My mother was such an impulsive spender, but her impulsive behavior wasn’t limited to money. She was that way about almost everything. From her business endeavors to her anger. For those who are truly impulsive, it may be a more difficult journey to get your finances together – but it doesn’t mean you shouldn’t try.

If impulsive spending and investing was one of your problems, take a look at your past behavior and see how you’ve changed since then. How have these changes affected your finances? How do you feel about the research I quoted above?

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This post is simple. My goal is to give myself and the readers of Frugal Pinoy the chance to be completely honest with ourselves about our money. While I’m generally doing ok, there are some aspects of my financial life that still need improvement.

Let’s take the time to review this questionnaire. You don’t have to write your answers in the comments. In fact, I just recommend that you print it out and answer it in your private journal or a piece of paper. As for me, I’ll do my best to disclose what I can below, without sacrificing my privacy too much.

Without further ado, let’s get honest, shall we:

Finances

1. How much monthly income do you have minus taxes? Apart from your salary, include other side income streams such as businesses, allowance, etc. [FP's note: My income is ok, but I want to earn more.]

2. What is the exact amount of money you spent last month? Including utilities, debt repayment – everything. [FP's note: All my expenses are in a spreadsheet, so I only have to open it to answer this question.]

3. When you subtract your answer to question #2 from your answer to question #1, do you get a positive or a negative number? If it’s a negative number, you are obviously living beyond your means.  [FP's note: Positive! But if I include savings, obviously the answer is zero, since I "spend" every centavo.]

4. If you don’t have an answer to #2, how come you don’t know how much you spend? Too busy? Not sure how to track your money? Overwhelmed at the thought?

5. How much debt do you have? Credit card debt, loans, borrowed money from friends and family. [FP's note: No debt.]

6. If you suddenly lost your job and other sources of income, how long would you survive without resorting to debt or receiving money from relatives/friends? This points to your emergency fund, if you have one. [FP's note: Personally, my family and I could go on for over 6 months, even longer if I tap into my savings outside of my emergency fund.]

7. What’s your definition of being wealthy/rich? It could be a specific amount, a feeling, a lifestyle, etc. Usually, though the answer doesn’t lie in a specific amount, because it’s not the money per se that we want, it’s the experiences and things it can buy.

8. Do you think you have what it takes to be rich? Why or why not?

9. If you want to be rich, what steps have you taken to reach that goal? What additional steps do you need to take?

10. What large expenses will you have within the next 10 years? For those in their 20s and 30s, it could be a wedding, kids, travel, a new home, starting a business, etc. [FP's note: For me it's a house, travel, and kids.]

11. Are you financially prepared to handle your listed expenses from #9? True, you can take out loans to pay for many of these large expenses, but consider this question with the thought that you shouldn’t incur additional debt. [FP's note: Yes, I'm on track with my saving goals.]

12. Do you have any investments? Not just limited to stocks. May include businesses, sources of passive income, bonds, real estate (intended for rental or selling), etc. [FP's note: I have a few investments, but would like to be more aggressive.]

13. How do you make financial decisions? Do you do your own research? Rely on advice from experts? Or do you just go with your heart? [FP's note: A little bit of all three. But the most important factor for me is to gain as much informational advantage as I can.]

14. Do you tithe regularly? Apart from contributing to causes you care about, volunteering your time and giving donations gives you a feeling of abundance. [FP's note: I donate to causes, but want to do more volunteer work.]

15. Are you part of the 10% of Filipinos who save up for retirement, or are you part of the other 90% who don’t? [FP's note: I'm part of the 10%.]

Work and Employment

16. Why are you working at your current job? Apart from the paycheck, what is your motivation for getting up each day and going to the office? [FP's note: I love it, that's why.]

17. If you really like/love your job, are there ways you can become more productive at work? Frugality with your time is equally important. [FP's note: Working on this every single day. It's an ongoing battle. Some days I win.]

18. If you really dislike your job, what is forcing you to stay? I feel sad when I see highly educated, competent employees rant on and on about how much they hate their job.

19. If your job is your only source of income, have you ever thought of creating more income streams? This may include businesses, side raket as a freelancer, garage sales, investments that pay dividends, etc. If you’ve considered these streams of income, have you taken steps to get more involved in them? [FP's note: I've got multiple income streams, but not as many as I'd like.]

20. Have you ever asked for a raise? For some reason, most corporate workers I know are too shy to ask for a raise. I suppose that given the current economy, it might seem like an inappropriate time. Still, you have to consider it if you have a good track record. Have you brought new clients to your company? Did you save them any money? [FP's note: I raised my rates in the past year or two.]

21. Are you aware of all the benefits offered by your employer and do you take full advantage of them? Even your dependents might be eligible to use your benefits. [FP's note: No employers, so no benefits. I have to take care of this myself.]

Family Life

22. Do you and your family have clear “rules” about money? This is especially important if you’re married or if you plan to get married. Will your money and assets be combined or will you keep them separate? Do you talk about saving and spending? [FP's note: My partner and I are completely open to each other about money.]

23. Have you prepared a will? Who gets your assets when you die? Do you have the paperwork to support this? What is the chance of your will being contested? [FP's note: Working on this. I want it done with a professional so it will be hard to contest.]

24. Do you have a living trust? This means that if you ever become incapacitated, there is a designated person who will handle your affairs in the manner you’ve instructed. [FP's note: Working on this.]

25. What are you teaching your kids about money? Children learn more by your actions rather than your words. What financial values are you indirectly teaching them? What values are you directly teaching them?

Spending Habits

26. How do you pay for big purchases? Through cash, debit card, or credit card? [FP's note: Cash.]

27. Do you pay your rent, utilities, and other bills on time every time? [FP's note: I'm on time 98%. Sometimes I forget the phone bill. Sometimes the phone bill doesn't arrive!]

28. How long do you wait until you decide to buy an expensive item you want but don’t really need? Do you buy it as you want it, wait for a month or so, or save up for it and *then* buy it? [FP's note: I plan for it based on my disposable income.]

29. How much research do you do for your purchases worth more than P5,000? Do you look at online reviews and compare prices? [FP's note: I research when I can, but gadgets are my partner's forte so I trust her with those decisions even if the gadget is for me.]

30. Are you making an effort to lessen your cost of living? You don’t have to sacrifice too much or start a diet of lugaw. But it helps to save money where you can, so you can channel it to the things you do care about. [FP's note: Of course I do this. I don't have an expensive vehicle because I don't care about it so much, but I care about the quality of my food. And when I travel I choose cheap accommodations because I prefer to extend my stay for a few days rather than have aircon and a complimentary breakfast.]

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In my post for Blog Action Day last October, I wrote about being broke vs. poverty. Being broke is about making the wrong financial decisions which prevent you from spending for your necessities. Poverty, on the other hand, is the inability to acquire your basic needs because you don’t have access to the education, resources, or opportunities that will allow you to rise above that state. As I concluded in that article, being broke is a choice, while poverty is not.

While it’s true that some people who grew up in poverty were able to rise above it as adults, it is extremely difficult to do so. How come most poor families remain poor generation after generation? New research shows that this all has to do with the effects of stress on a child’s developing brain.

Here’s an article from The Economist exploring the results of a study:

“Children with stressed lives, then, find it harder to learn. Put pejoratively, they are stupider. It is not surprising that they do less well at school, end up poor as adults and often visit the same circumstances on their own children.”
Source: “I am just a poor boy though my story’s seldom told” from The Economist, April 2009

This is all because of a part of the brain called “working memory”. Neuroscientists discovered that the working memories of children raised in poverty are much smaller compared to those who were middle-class. This difference is significant because the capacity of one’s working memory is crucial to one’s development. According to the article, this is what working memory is for:

“[...] Working memory is the ability to hold bits of information in the brain for current use—the digits of a phone number, for example. It is crucial for comprehending languages, for reading and for solving problems.”

When a child grows up in a stressful environment, this stress suppresses the creation of new nerve cells in the brain, as well as shrinks the parts of the brain that are associated with working memory.

The study shows that these negative effects on a child’s brain were explained only by stress, rather than other aspects of poverty such as nutrition, shelter, poor access to quality education, etc. Apart from the lack of financial security, poor people are also stressed for other reasons:

“[...] it is now well established that poor adults live stressful lives, and not just for the obvious reason that poverty brings uncertainty about the future. The main reason poor people are stressed is that they are at the bottom of the social heap as well as the financial one. “

To be clear, the study doesn’t say that poor people are stupid while the middle class and wealthy are smart. What the research reveals is that a stressful environment can prevent the optimal development of a child’s brain, especially when it comes to solving problems, reading, and linguistic abilities. While overcoming poverty isn’t impossible, it can be very, very hard given these circumstances.

The research may not be comprehensive, as it doesn’t address other factors, but it’s a start. The only way we can fight poverty is if we have a concrete understanding of its causes – no matter how complex they are. If you want to read the source article from The Economist, click here.

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People say that money can’t buy happiness. Is this the truth or just a meaningless saying? When I think about this more, I realize not having enough money for your needs can be a source of stress. If you just got laid off, for example, how can you be happy if you spend sleepless nights worrying about where to get your kids’ tuition? Isn’t the lack of money a typical reason why some couples fight? Or if you work at a job you hate just for the paycheck, won’t you be more miserable compared to someone who has enough money to invest in a business they are passionate about? True, you can borrow the cash you need from friends and relatives, but that tends to put a strain on your relationships.

I suppose money can buy some amount of happiness in the sense that you won’t have to feel stressed or worried about the basics. Here’s what some psychologists found out about the matter:

People with more money tend to be happier than those with less – but only up to a point. That is the conclusion of psychologists Ed Diener at the University of Illinois at Urbana-Champaign, and Martin Seligman of the University of Pennsylvania, Philadelphia, who have reviewed numerous studies looking at the psychological effects of wealth. They report that money’s impact on happiness suffers from diminishing returns: once you have enough for food and shelter, more cash doesn’t bring much extra joy.
Source: “Why money messes with your mind” NewScientist.com

While money can’t buy happiness, it can give you the security and opportunities you need for pursuing the things, relationships, and experiences that make you happy.

In my experience, this is true because having enough money for your necessities allows you to spend your time and energy on the other things that do make you happy. But once you have enough for food, rent, and the bills, acquiring more money doesn’t necessarily mean you’ll be happier. After you’ve made yourself financially secure, true happiness and joy is something that you have to create for yourself, after all.

So if I were to rewrite the saying for accuracy, it’d be: Money can buy security, but more money can’t buy happiness.

Here’s another interesting fact from the study: if you have some extra money to spend on fun things, paying for experiences rather than material things can bring more pleasure.

The researchers found that people reported “experiential purchases”, such as trips to the theatre or travel, as bringing them more happiness than material purchases such as clothes. A concrete purchase may have cost more and lasted longer but a good experience brought more pleasure.
Source: “Why money messes with your mind” NewScientist.com

I guess this means that if you do end up with some extra money that you can spend for personal rewards, you can maximize the happiness it gives you by spending it on a trip rather than an expensive watch.

What can you say about the study? Do you think it reflects your personal experience with money and happiness?

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