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”.

Image by jdhancock from Flickr

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.

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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First of all, I’d like to greet all Frugal Pinoy readers out there:

Happy New Year! Thank you for supporting and reading Frugal Pinoy. I hope that you continue to find this site useful in 2010. Most of all, may you have a healthy, happy, and productive year ahead of you!

Now before we leap into 2010, let’s take this opportunity to review Frugal Pinoy’s top 10 most informative articles for the year.

Does Frugal Pinoy apply to you?

At the start of 2009, I wanted readers to ask themselves if the articles I  post here are relevant to them. This was my response to some comments from both friends and strangers that the site was not applicable to them.

A Different Way of Looking at Income

Do you judge or measure your income per month? If so, you may not be earning as much as you think. This article explores the reasons why we should measure our income by the hour instead.

Money Myths: Frugality Means Sacrificing Fun

In this article, I attempt to debunk the myth that a frugal life is a hard and boring life.

6 Signs That You’re Living Beyond Your Means

Don’t know how much you’re spending each month? Feeling guilty about using that credit card? Watch out. You might be spending more than you earn.

My Investment Strategy

In this short post I talk about my decision-making process behind my investments. Hint: it has nothing to do with the hot stock tips.

Getting Out of Debt vs. Saving: Which Should You Prioritize?

When you’re trying to make ends meet as well as paying off debt, you might feel like you’re being spread too thinly. How do you choose between saving for emergencies and being debt-free?

When Listening to Experts Use Your Brain

Researchers found that when people are presented with an expert, they drop all attempts at decision-making – even if the expert is fake. Is it possible to make independent financial decisions despite all the “expert” advice we receive?

Money Myths: Can Money Buy Happiness?

Scientists learned that having enough money for necessities can buy a feeling of peace and security – but anything else beyond that is up to you.

The Hard Truth: 30 Money Questions You Should Ask Yourself

A no-BS list of questions to help you face the truth of your financial situation.

Free Download: Frugal Pinoy Budgeting Spreadsheet

I made a free downloadable budgeting spreadsheet for Frugal Pinoy readers. There’s a video tutorial to help guide you through it.

Also, let’s not forget that nearing the end of 2009, I launched the 25  Days to Healthier Finances series. In that series, I posted one article per day with an actionable task that readers (and I) can do to make our financial lives better.

That’s it from me for today. Again, I’d like to thank all the Frugal Pinoy readers (even the newcomers) for supporting and reading the blog this year.

All the best,

Celine

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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?

Image by a_glitch 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?

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.)

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.

Image by Sophie from sxc.hu