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?

Image by cobrasoft from sxc.hu

This is Day #17 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:

When it comes to time and money, we usually focus on the things we have to do. Paying the bills, finishing up that report, cleaning the house. While these things are important, we should be equally mindful of the things we shouldn’t do.

Today’s Task: Know the things that you don’t care to spend on.

It’s simple. Just jot down the expenses that really don’t matter to you. Here’s a short list of some things that don’t matter to me:

• Dining out
• Watching most films in the cinema
• Clothes and accessories (as a side effect of rarely going out)
• Cable TV
  

Things that matter to me:

• Books
• Good quality of food
• Maintaining a solid but beautiful house
• Hobbies such as woodworking and gardening

What does this mean? By making the list of the things that don’t matter to you, you’ll know what expense traps to avoid. For example, why would I spend P500 to try out a new restaurant when I can use that money to buy high-quality ingredients for a home cooked meal? Or, why would I spend P200 to watch a movie in a mall dahil wala lang akong magawa, when I can usually buy 5 books with that at my favorite used books store? It’s like building a list of “not-priorities”.

You can also do this exercise for a major purchase so that you won’t be distracted. When buying a new car, this may be your list of not-priorities:

• Color
• Exterior design
• Quality of speakers

By making this list before you look at cars to buy, you won’t be distracted by the bells and whistles that don’t matter to you. You won’t go “Shit, panget pala gas mileage nito, nadistract ako sa sleek, chromed-up design.” Conversely, if the exterior design matters to you the most, you won’t be distracted by sales pitches about payment terms or storage space.

When we have limited resources, we need to know the things we can “sacrifice”, and the things we don’t care about should be the first to go. That way, we know that we’re left with the things that matter.

Image by doctor-a from sxc.hu

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?

Image by ctr from sxc.hu

“Live within your means” is one of the first rules of personal finance. If you think about it, this is common sense. Still, most people forget this and spend more than what they earn, getting themselves into financial trouble.

Not sure if you’re living beyond your means? Then read on to find out if you have any of the following 6 symptoms:

You don’t know how much you spend each month. If you can’t answer the question “How much are your monthly expenses?” then now’s the best time to compute it and find out. Guessing isn’t allowed. You need to know the ballpark figure for sure.

Why is this important? So you can compare it with your income and know for sure that you’re spending less than what you earn.

You’re dependent on your credit card. Whenever money’s tight, you find yourself using your credit card and just paying for those expenses after your next paycheck arrives. Usually, your credit card bill is more expensive than you thought, too. Because of that, it’s possible that you’re also afraid of opening your bill each month.

You regularly dip into your savings, if you have savings at all.Your income isn’t enough so you have to pay for some purchases with your savings.

This used to be one of my mistakes. I had “savings” but I didn’t know what they were for, I was just saving up money to be spent later. This means that whenever extra expenses came around, I would spend my savings on them whether they were needs or wants.

Your savings need to have a purpose. Are they for your emergency fund? Retirement? A new house? Without that purpose, you’ll be taking money from your savings indiscriminately.

Speaking of savings, you’re saving up less than 5% of your income on retirement or emergencies. Saving more is especially important if you want to maintain your lifestyle during times when your income is lower, you’ve lost a job, or you’re ready for retirement.

You live from paycheck to paycheck. There was a time when I would eagerly await my next paycheck – because I’d already run out of money before it arrived. This is a very stressful way to live.

You need to be confident enough about your spending habits to know that you can wait a bit longer for that next paycheck. You can only feel this way if you know for sure that you’re spending much less than what you earn.

You use new loans to pay off existing loans. It may be common for people to borrow money to pay off other loans, but it’s a clear symptom of living beyond your means. Think about it for a second – getting into more debt to pay for other debts. Not really a sign of financial health.

Have you ever experienced any of these symptoms? What have you done about them?

Image by Steve Woods

I’m proud to say that I made only a few money mistakes ever since I started earning.  It was my mother who made all the money mistakes in our family, and I mostly learned what not to do by just watching her.   She hasn’t saved enough for her retirement, she incurred so much debt that it’s impossible to repay, and she lived beyond her means even when she had no job.  Her mistakes were a financial nightmare for the entire family.

I guess you could say that I became smart with money because I was so afraid of ending up like her.  This fear made me educate myself about saving and earning so that I would not have to repeat her mistakes and make my children pay for them.

But this doesn’t mean that I’m free from mistakes.  I am perfectly human.  I’ve made some money and business mistakes that I wish I never made.  Here they are:

Lending money to others.  Sometimes, even when it comes to relatives, lending money actually means giving it without expecting anything in return.  For years I said “yes” to lending money to family members, and I rarely saw a centavo of my money back.  This led to tense family relations, which weren’t worth the money I “gave away”.

The bottom line?  Involving money in your family relationships tends to be messy and destructive.  Learning from my mistake, I’ll be avoiding this situation again.

Doing everything myself.  When I started my online business, I did everything myself.  It’s perfectly normal to start a business as a one-woman show. The problem was that it stayed that way for 3 years.

One of the most important things about running a business is that you should work on it, not in it.  I got this idea from a book called The E-Myth Revisited.  You should get others to work with you, whether it’s a business partner, a contractor, or in-house employees.  This allows you to focus on the more important aspects of the business as well as the tasks you enjoy.

What does this have to do with money?  Well, if you do everything yourself, your time will be consumed by tasks that anyone else can do.  You won’t have the time or energy to do other tasks that will bring in more money such as expanding your business, doing guerrilla marketing, and creating other means to diversify your income.

Undercharging for my services.  I used to be afraid to charge higher for my writing services, thinking that clients would hire some $1 writer from other countries.  I used to charge  $5 to $20/article.  It took a very generous client before I realized that I could charge much more than that.  Now I get paid around $30 to $100 for most of my work.  This means that I get paid more per hour and can actually relax about work a bit, rather than spending every single waking moment writing articles.  I may love my work, but there are other things I want to do as well.

Also, getting paid more made me become more serious about improving the quality of my work.  I guess both my clients and I won in the end

Not applying the 80/20 principle.  One of my biggest business mistakes was giving all my clients and projects equal time and effort.  Why is this a mistake?  Because some ventures, clients, and projects will be worth more than others.  What should you spend more time on, the difficult and demanding client who pays you at a low rate, or the low-maintenance client who pays well?  It took me a few years to learn to focus on the latter.

This is where the 80/20 principle comes in. A short definition of this principle is that 80% of your output/income, should come from 20% of your input/effort.  Of course, you don’t follow this idea literally, counting every percentage.  The point is that you should focus on the things that give you the best results with the smallest amount of effort.

These are only the top 4 mistakes I can remember off the top of my head.  How about you?  What financial mistakes have you made in the past?  What could you have done to avoid them?

Image by ilker from sxc.hu

It’s the start of a new year again, and it’s time for planning one’s finances for the rest of the year.  I spent the past few weeks working on my financial goals for 2009, so that I can increase my chances of being financially stable in 2009.

I find that it’s important to make your goals as specific as possible.  For example, “save more money” is a bit vague.   How much will you save and what are you saving it for?  Also, write down the actions you need to take for each goal. If you intend to make more money, how will you do that?  What are the steps you need to take to make it happen?

I encourage you to do the same thing.  Let’s make this year a year of better financial responsibility.  List your financial goals on your blog, and send me a link to your post (either through the contact form or the comments section of this post).  At the end of the month, I’ll compile all your links and share them to other Frugal Pinoy readers.

Note: For privacy, I won’t be including actual figures here, just percentages and placeholders.

My financial goals for 2009

Earn at least P xx,xxx per month.  I’ve raised this by 63% from my previous goal last 2008.  This is my most important goal, because without it, I won’t be as successful with my other goals.  Here’s how I plan to accomplish this goal:

• Be consistent with my work output.  At least 13 articles per month for one client,
• Explore other moneymaking opportunities.  This includes a passive income stream (more about this later), applying to travel writing gigs, launching my illustration studio, and earning more from my web content service.
• Put my money in accounts with better returns.  This means I’ll look into special deposit accounts, time deposits with higher interest rates, and maybe even other investments.

Finish saving up for my 1-year emergency fund.  Right now, I only have the money for a 6-month emergency fund.  I’d like the security of knowing that I can pay for my current lifestyle even if I don’t earn anything for a year.  This is especially important since I have dependents.  Based on my calculations,I’ll finish saving up for my emergency fund by September.

Reach a certain amount of savings for my retirement fund.  My retirement fund is doing okay, but every year I have a goal of how much I should set aside for retirement.  Note that my definition of retirement is the time when I am no longer physically or mentally able to work.  I love my work, and I want to do it for as long as I can.  Also, since I don’t have a corporate job, my definition of retirement is different from the traditional definition.

Save up at least P xxx,xxx for Pangasinan house.  I’ve already mentioned before that one of my goals is  to build a house in a farm in Pangasinan by 2011.  To do that, I need to save a certain amount of money this year.

Prepare a will and have it notarized.  Remember Heath Ledger?  When he died, he did not update his will, so there was nothing in it about his daughter and his ex-wife.  I want to make sure that my partner gets the bulk of my savings and personal effects, and the only way to do that legally is through a will.  I’ve seen many Filipino families get torn apart just because people didn’t agree about who was entitled to what.  Something as legally binding as a will prevents these unnecessary arguments.

Here’s a sample of a will that is valid in the Philippines.  Feel free to browse that site as it also has templates of other legal documents, such as deeds of sale and special power of attorney.

Donate more money to causes I support.  I already donate to an animal shelter, but I want to donate to PAWS, Haribon, and maybe an educational NGO.  I welcome suggestions here.  If you also plan on donating to causes in 2009, click here for a list of organizations you can donate to.

Establish a passive income stream.  To ensure that I have an income even if don’t have any clients, I need to establish an income stream that requires little input and maintenance.  I’m thinking of working on an ebook (for an international audience) or online mentorship (for Filipinos).  I haven’t fleshed out this idea yet, but I’ve scheduled the planning stages in my calendar.

I’ll be updating you on my goals each month, to show you whether I’m on track or not.  That’s the point of blogging about your goals – so that there’s public accountability. If you’re writing a list of goals that only you can see, it’s very easy to remove some items or throw the list away altogether.

Now, it’s your turn.  How about you?  What are your financial goals for the year ahead?

Today I found this great video by Ron Davis, whose personal development blog, Distinctions For Life, contains great advice on living better.

I thought I’d share this video entitled “You Don’t Really Want Money”, mostly because it points out several things I believe in:

•  That when people want money, they don’t really want the money per se, rather, they want what they think the money will bring.
• You don’t necessarily need more money to get what you want.

You can play the video below:

At the end of the video, Ron tells us to ask ourselves the following questions:

• Why do you want money?
• How will you know when you have enough money?
• What picture appears in your head when you think about having enough money?
• Can you have that moment or feeling without money?

Think about them.

There’s a free personal finance ebook available at Mytwodollars.com . “Money Matters for All Ages: A Guide to Taking Control of Your Finances from Birth to Retirement” is a comprehensive collection of personal finance and frugality tips that may prove to be useful, no matter how old you are. This includes infants and young children, teenagers, college-aged people, and people in their twenties up to the sixties. This ebook also covers advice for retirees. This series was even featured on MSN Money.

Here’s a description from the website:

This e-book is the culmination of sixteen different personal finance bloggers who got together and decided to write a financial guidebook that spans an entire lifetime. From the innocent little infant to the older retiree, all the different stages of life are covered here. Whether you are in your 20’s or 30’s or any other age — you can benefit from reading this book.

I’ll be taking a quick look myself, and I might even post a review. So far, it looks like we can all learn a thing or two from this handy resource.

Click here to download the ebook. Once you’ve read it, feel free to share your comments with us.

To recap the previous post, here are the questions you need to ask yourself to determine if you have what it takes to be a millionaire (at least, according to David Bach’s Automatic Millionaire):

1) Do you pay yourself first?

2) Do you have an emergency basket of cash?

3) Do you know what your latte factor is?

Now, on to the remaining 3 questions.

4) Do you own your own home?

According to The Automatic Millionaire, statistics say that most renters have a low net worth (roughly $4000) and home owners have a higher net worth ($140,000 and up). However, this isn’t necessarily true if you have a long-term mortgage you haven’t paid off yet.

If you already own a home, you need to learn why it’s an important asset and investment. According to David Bach, You can leverage the value of your home, especially when real estate values go up. (I’ve seen this happen in Marikina, especially over the last few years.) Also, nothing compares to the sense of security you feel when you’re owning a home. Overall, David Bach says that whether you rent it out or hold on to it, a home is a good investment.

5) Do you give to charity?

Some people give for tax deductions, while others give because they’re feeling guilty. They wait until the end of the year, ask themselves how much of their money is extra, and that’s what they give. David Bach doesn’t recommend this. He suggests that we make giving automatic – just like when you automatically pay yourself part of your income.

This part is all about feeling like you’re coming from a place of abundance. Some people may have multi-millions, but if they don’t give away a single peso to anyone, for a cause larger than themselves, they probably feel cheap inside. From David Bach’s research, most multi-millionaires have one thing in common: they were giving part of their income for charitable causes, even when they weren’t wealthy yet. It’s all about the mindset rather than just the measurement of how much money you have stashed away in the bank.

I can’t say that this is something I do on a personal level (I’m not in the best financial shape), but my business partner and I have agreed that part of our company profits should go to charity. We have yet to decide the beneficiaries, but it’ll probably go to causes that we truly believe in.

6) Is your financial plan automatic?

Wherever your income goes – to the bills, savings, retirement, emergency funds, debt payment, charity – you need to make these payments automatic. Not only will it save you time, but it strengthens your commitment to distribute your income properly. It lessens the spending temptations you may encounter along the way.

Personally, my financial plan isn’t automated. The main reason for this is because I get paid in cash (via remittances, because I’m an online worker). However, several banks offer bill payments (via phone or online). So if it were convenient and possible for me to automate distributing my income, I would. It’ll certainly save me a lot of stress doing personal accounting. Also, it’ll force me to save more.

I’ve been listening to David Bach’s “The Automatic Millionaire” audio book. At the beginning of the audio book, he wants you to find out if you have what it takes to be a millionaire. You can find out if you do by answering these questions:

1) Do you pay yourself first?

David Bach recommends that as soon as you get your paycheck, you should pay yourself first. Not the government, not the electric company, YOU. He also recommends that you pay yourself at least 10% of your income.

Personally, I think it’s important to pay yourself. After all, it doesn’t make sense to work really hard and have someone else take your money.You need to make it possible that YOU receive a percentage of your income. He recommends that you set it aside on your savings or retirement account.

However, it’s not as easy as David Bach portrays it. When PLDT sends you that notice of disconnection, you can’t exactly tell them “I’m sorry, I can’t pay you now because I had to pay myself first.” It’s very, very important to pay yourself, but make sure that you can survive with what’s left. I’ve had my own experiences where I had to pass up paying myself first to pay the “Big Guys” (PLDT, Meralco) and for other necessities (food, school supplies).

2) Do you have an emergency basket of cash?

I’ve talked about emergency funds in the past (specifically, in my pinoy money talk post). David Bach recommends that you have at least 6 month’s worth of living expenses stashed away in an emergency fund. Personally, I have 3-4 months worth of living expenses in mine. My goal is to have a year’s worth of expenses.

Why is an emergency fund important? To prevent you from digging yourself into a financial hole, should emergencies arise. If you want to learn about emergency funds, click here to read the post I wrote about it.

3) Do you know what your latte factor is?

Throughout his books, David Bach often talks about the “latte factor”. This is the small amount of money that we spend regularly for little things. An example – if you buy a latte every morning before going to work. Let’s say that latte costs P150. For an entire work week of 5 days, you spend P750 on that latte. After a month, you would’ve spent P3,000 on lattes alone. You need to figure out what unnecessary regular expense accumulates to a lot over time.

For me, my latte factor is fast food chains. That’s why I have a No Fast Food Goal for the entire month. For other people, it might be their cellphone credits, idle chatting on internet cafes, etc. Figure out what your latte factor is by writing down your daily expenses as you’re paying for them. that way, nothing slips by your radar.

There are 3 more questions you need to ask yourself if you want to know whether you have what it takes to be a millionaire. Click here for part 2 of this article.