Saturday, December 19, 2009

The Value of Money

Here's an interesting concept from the real estate sector on why one loans to buy a house or "Why Amortize at an Interest?"

What they basically say is this:
Money devalues every year
Interest rate is almost equal to devaluation rate
So the interest you pay only covers the devaluation of your money

Why is this concept important if it applies to ones situation? Because if your investment earns at least 50% more than the devaluation rate then its wise to borrow to invest. Seasoned real estate brokers and developers observe this all the time. They borrow money at 5% to 10% per year rate to buy a property that doubles in value in three to four years.

Simplified:
Borrow P1,000,000.00 to buy a P1,000,000.00 property
Interest at 10%
Year 0: P1,000,000.00
Year 1: P1,100,000.00
Year 2: P1,200,000.00
Year 3: P1,300,000.00
Year 4: P1,400,000.00
Year 5: P1,500,000.00

Year 3: property valued at P1,500,000.00
Year 4: property valued at P1,750,000.00
Year 5: property valued at P2,000,000.00

This normally happens when one buys into a property that will be developed in a few years, like buying condominium units or townhouses at pre-selling price, and liquidating them upon turn-over in three to four years.

Here's one property that's pre-selling now: Gilmore Tower.

Friday, September 4, 2009

Retail Treasury Bills

Good News: Retail Treasury Bills will be auctioned off this September 15, 2009.

A total of P25 billion worth of Retail Treasury Bills with fresh terms of three years, five years and seven years will be issued and coordinated through BPI Capital Corp., First Metro Investments Corp., Rizal Commercial Banking Corp., BDO Capital & Investment Corp., and state-run Development Bank of the Philippines and Land Bank of the Philippines.

What are Retail Treasury Bills (RTBs)?
RTBs are medium term government issued loans. These are issued to help the government raise funds to finance its projects and expenses.

Why invest in RTBs?
Check your bank deposits. How much have they earned in three years? Five years? Seven years? RTBs will always give you a better deal than your bank deposits.

RTBs are a good way to get you started in the investment game. Most people get derailed because they end up spending their deposits rather than invest them.

Investing in RTBs provides the comfort of dealing with a bank, while providing the discipline to keep the money until the term matures.

Investing in RTBs adds to the diversity of your investment portfolio. Remember not to put all your eggs in one basket. Part of the strategy is to have investments maturing at different times.

If you have money to spare, buy RTBs this September 15, 2009. Your money will surely earn more than your bank deposits. Call your bank now (see list of coordinators above) and inquire about the Sept.15 RTBs.

Thursday, September 3, 2009

Why Invest in Life Insurance

Thousands of years ago villagers didn’t need insurance because relatives always looked after their own. Hundreds of years ago people didn’t need insurance since families took care of their own.

With the advent of the industrial revolution families started living in communities apart from relatives, and people earned just enough just to take care of their immediate family.

Thus the practice of villagers and relatives pooling resources at times of need evolved into individual strangers investing in financial institutions that managed funds for future emergencies.

In a way, insurance has a very unique concept of giving. One shares a fraction of what his family may receive in case of death, accident, or property damage.

At the end of one year would you be sad that you didn’t use you fire extinguisher or thankful that you didn’t?

Compare your family’s financial success as a bus trip to the top of a mountain, the road winds and spirals from the bottom all the way to the top of the mountain. For most people, when the bus stops running their trip up the mountain stops, while others would take a long slow trek to finish the trip, very few would finish it.

If you had life insurance, when that bus stops, your loved ones take an elevator to the top of the mountain.


How to use life insurance
Compute your monthly expenses multiply by 12, multiply again by ten, and then add your loans & debts. This is the amount of insurance coverage you need.

[(Monthly expenses x 12) x 10] + loans & debts = insurance coverage
[(P30,000 x12) x 10] + P400,000.00 = P4,000,000.00
Insurance Coverage = P4,000,000.00

Multiplying monthly expenses by 12 you get your annual expense.

Multiply annual expense by 10 gives you an amount that if invested in the right financial instruments would earn 10% every year; thus your loved ones would not miss your income contribution for a long time.

Adding your loans and debts would ensure that you leave your loved ones debt free without touching your income contribution.

Depending on one’s age a term or accident insurance to cover P4,000,000.00 will cost about P10,000 to P20,000.

Term insurance covers you only for a year, and you have to renew coverage every year? Why term insurance? Because your annual income and expenses increase and decrease, thus you can freely adjust your coverage every year without buying a new insurance. Plus the cheapest insurance is term insurance.

Ultimately, the goal of financial independence is to reach the top of the mountain, and by then you wouldn’t need that elevator. Unless of course you have large properties and need insurance to cover your estate taxes, but that’s another story.

The best time to buy insurance is now. So call your insurance agent now.

Wednesday, September 2, 2009

Equity Funds (Stock Market Funds)

The stock market is one of the most profitable investment vehicles available. Unfortunately, most people are wary of the stock market because the value of stocks fluctuate everyday with daily trading, and when the stock market crashes the value of their money may fall.

One thing prospective investors should understand is that the stock market is a long term investment.

Stocks are the most profitable investments over a long period. In any given twenty year period that includes even recessions the stock market outperforms all investment vehicles, even the real estate market.

For novices, the best way to take advantage of the stock market is to invest in Equity Funds. An initial amount of P5,000.00 to P10,000.00 can start an Equity Fund investment.

Equity Funds are Mutual Funds, companies that pool money together and invest in stocks with the purpose of making the most profit for the company and its investors.

Making Equity Funds Work
1. What are you saving for?
Being a long term investment, Equity Funds are best used to beef up funds for future needs like retirement fund, college education, retirement health care.

2. Diversify. Don’t put your eggs in one basket.
Make sure the future does not surprise you. One never knows what the future holds, and one can only predict ones future needs. A good mix for future needs is a guaranteed plan (like an education plan) matched with equity funds.

3. Hitching a ride.
Savings accounts are snails, bond investments are cars, and stocks are jet planes. Investing in equity funds is like hitching a ride on jet plane. You don’t have to be the pilot to enjoy the benefits.

4. How much to invest in Equity Funds?
Invest money that you can forget. If you start an investment of P10,000.00 and add P1,000.00 every month for 5 years, you would have over P500,000.00 in the fund after 20 years at an average return of 14% per year. Not bad for P58,000.00 you set aside for five years and forgot about.


Choose the best Equity Fund that suits your personality. Some equity funds are more aggressive than others. Ask your fund agent the equity fund’s investment philosophy and what type of stocks or companies their equity fund is invested in.

Although equity funds buy and sell shares on a daily basis, they stick to a certain mix that mirrors their philosophy. Some funds would invest more in Real Estate and Telecom shares, while others would invest less in these type of stocks and bulk up on mining and BPOs.

There is a philosophy in each investment strategy. Make sure you understand the company’s investment philosophy and that you are comfortable with it.

Monday, August 31, 2009

BOND FUNDS

One of the earliest Mutual Funds in the Philippines is the Bond Fund.

On the average, Peso Bond Funds over the past three years have earned 6% per year, while Dollar Bond Funds have earned an average of 3% per year over the past three years.

Bond Funds are comprised mostly of government issued bonds mixed with corporate bonds, capital bonds, retail treasury bonds, cash and time deposits.

It only takes P5,000.00 to start a Bond Fund investment. I’ve seen many people buy mobile phones worth more than that, every six months.

What are Bonds?
Bonds are loans that are certified by the borrowing entity like the national government, a corporation and in some cases local government unit.

How safe are bond investments?
Government bonds are as good as cash. Money in your wallet is a legal tender certified by the government with the words “ANG SALAPING ITO AY BAYARIN NG BANGKO SENTRAL AT PINANANAGUTAN NG REPUBLIKA NG PILIPINAS”. Government bonds are certified in the same way.

How does a bond work?
When a government’s projected spending is more than its projected collection it has to borrow money to fund is projects. One way to borrow money is to issue bonds.

The government floats bonds to financial institutions, for example a loan payable in five years at an interest of 5% per year. If financial institutions agree with the terms and wish to loan a total of 20 billion pesos, then 5-year bonds with a total worth of 20 billion pesos with annual interest of 5% are issued by the government to the financial institutions.

Financial institutions have many ways to make money out of it before the 5-year bond matures, like resell these bonds in smaller chunks and higher interest rates, or use these as assets to back up loans. The question is how do you make it work for you?

MAKING BOND FUNDS WORK FOR YOU

Understand that Bond Funds are Mutual Funds as such these are investments whose value fluctuate everyday due to everyday trading, but will always earn more than a time deposit.

I’ve met people who have hundreds of thousands of pesos decaying in savings accounts and checking accounts.

Savings and checking accounts are good for business transactions and emergency fund. Multiply your monthly expenses by three and that’s your emergency fund. If you have a business, you know your monthly expenses and how much money you need in the bank.
How much more of your savings and checking account money is left? Invest that in the Bond Fund.

Emergency Money in a Bond Fund makes more sense
Your savings and checking account gives you an interest of 1% per year, less 20% income tax every year. So after a year your P20,000.00 becomes P20,160.00

A Bond Fund has an entry fee of 2%, you have to lock it in for a year, then after that it will no longer be subject to any fees or taxes. So your P20,000 becomes P20,580.00 after a year.

The best part is after five years your P20,000 in the bank becomes P20,812.90 while your P20,000.00 Bond Fund investment would have reached P25,000.00 during the same period.


Bond Funds are not investment tools. Bond Funds are financial instruments that can create a buffer or emergency fund better than savings and checking accounts or time deposits.


Knowing your monthly expenses opens you up to investment possibilities. Let’s have a run through:
1. Multiply monthly expenses by three, and deposit this amount in your savings or checking account.
2. Multiply monthly expenses by three, and invest this amount in Bond Funds.
3. Calculate your monthly expenses every quarter to check if you need to increase your emergency fund.
4. Let your Bond Fund grow
5. Remember the 10-20-70 rule for income? 10% goes to tithes, 20% goes to investments, 70% spend on yourself and family.
6. Once your emergency fund is set you can then invest in other financial vehicles.

Last tip: Understand what events should eat up your emergency fund
1. Loss of income – if you lose your job you have six months to find a new one. If this is not too comforting increase your bond fund emergency fund to comfortable levels.
2. Sickness and accidents – if you or an immediate family member gets sick and you don’t have health insurance touch your emergency fund.
3. Other people – This should fall under the 70% of the 10-20-70 income rule. If they frequently ask you for financial help, they won’t be able to help you financially in your time of need. Your emergency fund is for you, your spouse and your children.
4. Replace a lost item, like mobile phone – falls under 70%
5. Tuition – falls under 70%. While future tuitions should be planned and part of 20%
6. Car or House needs repair – touch your emergency fund. Although if you practice preventive maintenance then this should be under 70%
7. A business opportunity – get from 20%, and skim from 70%

Make a chart of events that occur or may occur in your life and identify these if they fall under the 10% or 20% or 70%.

Sunday, August 30, 2009

Material Wealth and Heaven

It was mentioned to me that most people want to be rich but feel guilty wanting to be rich, or fear to be wealthy. Most of the guilt and fear may be rooted in the following passage:

Then said Jesus unto his disciples, Verily I say unto you, That a rich man shall hardly enter into the kingdom of heaven. And again I say unto you, It is easier for a camel to go through the eye of a needle, than for a rich man to enter into the kingdom of God. - Matthew 19:23-24


I recently attended a seminar conducted by Bo Sanchez and this passage in the Bible was very well explained.

We must understand that this was said and written originally in Hebrew some 2000 years ago. Idioms, phrases and words change over time. When my mom was younger "cute" meant "small and bow-legged", now-a-days "cute" is synonymous to "pretty".

"The eye of a needle" is an idiom, an expression. In Hebrew some 2000 years ago "the eye of a needle" refers to the house of a camel, or a camel hole. A camel of course has always been used by travelers to carry heavy loads.

Consequently, in order for the camel to enter its home/hole it needs to unload its load and kneel. Unlike a horse, a camel sleeps on the ground with its knees bent.

Thus, for a rich man to enter the Kingdom of God, he must first detach himself from his material possessions and kneel before God to thank God.

How do you detach yourself from your earthly riches?
Man always finds a way to spend money for himself, why not use the money to help others. Divide your income like so:
10% go into tithes
20% invested
70% spend for yourself

And if you think 70% is too much, try investing it into something that will produce jobs; or you can increase your tithes.

Instead of having a car for each day of the week, why not have two cars and five scholars? After all, a scholar would forever be thankful to you, while a car would forever ask for gas, oil, water, cleaning etc.

Think of other ways to thank the Lord for your abundance.

Remember, a parent will not reject his child. A rich man also belongs in the house of God.

Saturday, August 29, 2009

What is a Mutual Fund?

In the United States and Canada almost 70% of the people invest in mutual funds. In the Philippines, less than 1% are invested in mutual funds.

There will be many posts in this blog about mutual funds because it is a legal investment scheme that even a student can afford. A starting investment amount of P5,000.00 and you can add P500.00 to it any time

According to the US Securities and Exchange Commission a Mutual Fund is a company that pools money from investors and invests the money in stocks, bonds, short-term money-market instruments, or other securities.

Bond Funds invest in government funds to make the safest profitable medium-term investment for the company and its investors; while Equity Funds invest in stocks with the purpose of making the most profit for the company and its investors.

Things I like about Mutual Funds:
1. Investors are shareholders – thus are co-owners of the fund
2. Fund managers are also investors – it ensures they work for the shareholders to profit
3. What the fund earns is what shareholders also earn
4. Investors are charged a minimum amount upon entry (0.5% to 5% of investment). No charges when exiting the fund.

How to make it work?
First of all, the money invested in the mutual fund must have a purpose:
- college tuition for your new born child
- your retirement fund thirty five years from now
- your second home twenty years from now
- your health fund thirty years from now
- your travel fund fifteen years from now
- your silver wedding anniversary fund twenty five years from now

Second: understand it's a long term investment, as emphasized by the examples above.
- once you put money in, you only add to it
- never take money out from it
- emergency money belongs in the bank not it mutual funds

Third: you draw money from it only when the time for your specified purpose for it arrives.
- JR needs P100,000.00 for his first semester in college, redeem P100,000.00 worth of shares
- You spend P50,000.00 per month after you retire, ask the mutual fund to deposit in your bank account P50,000.00 worth of shares every month.
- Your silver anniversary is due next month. Close the fund you opened for your silver wedding anniversary.

Fourth: understand the timing of your needs, it is best to have one fund per need
- JR starts college fifteen years from now, invest in a fund that will finance it
- Retiring in thirty years, open a separate fund for it

For more information on Mutual Funds visit the Investment Company Association of the Philippines (ICAP). Here you will find all the mutual fund companies in the Philippines and all the types of mutual funds that are available for you.

Understand that each company and each fund has its own philosophy in investing. Some companies are more aggressive than others, while some are more conservative than others; which is why they have varying returns.

No company or fund is better than the other. Check each funds' track record, then choose which fund is suitable for your specific need.