CHAPTER ONE: It’s not the How, it is the Why!
Fely and I had started to invest in the 90’s. We invested in real properties, in stocks but we failed to achieve our financial goal? Why? Because we did not define clearly our PURPOSE for investing, WHY are we investing? What is the investment for, how much should we accumulate, and what is the target date? In investing, the PURPOSE or GOAL defines the Investment Vehicle to use.
In the past we simply invest for no particular reason. When we learned right investing, Fely and I now invest for a purpose or a particular financial goal. We made sure too, that we have a Complete and Solid Foundation through a Complete Investment and Protection Strategy.
Foremost of these purpose for investing and protection are what we term as HIDEE.
H is for the Healthcare needs: Both the Short Term and Long Term Healthcare needs. I is for the Income Replacement at retirement. D is for Debt Payments, E for Education and the last E is for Estate Preservation. We need to do some calculations on this.
There are other Goals that needs to be planned for. Buying a new house, supporting you parents, travelling abroad or having a Pilgrimage. All these needs to be defined first.
This is what we found: The investment Goals or Purpose, will define what Investment Vehicles to ride. Without a purpose, we can invest but this is like creating a travel plan without an itinerary. Imagine planning for a pilgrimage to nowhere? How do we know what is the appropriate vehicle to use? That is exactly the same in investing. When we are clear with the WHY, the HOW and WHAT just follows…
I have attached below the worksheet we used to define our investment goals.
A. Health Care
The topmost priority in our Investment and Protection Goal is Health Care. Employees normally have a short term healthcare benefit. However, like many people when the company retire us the company gets the benefit back. We also need to have a Long Term Healthcare. By long term, it means a healthcare coverage beyond retirement. This is very basic and the first priority in building your financial foundation. Why is this so?
When Fely and I were both employed, the company we worked with really provided very well for our healthcare. However, when the company opted to give us early retirement, our healthcare also ceased. Thus, it gave us a very big lesson that we must make sure that while we are working and the company provides for our short term healthcare, we must invest on our own long term healthcare too. We do not want to experience the stories of Jose and Juan and many others who have struggled and still is struggling financially because of a medical crisis in their life.
So this is the first investment and protection goal that we took care. We acted on it. We got ourselves and our children, long term healthcare. Our entire family are secured that any medical crisis we might encounter, we have money that we can use. Fely and I do not need to sell off our stock investment, or properties. We do not have to incur debts. We have a solid financial foundation.
We calculated how much we would need in case of a medical crisis, as well as for the basic medical needs. By basic, this includes maintenance medicines, and vitamins, and supplements. We calculated the future value of what we spend today to the year we project we actually will need it. We used an inflation rate of 7%.
I had seen many families that went bankrupt because of a medical crisis. One of them is June; a retiree from a prestigious local company. In his retirement years, he had cancer. All their lifetime savings and properties were wiped out in just a matter of months. He even had to ask financial support from family and friends. He had to even resort to borrowing money. Finally he succumbed to the disease not because there is no cure but because he has exhausted all his resources and his family could no longer support him. He died penniless and in debt.
Jose a seafarer, with very high pay had lots of money. Whenever he arrives from months of sailing as captain of a chemical tanker, the whole “barangay” celebrates days of feasting and drinking for his many friends. He lived a life of a multi-millionaire. But one day, he was diagnosed with heart ailment. For the first year, his company and his savings enabled him to survive.
However, his resources to pay off for his medical needs and daily expenses did not last long. Worst, since he no longer can ably steer the ship, he was retired by his company. Since he is retired, he no longer is covered by the healthcare the company previously provided him. Even now, he still is below 60. But because of his heart condition, he is not taken in even on a lower post. Thus, he no longer had income, and along with that, his drinking buddies abandoned him. Worst, his wife left him alone. Now, on his late 50's, he is lonely, penniless, jobless, and cannot afford to care for his health.
Another guy we met was Juan, a very young Training Manager of one of the fast-food chain in the Philippines. Even before he reached 30, he had a stroke rendering half of his body paralyzed. Like the experience of Jose, the company only took care of him on a very limited number of months. Eventually he was also asked to resign. So the short term health care he enjoyed as employee is no longer in effect. Since he did not invest on his own short and long term healthcare, he had to pay for his physical rehabilitation from his own savings, and from the help of his family. This definitely put a terrible stress in the family's finances.
Peter is another example of those who had very successful career in the past, had high position, and well covered short term health care. He is almost always on travel and had assignments overseas as a Manager in a Semiconductor Manufacturing. However, he had contracted kidney problem that necessitated medical attention.
Initially, he was covered by the company he worked with. But, of course as usually what happens, the company would only cover medical needs of an employee on a limited basis. This left him to fend for his own needs. Since he did not invest on his long term healthcare while he was gainfully employed, he did not have any back up plan. In his early 50's, he is unemployed and survives by the income of his small business, and by asking help from his former co- employees and friends for his regular Dialysis that already had cost him millions. Today, Peter has succumbed to his illness not because it does not have a cure, but because he no longer has money for it.
We met many June, Jose, Juan and Peter of different ages, who went through the pain and difficulties in their finances due to medical crisis. People really go bankrupt if they do not have the basic short term and long-term healthcare. It does not matter whether you are in the early part of your career or in the last quarter of your work life. The lesson we learned from these people we met is clear, we have to make sure that in building our solid financial foundation, we must indeed start it by securing our own long term health care. And if we do not have a short term healthcare, we must secure it too!
We have started on 2007 and completed our 5 year investment on this Long term healthcare. With just the interest earnings of our long term healthcare coverage, we can sustain our daily basic maintenance or even a medical crisis, which we pray won’t happen. But just in case it does, we have more than a million pesos to cover for that. We won’t have to sell any property nor borrow money. Better yet, we expect and claim that we will be healthy, and thus, would use the interest of this invested money to help other people like Juan, Peter, and Jose who are in desperate need.
On 2015 we took another Long Term Care (LTC) Plan to beef up our Health Protection in our senior years. We will finish investing on this LTC by 2022.
B. Income Replacement and Life Protection- Insurance
The second priority we learned and executed is to have our Investment for Income Replacement alongside Insurance Protection to have a solid financial foundation. Most Filipinos either do not have insurance or is under insured. You can do your own survey to find out that only about 1/10 Filipinos would welcome the idea of putting aside money for Insurance Protection.
But, let’s face it. All of us will die, we just do not know when. I want to share with you that Life Insurance is actually like renting an apartment. You see, if I buy an apartment it will cost me a million or more for a budget studio type apartment. To rent it will cost me about ten thousand. I can live in the comfort of the apartment by renting it at ten thousand while I do not have yet the million to own it. The cost of owning an apartment per month in this example is about 100 times the cost of what we pay as rent. The cost of Insurance varies with age. On the average, for those who start young in their insurance protection, they pay less. We pay this to have peace of mind. In case we die too soon our family will survive our loss.
I fully believe that having Life Protection or Insurance is a priority over Investing in other investment instruments. The cost of insurance increases as we grow older; thus, the earlier we start, the better. I believe that the amount of insurance we need to have depends on two things. The amount of Responsibilities, and the amount of savings and investments that generates passive income we already have. The basic amount of insurance is equal to about 10 to 20x Annual Income. This is also the Target amount of the Investment Accumulation needed to generate our Income Replacement in Retirement. So if you are earning about 20K Gross Income per month, you need 20x12x10 = 2.4M of Insurance. When you have accumulated about 2.4M of Investment, you are already self-insured. To factor in Inflation, you can multiply the value every 18 years if the Inflation Rate is 4% on average. Will guide you on this in more detail if you want to understand this better.
When the size of our Passive Income is already equal to the size of our Responsibility, then, Insurance is no longer a need. Thus, the Insurance Coverage I recommend is equivalent to the Amount of Responsibilities minus Amount of Passive Income.
If you are young with not so much responsibilities, then, you do not need that much insurance. The amount of insurance must at least be equal to your responsibilities. Thus, if you are a bread winner, Insurance protection is indeed a priority item in allocating funds. But, Insurance can still supplement our Estate Planning needs when time comes that we have to transfer our inheritance to our children or loved ones.
There is an insurance that is non complicated, simple. It is pure term insurance. This is cheaper and can allow you to manage the difference in cost versus what is commonly called as bundled life insurance with investment. There is also bundled insurance. By Bundled, it has the component of both insurance and investment. I recommend the pure term insurance. However, you have the freedom to choose what suits your need and desire and affordability.
Fely and I got additional coverage for accident insurance. Cost of Accident Insurance is relatively cheap. We had taken an accident insurance for the entire family that covers us for a million pesos, and we only paid about five thousand (5000) pesos annually for this protection. We get this on top of the travel insurance we get every time we travel outside the country. It is really much better to be prepared for any eventuality. The peace of mind is priceless.
The problem with most of us Filipinos in general is that we do not believe in Insurance. Sometimes, we even use an excuse using our religion, saying we need not worry about our future for God will take care of us. Before I was enlightened about the need for insurance, I myself quiver every time an agent approaches us to sell insurance. I had this mind-set that insurance is a sign of insecurity in the love and protection of the Lord. What a very wrong mind-set. Yes the Lord loves me, but I have to still get my insurance to protect my love ones. For if I really love them, I should have myself insured so that in any case I die, there is instant money for the family which they can use to survive.
Among the Asians, we probably are the least insured. In many other countries, when people die, the family benefits from the instant money they get from their insurance. Thus, they maintain their lifestyle and survive even without the bread winner. In our country many die penniless, and in fact leaves a lot of debt and do not get anything for most are not insured. Statistics will show that many of the 100 million Filipinos are not insured. Moreover, some of those that are insured do not really know what insurance they need. And to my amazement, in Australia, they even insure their pets!
I also remember vividly in one seminar I attended. Rex Mendoza; one of the best if not the best fund manager in the Philippines, told us that “we do not have any right to invest if we are not properly protected”. In short, we must prioritize insurance over investing.
When we attended the Hillsong Conference in Sydney July of 2013, I turned on the TV and the commercial was “Pet Insure”. In Australia I am so amazed that dogs, cat, horses, or pets gets insured out there. In the Philippines, the car gets comprehensive insurance while the driver gets the lowest one or even none. I really hope this will change.
C. Debt Management
This is the third priority in building a solid financial foundation. We have shared our experience ... our harrowing experience on debts in our Book “Debt Destroyers”. I know a lot of people would be able to relate to our own story.
There are two kinds of Debts. There is good debt and there is a bad debt. Good debts pays off for itself. Bad debts on the other hand takes away more money from your pocket.
Bad Debt indeed has to be managed, or else, it will manage us. Managing debt comes after the basic protection, but is a priority over building emergency funds, and investing for the long term. Let us share why this is so.
Say you have 50 thousand cash on hand and you also have a debt of 50 thousand. The question is do you invest the 50 thousand or do you pay your debts? You need to check first the interest payment on the debt you incurred. Then, check how much is the projected investment returns.
If I place the 50 thousand on an investment that earns me more than the interest payments I have on the 50 thousand pesos I owe, then, this is "good debt". My coach told me that “Top Priorities in debt management are the bad debts. You can leave the good debts pay for itself.”
Classification of our debts into good and bad debts therefore was the first thing Fely and I did in our own debt management. Second thing we did was to prioritize payments for bad debt that has high interest rates. Then, we created a definitive elimination plan defining the amount to allocate for each bad debt to eliminate it on a particular timetable. Fely and I considered all of our credit card debts as “bad debts” for it has a 3.5% interest per month which none of the investment vehicle we know will guarantee such earnings.
While managing debts, it will be good to get additional Life Insurance Coverage to the amount of what you owe. This will ensure that the family you leave behind won’t be burdened with the debts in case you die before you fully pay your debt.
Debt consolidation is also a way we expedited payments of our bad debts. This means that all our existing debts were moved to a single loan on the creditor with the least amount of interest charges and longest payment terms. One particular example is a 500,000 Loan that we moved from the credit cards which charges us 3.5% to a bank loan that only had a 7% annual interest charges. Consolidate debts into a lower interest rate loans.
The “Debt Destroyers” details how we were able to fix our debt problems. I invite you to get hold of that Book Published by Shepherd’s Voice Publication.
D. Create Emergency Funds
First Quarter of 2020 is a good test for all of us as far as Emergency Funds are concerned. Many people struggle financially because of the inability to earn, or even worst is that a lot of people had an untimely retrenchment and sickness.
In the past Fely and I did not have Emergency Funds. Thus, when we encounter emergencies for our own family and our extended families we borrowed money. We got deeper into debts and our solution is either our credit card, or we go to our relatives or friends for financial help. This just put Fely and I further deeper into the debt trap. So what is the obvious solution? We have to “Create our Emergency Funds”. We need to save just about 3-6 months of monthly expenses to tide us over in case of emergency. One example is if our company suddenly starts to reduce headcount we have 3-6 months to survive. Another situation will be for repairs of a leaky roof, or when we need money for our car unexpected maintenance.
Emergency funds are not inclusive of the medical emergencies. Fely and I prepared for that which is what the basic foundation is all about: short and long term healthcare as well as life protection. The priority A and B discussed above.
Thus, we calculated how long we will survive by dividing the size of our emergency funds by our monthly expenses in case suddenly we are taken out of our job.
Fely and I saved our Emergency Funds in an instrument that we can easily withdraw. Savings account is the easiest and fastest way but it gives also the least growth to our money. We can also get into other Bank Instruments like Time Deposits. Another vehicle will be Mutual Funds which can earn more for us and is also easily “withdrawable”. Fely and I used the savings account in the beginning as we build our Long Term Health Care with Investment and Emergency Fund. Eventually, we invested more on Mutual Funds for our emergency funds when we had completed our investments in our long-term healthcare which is actually also emergency fund.
We have met many people who do not think about and save for emergencies and they end up with more debts. Emergency fund is the surest way to avoid getting back into the debt trap.
E. Education and Estate Planning
Education of our children also takes priority seat in our investment goals. We have invested in pre-needs that we were able to use and some that went to drain. But it did not stop us from learning and investing in the right vehicle for this goal. We want to give our children the best education that they can avail of. We want to give them the choice of what school to get into and not just settle for what we can afford.
I remember when I was about to finish my High School some few years back (ehem… in the 70’s). I really am worried on whether I can go to college or not. I thought I would have to stop studying and work for a while to have money for education. I studied hard, and prepared myself for getting scholarships.
First thing that crossed my mind was to get into the Philippine Military Academy. But because I was short (I was only 4 ft. 11 inches) when I finished High School, I crossed out that option. I took scholarship examinations and passed both the City of Manila, and the National State Scholarship. While this feat made me who I am now, I would want to spare my children the agony I went through, the sleepless nights of wondering if I can get into college. So I invested for my children’s education.
On 2016, Rjay my first born son, Chai my eldest daughter, Rocky, and Chiara are all done with their college education in their school of choice. Chiara, the youngest has also finished Business Management.
We need to invest also for Estate Preservation. This is a very important part in financial planning and this deserves a wider and deeper discussions. And, we really need to have an Estate Plan to ensure we are prepared to transfer inheritance that we built to our children. This can be covered two ways. You can get additional Life Insurance Coverage to pay for the Inheritance Tax to transfer Ownership of your properties to your children. The other way is to engage services in a company, which can create a Holding Company for all the properties, and investments you have accumulated. You may want to inquire from any of IMG Members, about the Asset Preservation Services Company which can help you on this.
There are other Goals you need to set. These are for your Dream House, Dream Car, and Dream Vacation. You need to define the time frame for each of these goals so you can quantify how much you need to invest for each one. The best Investment Vehicle for this will be in Mutual Funds.
But where do we squeeze out the money to invest?
