SSS and PhilHealth for OFWs

Insurance was one of the things that I talked about on Day Two of Project Be's Financial Literacy Workshop. I explained the concept of insurance and how it may address the risk of monumental future losses and expenses, especially when savings are insufficient. When I asked the participants who among them had insurance, less than 10 of 50 raised their hands. But when I asked who had SSS (i.e., Social Security System) and/or PhilHealth (i.e., Philippine Health Insurance Corporation) coverage, almost all of them raised their hands.

While it was good to know that most domestic workers in Hong Kong, as represented by the workshop participants, are active members of SSS and PhilHealth, that they don't consider these government instruments as insurance is a bit disconcerting. As a matter of fact, these two instruments are types of social insurance--ways that the government manages risk for its citizens: SSS offers a specific flavor of cash value life insurance while PhilHealth provides basic health insurance coverage. It's also worrying that SSS and PhilHealth benefits are sometimes ignored and mostly left unused in the Philippines, perhaps because SSS and PhilHealth memberships are compulsory for those who are employed and some people consider premiums immaterial compared to their wages. But even as SSS and PhilHealth remain misunderstood and unappreciated, for a vast majority of Filipino workers living abroad--particularly those who have limited income and act as breadwinners for family members back in the Philippines--these two government-backed insurance instruments serve as their families' first line and cheapest source of protection against risk. In this post, I will briefly present some of the benefits of SSS and PhilHealth coverage and how OFWs all over the world can avail of these benefits.

SSS OFW Coverage Program

Who are covered under this program? New and previous OFW members not over 60 years old; coverage of takes effect upon payment of the first monthly contribution.

What are the benefits of an OFW member? For a maximum monthly premium of 1,560 pesos, OFWs are entitled to various benefits and loan privileges, provided qualifying conditions are met. In general, the greater the accumulated contributions, the greater the value of the benefits. Some of these benefits include:

• Sickness allowance of up to 54,000 pesos
• Maternity benefit of up to 39,000 pesos for a maximum of 4 deliveries/miscarriages
• Funeral benefit of 20,000 pesos
• Retirement/disability/death monthly pension of up to 2,400 pesos per month, paid in perpetuity, or a lump sum payment of total contributions plus interest
• Access to salary loan of up to 24,000 pesos, housing loan of up to 2 million pesos, and house repair and improvement loan of up to 1 million pesos

One advantage of SSS over comparable policies offered by private insurance companies is that failing to make a contribution--a real possibility since OFWs make voluntary (and not mandatory) contributions--does not invalidate the coverage, which is what happens if you miss payment for private insurance. It must be said, though, that missing an SSS contribution will temporarily make you ineligible for some benefits, although you can always make up for it in the future.

OFWs can avail of/apply for all benefits except housing and house improvement loans through 13 SSS international offices in Asia, the Middle East, and Europe.

For more information, please visit the SSS website, or contact the Foreign Branch Expansion and Monitoring Department of the SSS Head Office at 924 7844, 435 9814, or ofw@sss.gov.ph.

PhilHealth Overseas Workers Program

Who are qualified members? Active land-based (as opposed to "sea-based") OFWs who underwent the normal process of registration as an OFW at Philippine Overseas Employment Administration (POEA) Offices. OFWs who are currently abroad but are not yet registered with PhilHealth may also register under this category.

Who are qualified as dependents? As I mentioned, unlike private health insurance, dependents of PhilHealth members also enjoy benefits without additional premiums. Qualified dependents include:

• Legal spouse (non-member or whose membership is inactive)
• Child or children - legitimate, legitimated, acknowledged and illegitimate (as appearing in birth certificate) adopted or stepchild or stepchildren below 21 years of age, unmarried and unemployed.
• Child or children - 21 years old or above but suffering from congenital disability, either physical or mental, or any disability acquired that renders them totally dependent on the member for support.
• Parents (non-members or membership is inactive) who are 60 years old and above, including stepparents (biological parents already deceased) and adoptive parents (with adoption papers).

What are the benefits of membership? For an annual premium of 1,200 pesos (will be 2,400 pesos starting January 1, 2013), members and their dependents are entitled to the following benefits:

• Inpatient coverage - PhilHealth provides subsidy for room and board, drugs and medicines, laboratories, operating room and professional fees for confinements of not less than 24 hours.
• Outpatient coverage - day surgeries, dialysis and cancer treatment procedures such as chemotherapy and radiotherapy in accredited hospitals and free-standing clinics
• Special benefit packages for specific cases

For more information, please visit the PhilHealth Overseas Workers Program website.

Quickie Problem

Suppose you're on a game show and you're given the choice of three doors (and will win what is behind the chosen door). Behind one door is a car; behind the others, goats. The car and the goats were placed randomly behind the doors before the show. The rules of the game show are as follows: After you have chosen a door, the door remains closed for the time being. The game show host, who knows what is behind the doors, now has to open one of the two remaining doors, and the door he opens must have a goat behind it. If both remaining doors have goats behind them, he chooses one at random. After the host opens a door with a goat, he will ask you to decide whether you want to stay with your first choice or to switch to the last remaining door. Imagine that you chose Door 1 and the host opens Door 3, which has a goat. He then asks you "Do you want to switch to Door Number 2?" Is it to your advantage to change your choice?

Please spend some time to think about the problem and try not to google the solution; feel free to discuss in the comments section. I will post the solution next week. Have a great weekend everyone!

Money, Power & Wall Street

Close to four years after the fall of Lehman Brothers, we still have not fully recovered from the crisis that has produced throngs of unemployed around the world and now threatens the already-delicate political and economic stability of the Euro zone. Perhaps the best way to equip ourselves against how events may turn for the worse in the coming months and years is to try to understand how the decisions of industry insiders, regulators, and world leaders have cascaded into this raging economic maelstrom that now seems impossible to stop. So if you have four hours to spare, please watch this PBS documentary about the financial crisis: Money, Power & Wall Street.

Understanding Debt and Interest

PERSONAL FINANCE 101

On Day Two of Project Be's Financial Literacy Workshop on Saturday, I will discuss the concept of debt and interest to our Filipino domestic worker participants. Again, in the interest of hitting two birds with one stone, I will try to articulate my approach in this post; then maybe you guys can give a feedback or two at the end.

In trying to understand debt and interest, we need to look at debt transactions from the points of view of both the borrower and the lender. It would also help if we treat capital or funds as a "good" that people want and/or need, the same way people want and/or need things like food, clothing, and iPhones.

When people don't have enough money for things they want to spend on--a brand new washing machine, an Ateneo education for their kids, or a new business, for example--they almost always turn to debt for additional funds (unlike businesses which can also seek equity financing). And as more individuals and households borrow money, the demand for debt-as-a-good rises correspondingly. Accordingly, people with excess income and savings have the means to lend funds to those who seek it; the more people save, the greater the supply of funds available for financing.

Interest as the "price" of funds

In its simplest sense, interest is the price a borrower pays the lender for the use of the latter's funds (and interest rate is just interest relative to the borrowed amount). And just like any other good, this price is determined by the demand for and supply of excess funds: the more people seek funds, the higher interest rates are; the more people generate savings, and consequently, funds available for lending, the lower interest rates should be.

To illustrate, say person A has 100,000 pesos that she does not plan to spend until after one year. Person X, on the other hand, needs 100,000 pesos now. X approaches A to borrow the 100,000 pesos and promises to repay the 100,000 pesos after one year. If A fully trusts X to live up to his promise, then she may very well agree to lend him 100,000 pesos at zero interest.

What if another person, Y, also needs 100,000 pesos and approaches A to borrow the amount. But unlike X who only promises to pay back the borrowed amount, Y promises to pay back 110,000 pesos after one year. If A trusts Y the same way she does X (you'll see later why this is relevant), then clearly her best move is to lend to Y. But if X needs the funds badly enough, he can make a counter offer that is higher than Y's offer; X and Y can continue bidding the interest up until it goes beyond the ability of one of them to pay. Here we see how the additional demand for funds may drive the interest rate upward (much to the delight of lenders like A, of course). Similarly, when there are more people with funds to lend relative to borrowers--when the supply of funds is high--borrowers like X and Y can shop around for lenders with the lowest interest rates. When more people are capable of lending money, A will have to accept possibly lower rates offered by borrowers. Whatever the case, generally the demand for and supply of funds determine the level of interest rates.

Interest = opportunity cost + risk premium

In the example above we have excluded certain factors may steer interest rates away from the level dictated by market forces. One such factor is the availability of investment opportunities. For example, if A believes that she can easily earn 15% per year if she invests her money instead, then it won't make sense for her to lend her money at a rate that is less than 15%. If A lends her excess funds, she will lose an opportunity to earn 15% from another investment; we therefore say that the opportunity cost to A if she lends her money is 15%, and that this should be the minimum interest rate that she should accept.

The nature of borrowers--specifically their ability to repay their financial obligations on time--also affects the level of interest that lenders demand. Say A is an experienced lender who typically lends at 10% per year, as dictated by her opportunity cost. Say she suddenly realizes that a group of her borrowers has been unable to pay its loan on time one out of five times. In other words, if at any given time five people from this group borrows 100,000 pesos each, only four are able to pay the full principal plus interest amount of 110,000 after one year, resulting in a loss of 60,000 pesos. To make up for the higher risk of default for this particular group of borrowers, A may decide to increase the interest rate to a level where she'll break even even if one borrower out of five defaults (What should the new interest rate be? I'll let you figure that out as an exercise). The excess interest rate A will now charge "riskier" borrowers is called the risk premium.

To summarize, in this post we discussed debt and how various factors may affect the level of interest on debt. We have learned how the demand for and supply of excess funds dictate the general level of interest rates, and how lenders may adjust this rate based on available investment opportunities and the chance that borrowers will default on their loans. Finally, please remember that this is just a simplified discussion of a complex topic, and so I have deliberately excluded other details like the effects of inflation and the other types of risk involved.

Free Online "Introduction to Statistics" Class

PERSONAL FINANCE 101

In previous posts, we lightly touched on statistical concepts like the mean or average (in computing for investment returns) and standard deviation (in estimating risk). Unfortunately for a lot of us who are "allergic" to numbers, the theory and practice of prudent financial management is steeped in statistical and econometric lore. Fortunately, a recent growing interest in the industry and academe to provide meaningful and free online education has resulted in initiatives like Udacity, which now provides a free online statistics class: Introduction to Statistics (ST101) - Making Decisions Based on Data.

The course will be facilitated by Sebastian Thrun, a Professor at Stanford University and a Google Fellow. According to the course description, no prior background in statistics is necessary, which I'm sure is perfect for a lot of us.

So if you want to up your proficiency in investment and financial management, or just make better decisions in whatever situation, I suggest that you take this course with me. I can discuss the assignments with you, but I won't let you copy from me, hahaha.

The course starts on June 25, 2012, so enroll now. See you all in class!

When is "Zero Interest" Not Zero Interest?

DEAR INVESTOR JUAN

Dear Investor Juan,

I'm planning on getting a credit card just for the purpose of getting a highly needed device (and I mean highly) using a 24-month zero interest installment plan. I don't really know much about this but is there always a catch to this thing? I'm sure I can pay the necessary monthly amount but I just wanna make sure that I will only pay for the device with a true zero interest and no other random fees added. Thanks.

Marvin


Dear Marvin,

"Zero interest" payment plans work this way. Say you want to buy something with a sticker price of 120,000 pesos. Then the a store sales representative approaches you and tells you that the item is available at zero interest for 24 monthly installments. This means exactly what it seems it means: you use your credit card to pay for the item, and you will be charged 120,000/24 = 5,000 pesos per month, without any additional charges. In this sense, the offer is "zero interest".

However, the monthly installment for this item becomes part of the minimum amount due as long as it is not completely paid. Which means that if your usual minimum amount due is 500 pesos, on the next billing statement after you purchase the item the minimum amount due will be 5,500 pesos. If you fail to pay this amount by the due date, then you will incur a significant financial charge and your purchase will not be zero interest anymore.

Also, and this is something that a lot of us are not even aware of, such schemes are zero interest only insofar as the "real price" of the item is the same as the sticker price. I know this may be confusing; it says 120,000 on the tag, how can that not be the real price? Well, ask the sales rep how much you would have to pay if you paid "cash" up front--meaning the full amount in one cash payment. The sales rep will consult someone or a record book, pause, and 9 out of 10 times quote you a price that is 5 to 10% lower than the sticker price. Don't believe me? Try it. I do it all the time when I shop for gadgets and other similar stuff, both in the Philippines and here in Hong Kong.

If the cash price is lower--say by 10%--than the sticker price, then paying 5,000 for 24 months for it would not really be zero interest since you would essentially be borrowing money at approximately 10% per year (I'll leave it up to you to compute the exact implied monthly/annual interest using this example). Does this mean you shouldn't avail of the installment plan anymore? Of course not. Maybe you don't have enough cash at the moment to pay up front and you badly need the item, and/or maybe borrowing at 10% per year is acceptable to you. What's important is that you know that you have options. You'll lose nothing by asking, right?

A Closer Look at SMIC's 15 Billion Peso Bond Issue

DEAR INVESTOR JUAN
IN THE NEWS
PERSONAL FINANCE 101

Dear Investor Juan,

I am Manny, an OFW from Qatar, one of your new readers and I admire your willingness to share your knowledge. I'm also new to investments and I would like to request for your opinion and analysis and explanation of an article I read in Philippine Daily Inquirer about SMIC's bond issue found here. I like to know what phrases like "scripless form at 100 percent of face value," "indicative interest rate will be a maximum of 6.2115 percent a year for the seven-year bonds," and others mean.

I hope you can find time to explain these, not just to me, but also to all your readers.

Thank You.

Regards, 
Manny


Dear Manny,

Thanks! I'm glad that you find the website helpful and interesting. And thank you for sharing this information with us.

I've already discussed bonds to some degree of detail in prior posts (i.e., "The Ins and Outs of Bonds" and "Pricing Bonds"), but this issue presents a good opportunity for me to discuss some things that I haven't talked about yet and emphasize those that I already have. So let's go through these details one by one.

1. "It will be SMIC’s first time to offer retail bonds since 2009 when it issued P10 billion worth of bonds."

Corporate bonds are typically available in denominations that are beyond the reach of individual investors, running in the neighborhood of hundreds of thousands of pesos. Retail bonds, on the other hand, are more affordable since they are available in denominations of 10,000 pesos or so.

2. Based on documents from the SEC, SMIC’s bonds will have a term of seven and 10 years with a base offering size of P10 billion and an option to increase by P5 billion in case of oversubscription.

Term (or tenor) of a bond is the number of years from the issue until the issuer (or borrower)--in this case SMIC--has to pay back the face value or the borrowed amount (from the point of view of the investor, the invested amount) to the investor/lender.

3. The proposed bonds due 2019 and 2022 will be issued in scripless form at 100 percent of face value. 

For several years now, publicly-traded securities like bonds and stocks have been issued in "scripless" form, which means that investors are not issued paper certificates of ownership anymore; instead, ownership is just recorded (electronically) on the "books" of the broker.

4. Prior to final redemption, SMIC will have a one-time option but will not be obligated to redeem the bonds in whole. The redemption option is open on the 10th interest payment of the seven-year bonds and on the 14th interest payment for the 10-year bonds.

Just like this East West Bank issue I discussed two years ago, these SMIC retail bonds are "callable," or include a "call option." This option gives the issuer (SMIC) the right but not the obligation to buy back the bonds at a certain price (face value + a certain premium) for a specified period of time (from the 10th interest payment for the seven year bonds and from the 14th interest payment for the 10-year bonds). The issuer would benefit from exercising this right if and when interest rates fall within the specified period, since it will then be able to buy back the bonds at a price lower than the prevailing market price.

5. Indicative interest rate will be a maximum of 6.2115 percent a year for the seven-year bonds based on PDST-F benchmark as of May 21 and 6.975 percent a year for the 10-year bonds. 

The indicative interest rate is the return you will most likely earn per year, before taxes, if you invest in the bonds and hold them to maturity. You will know the actual interest rate when you actually buy the bonds.

There you go. I hope you find my answers helpful. To help you decide whether to buy these bonds or not, you might want to take a look at my past posts about other investment alternatives and risk and return. Good luck!

Using SWOT Analysis to Attain Your Financial Goals

PERSONAL FINANCE 101

I was recently invited to become part of "Project Be," a nonprofit organization based in Hong Kong that runs financial literacy programs for Filipino domestic workers. My first gig is on Sunday, June 10, where I'll talk about how to use the SWOT analysis tool to come up with personal finance strategies. To save time, I have decided to use this post to flesh out how I will approach the topic for the workshop.

"SWOT" stands for Strengths, Weaknesses, Opportunities, and Threats and is a commonly used tool for strategy formulation in businesses. It involves identifying the capabilities (i.e., strengths) and limitations (i.e., weaknesses) of the organization and determining how these capabilities may be used and limitations addressed to exploit opportunities and face threats from the firm's external environment.

This same analytical framework may also be used to arrive at strategies and specific courses of action that aim to achieve personal finance goals. The exercise thus starts with an articulation of "SMART"--Specific, Measurable, Attainable, Realistic, and Timely--financial objectives. This means "I want to be rich" is too vague and "I want to be a (US dollar) billionaire" may not be very realistic/attainable, and it would be better if you say "I want to amass 5 million pesos in assets in 5 years" or "I want to earn 20,000 pesos in passive income each month."

Once you have stated your financial goals, you would need to do a bit of introspection and identify personal strengths and weaknesses. Some examples of strengths include a good-paying, stable job, good communication skills, trustworthiness, an established network of contacts, and so on. Some examples of weaknesses are excessive buying compulsion and unfamiliarity with personal finance concepts.

Then take a look around you and identify emerging opportunities that you can exploit to achieve your goals and external threats that might make it more difficult for you to achieve your objectives. Some opportunities may be macroeconomic in nature, like the increasing confidence of global investors in the Philippines or low interest rates, or specific trends involving the supply and/or demand of/for particular products. In identifying threats, you can use Porter's Five Forces framework to identify the state of competition in your industry (if you're planning to put up a business, for example), possible threats from new entrants and substitutes, and how your business stands with respect to potential customers and suppliers.

Of course, the exercise does not end with just listing these SWOTs; you need to find a way to merge everything by coming up with specific courses of action to attain your objectives. As a guide, you can ask yourself the following questions:

• How can I use my strengths to exploit available opportunities that would help me achieve my goals?
• How can I use my strengths to face threats to achieving my goals?
• How can I limit or address my weaknesses so that I can better exploit opportunities that would help me achieve my goals?
• How can I limit or address my weaknesses so that I can better face threats to achieving my goals?

Please note that these guide questions all end with achieving your goal, which is the entire point of this exercise. Your answers to the questions should be in the form of "action statements" that lead directly or indirectly to achieving your financial objectives. For example:

• I will save 10% of my monthly salary and invest these in equity UITFs.
• Since I'm a good "people person," I'll try direct-selling XYZ Cosmetics, which are becoming really popular in our home town.
• I will read more Investor Juan articles so that I'll learn more about how to manage my money.

Of course, these action statements are worthless unless you actually do them. I suggest you start with the third example, you can never go wrong with that. ;)

Saving for Saving's Sake

What are "savings" and why do people save?

These are questions that are rarely asked whenever matters of personal finance are brought up and talked about. Instead, most of us just embrace "saving" as an infallible virtue that everyone should strive for--that we should save for saving's sake. Unfortunately, before we can start making savings-related decisions that make sense, we must first understand what saving is and why we *sometimes* need to do it.

Essentially, saving is the act of setting aside a portion of one's income for whatever reason; the amount set aside is what we refer to as savings. If we want to be more specific, and because rarely do we treat the saved amount as a goal, in practice, savings are what's left over from spending. Again, if we want to be even more specific, saving is what is left over from spending and consuming. We make this distinction between spending and consuming because there are things we buy that we don't consume immediately--like a washing machine or a car--but rather in increments, over time. So in a sense, these "durables" represent a combination of consumption and savings: that portion we "use up" is what we consume and what remains--the value of the item after accounting for wear and tear--can be considered savings. It is important to make this distinction because it allows us rationalize our decisions and  better record big-ticket purchases on our books. For example, if you buy a brand new 50-inch HD TV for 100,000 pesos and you expect to use it for 10 years, then instead of treating it as a one-time purchase of 100,000, maybe you should treat it as an annual expense of 10,000 pesos for 10 years.

Why do we even "have to" save in the first place? Because savings are what's left from consuming, we can look at the act of saving as the postponement of consumption to a later date. Therefore, to answer the question "why do we save," think about reasons why you would want to postpone consumption in the first place?

1. You expect that the interest you can earn from saving (and investing) would be higher than the rate by which prices will go up in the future, i.e., the rate of inflation. 
2. You are sure that you will need money in the future for basic needs, but not sure if you'll still have the money to cover these expenses then.
3. On top of basic needs, there's a possibility that you might need money to cover unforeseeable expenses like hospital bills and you are not sure if you'll still have the money then to cover these expenses then.
4. You are pretty sure that you can cover all your needs and wants until you die, but you also want to cover the future needs and wants of other people (such as your children's grandchildren).

Basically, your decision to save (and save how much) will be a direct result of how your personal circumstances, tastes, and related decisions interact with the above expectations. If you expect some items to increase significantly in price in the foreseeable future, then it makes sense to buy them now rather than later. If you have an ample retirement coverage, then the need to save for retirement (as in Number 3) will be less; also, instead of piling up cash for unforeseeable expenses, maybe it's better and cheaper to just buy insurance because then your risk will be pooled with that of other people. Of course, the more developed institutional support (though SSS/GSIS and Philhealth, for example) for these future needs is, the less the need to save.

Finally, if you consider for a moment that you won't live forever and if you just focus on the needs and wants of your immediate family (and exclude relatives to the nth degree and descendants three generations down the line), then maybe you can ease the self-imposed pressure to save, loosen your belt, enjoy your income, and live a little while you're still alive.