Dear Investor Juan,
Hello po and good day!
I have been reading about financial freedom, investing and mutual funds (through Francisco Colayco's book) but it was only until very recently that I put things to heart and thus stumbled upon this blog.
I am 23 years old and just recently gave birth to a healthy baby girl. My partner is 26 years old. I've only really been working full time for a year now and my partner for half so perhaps you can give me some slack and skip on the sermon on why we have not saved much.
We are still on the process of building on our emergency fund and only have around 10k in time deposit. I guess that would pretty much be our net worth (maybe perhaps a little higher if you include the 7k (9k worth, I think) air conditioner plus a few books, some baby stuff and a 1-year-old netbook that we could sell just in case).
Anyway, here is an overview of our monthly expenses:
Utilities/Home Expenses - 10k (we still -shamefully- live with my parents)
Budget for baby - 10k
Daily allowance for me and hubby - 4k
VUL from PRU Life - 3k (I got this for myself before I got pregnant)
Leaving us around 5-6k for savings
Perhaps you could give us advice on what you think of this plan. We used your Budget Planner excel sheet, by the way. We want to build up on our emergency fund but I am also contemplating about investing in mutual funds as well (at least just the initial 5K) since we will be expecting a midyear bonus come June 2013. My plan is to save at least 6K a month, perhaps get the 1k and place it in mutual funds. What do you think?
I know you would not suggest having the VUL but I already got it anyway. My hubby and I are both covered by HMO (plus baby will be soon, as well) and I'm thinking about making the emergency fund as a health fund, for the mean time.
We are also thinking about getting a Volkswagen Beetle which is around 35k-50k - I think it could really help us lessen transportation expenses as we ride the taxi when taking our baby with us. We also have to save up for baby's first birthday February next year (haha) and then eventually for her education, which maybe 50k a year in today's money and rates.
We do have plans of investing in an agricultural lot in the future - in five years, maybe? And then perhaps an apartment in ten. Anything that generates passive income.
Well, my letter is quite long now and it's probably giving you a headache. Compared to your other letter senders, I think we are quite low on money, no? But hey, it's never too late, right? We're still quite young and I also have my parents with me (hehe) whom I can ask for help if really needed. I also keep telling myself that, at least, as early as now, I am already thinking about having financial goals and changing the way we handle our money.
PS. I believe we could really achieve our financial goals - we were able to save up around 50K in just 3 months (and that doesn't count the monthly expenses we had to deal with) in time for my delivery.
PPS. I work as a freelance writer once in a while and I was wondering if you could refer me to the friend you were talking about in one of your blog posts.
Thanks in advance, Investor Juan and more power! And thanks a lot for teaching me so many invaluable lessons in personal finance. :)
Pam
Dear Pam,
First, let me get one thing out of the way: you and your partner are actually doing quite well. You have a positive net worth and presumably not in debt, you're still young, are both employed, and so have plenty of time and opportunities to prepare for the future. And perhaps what's most important is that you are aware of the need to take control of your finances, and have started to do something about it. Believe me, you guys are off to a very good start.
Now let me address your other concerns.
Over the years, I have been developing a framework for managing personal and household finances, an early version of which you may have already come across in this series of posts. The latest version, which I'm presenting for the first time in this post, looks like this:
Stage 1: Eliminate (expensive) Debt
Stage 2: Manage Risk with health and life insurance and an emergency fund
Stage 3: Save and invest for Retirement
Stage 4: Save for discretionary future Expenses
Stage 5: Build-up Wealth
(I hate acronyms, but I guess they're okay if they can help people remember important things... so there you go--DRREW).
I'll explain this framework in a dedicated post in the near future, but for now I think the only item that needs a bit more explaining is "discretionary future expenses." This item consists of high-priced purchases (home or car) and future needs that require a substantial amount of money (wedding, child's future education, European holiday, etc.). Depending on the actual item or need, planning for the purchase or expense may take priority over saving for retirement. For example, you might want to prioritize saving for your child's education over your retirement savings.
So right now, you are in Stage 2. You're employed, so you're amply covered by insurance, and you're starting to build up your emergency fund. Regarding this, I suggest that you take out the 10,000 from the time deposit account and just place it in a savings account. The purpose of an emergency fund is to have money in hand for emergencies so that you won't have to rely on debt (which tends to be expensive if taken on short notice) or selling your assets at a loss. Emergency funds need to be accessible any time, and it's okay if you don't earn interest--remember, you're not saving to get rich, you're saving for emergencies. Since you're spending around 25,000 per month, you have to continue adding to your emergency fund until you accumulate 150,000 to 200,000 pesos.
Regarding the VUL, if it's impossible to get out of the deal without incurring fees or losing more money, then just stay. But please just stick with your premiums and don't invest any more than you have to.
Once you have your emergency fund taken care of, the proceed to Stage 3 and save and invest for retirement. You have determine how much you have to save for this (it's something that I've talked about in the last post and in a future follow-up post). And this is where your plan to invest in property comes in: retirement savings need to be invested in long-term vehicles such as real estate and low-fee equity funds. So you have the right idea, just remember what you are saving for.
I guess that's pretty much all I can offer now. Thanks for the email and congratulations on the great start. I'll email you in private about that writing "racket." Good luck!