Wednesday, March 25, 2009

Simple Money Management

Taking up a business course in college, I was able to learn the truths and philosophies about money. Very interesting thoughts. Like in times of financial crisis, spending is actually good since it stimulates the economy. And that saving too much is actually bad. And that there is more than one way in multiplying your money, depending on the factors, your talents and skills, and circumstances. These are only a few things I learned because of school.

And thus, base from these things I learned in school, I read about, I analyze and ponder about, and (most importantly) from what I experience in real life, I made up a comprehensive idea on what to do with money. I still cannot fully exercise these ideas I have since I am still a year or two away from earning income. But here are some of those ideas:

Money, itself, is worthless
I believe that idle cash is worthless. When cash is just inside the wallet, or hidden inside the drawer, or waiting inside the piggy bank… when cash is not being used at all, it is worthless. In this philosophy, money only starts having value when it is used or spend. Of course, cash is the most liquid and readily accepted medium of exchange but when it is just being stacked and unused, isn’t it being inutile? No value at all. The design of money or cash is to be used, to be spent, and to be enjoyed. It loses its purpose when it’s idle. Scrooge McDuck might be the richest duck in the world but he is a fool for not spending all those money he has inside his money bin. Now, Scrooge is charming since he is not real, but real life people who delight in their money, wanting more and more, and then just loves to count the money they have are twisted in my book (of course, collectors of coins and bills are an exception since they amass money for the sake of collection and hobby). Being a miser and refusing to use money is very unhealthy philosophy. Having money in hand is to be kept minimal and for the sole purpose of immediate payments of current expenses or debt.

Then what should be done with idle money? It’s basic. Instead of stacking it at home, let the money earn by saving it at the bank. That way, you help in the circulation of money for healthy economy, and you get to earn from your unused cash. Plus, it can be readily withdrawn when there is immediate need for cash. But for the time being that it is still not needed, it earns interest. A savings deposit is always a good thing to have. But it is wise not to put all extra money in a savings account. If you do not need the money for the long term, put it in a time deposit instead, or an investment.

Insurance and pre-need plans
The scandalous affair about the Legacy Group may discourage investment in insurance and pre-need. But investing in them is wise indeed. A perfect “saving up for a rainy day” model. The principle of saving up is that so we will have ready money when an immediate need arises (health, death, accidents, fire) or a preparation for a future thing we want (education, house, pension for retirement). So why not invest in insurance and pre-need instead of saving all the extra money in the bank? The yield is better than interest in savings accounts. Of course, such companies we should choose to invest on should be trustworthy, stable, competent, and strong. I can think of three in the Philippines (based on what I read): Sun Life Financial, Insular Life, and PhilAm Plans (this is where my parents invested for my college education and I can say based from experience that this company’s good).

Stocks, bonds, securities, and mutual funds
If future good return on what you invest is the basis, securities and mutual funds, I think, top my list of preference. Acquiring stocks and bonds of corporations for dividends is the basic; to be a stockholder or a bondholder. But if you are not really into being this kind of businessman, then play the securities game (oh yes, it’s just like Las Vegas gambling). Yes, securities are risky, and you can lose big time if you don’t know what you are doing, but it is a truth that good instincts can easily make you rich in this game. But before playing the securities game it is necessary you have the time, the patience and diligence for research, and good instincts. If you do not have these qualities, then it is better to invest in mutual funds. In investing in mutual funds, it’s just like you have the “playing” done for you by professionals instead. What’s left to be done is to be able to choose wisely which mutual fund you should invest.

Riskier but more rewarding than playing the securities and mutual funds game is using your money for capital for your own business. I think this would be harder. No question that entrepreneurs can make it big, but it would require a lot of hard work, a lot of dedication, good communication and relating to people skills, good management, good marketing, and a very good vision. Personally, I don’t think it would work for me.

Real estate
Heaps of money is needed when venturing to real estate. But it’s always one of the best investments you can do. Land always appreciates (and the odds for those circumstances that depreciates land is low) and though a house or building depreciates you may derive rent income from it. Or make it your home instead. I believe that having your own place is one of the best investments you can do in life. Of course, it is unlikely one can afford real estate easily. The best scenario is to plan for it for the long term, and obtain the money to finance it from saving and investing (e.g. securities and mutual funds). If not, there’s always the mortgage.

Promptly settle debts
Though possible, having no debt is almost non-existent in real life. But then, pay debts promptly, like loans and mortgage. Borrowing is not at all bad, as long as the proper evaluation of cost-benefit analysis and opportunity cost is made. The interests would kill you if you don’t pay debts promptly. Or if you can’t pay for the principal installment because there is another thing you have to use your money for, at least be sure that the enjoyment or benefit from where you’ll utilize your money will outweigh the enjoyment or benefit you’ll get when you pay the principal (again, evaluation of cost-benefit analysis and opportunity cost). Credit cards are no-no, if possible (believe me, credit cards will kill you faster than mortgage and loan interests). If not possible that you can’t do without credit cards, pay the balance promptly and not only the minimum per month. As much as possible, purchases and payments should be done by cash.

Evaluation of cost-benefit analysis and opportunity cost
I think I was able to illustrate it well at the last paragraph. In this principle, we should always consider that the enjoyment, benefit or potential rewards we will derive from our choice on where to use our money should always be worth it and exceeds the enjoyment, benefit or potential rewards from the other options of its usage.

Use money wisely
Money management is always careful. We should not waste our use of money. On making purchases or investments, we have to evaluate always if it is worth it (again, the “evaluation of cost-benefit analysis and opportunity cost”). Enjoying the use of money is what matters most above all. Illustration, in purchasing new models of celphones as soon as they come out in the market… It is worth it when the enjoyment we feel from each unit we purchase does not diminish when another new unit comes out, and as we purchase that new unit, we still don’t think that the old units we have are worthless now, but the happiness is derive from all the celphones (principle that collections as hobby is almost always good). But buying the new unit for the sake of fad and being updated with new models, then we don’t derive enjoyment and happiness from our old celphones anymore, then the money was wasted on buying the old units in the first place. If we are not happy on what we’ve done with our money, it’s always a waste.

Collections and hobbies
Using our money for our collections and hobbies is always worth it. It is almost assured that we don’t regret parting with our money for the sake of our collections and hobbies; happiness and enjoyment are attained (it’s what matters). In fact, vintage items (example, cars), toys, cards, comicbooks, antiques, art, and other collectibles and memorabilia usually appreciate in value. Not only you derive enjoyment from your collection, but it’s also financially rewarding in the future if you choose to sell some of your collections. And what of travel, sports, leisure, and such other hobbies? The experiences and fun are more valuable than money, aren’t they?

Share your blessings
Believe me, it is good investment. Treat and buy gifts for those people close to you, particularly family and friends. Help those in need. Give to charities. As much as you can. And the returns? Oh, I assure you, it’s tremendous. More blessings will surely come when you give and give. It’s the natural law. And investing in relationships with your fellow men is worth it. The yield is priceless.

Giving to God
This is the most important and best way to use money. The best investment. Giving to God cheerfully. By giving tithes and other offerings to God and Christian work, we are storing up riches in heaven – riches that would never be gone (unlike the riches of this world). It is a way of showing love and thanksgiving to God who gives us the money and other blessings. By giving to God, we also show our faith that the foundation of our financial security, and all of our other securities, is not on anything of this world but in Him alone; we show that we derive more pleasure in Him than our money.

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In summary, money is not the root of all evil, but love of it is. There’s nothing wrong in getting financial success, as long as our lives does not revolve around it. Money and riches will pass. It’s temporary. Thus we should not hold on to it too much but let us enjoy the use of our money. Let us also share our enjoyment of our money with others. And, lastly, giving to God is paramount.

My financial strategy in life? Spend, save, invest, and give.

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