Financial Planning: How to Begin? - Part 1

Let me first tell you the story of the wise man and the foolish man.

There were once two men, and each needed to build a house. The first man was foolish, and chose to build on sandy soil where it was easy to access and easy to dig the foundations. In a few short weeks he was almost finished. The second man was wise, and chose to build his house on a rocky hill, where it was very hard to access and to dig the foundation. He spent many months building his house. As time passed a huge storm broke upon the houses of these men. After much rain, a flood swept through the valley and the man's house that was built on the sand was swept away. But the second man who had built on the rocky hill was safe. No matter how hard it rained or how fierce the floods were his house remained solid and immovable.

The story above is from the bible Matthew 7:24-27. Most of us are like the foolish man. Have you heard stories about rich people becoming poor due to unforeseen events or due to wrong investment decisions? I bet you have. We really don't have the foundation when it comes to personal finance. Schools never taught us. Our parents may have educated us but only the basics.

To avoid ending up like the foolish man, we need to strengthen our wealth foundation first by knowing our financial standing. How? By preparing simple financial statements.

A) Net worth statement - list all your assets and liabilities. Assets are items or properties that you own such as cash, house & lot, cars, jewelries etc. Preparing this statement will give you an idea what you own and how much you owe. (Assets - liabilities = Net worth)

B) Income statement - this will give you an idea of your financial performance and how much you can actually save. There's the 70/30 rule where 30% of your salary should be put aside for savings (10% tithe so actually 20% savings). But for me, to be able to know how much you can save, know first your fixed expenses*. Common fixed expenses are rent, loan or mortgage, insurances. Know also how much is allocated for your daily expenses like food allowance, transportation or those necessary expenses or we may call it operating expenses**. If you are not sure how much to allocate to your operating expenses, I would suggest you estimate first or keep a record of your expenses then review it at month-end. It seems like a daunting task but there are many apps that can do this for you. I use to do it in excel before but now I use an app however, I seldom fill it up because our money is already allocated. We are left with an allowance only. Savings and other funds have separate accounts and I monitor them also monthly thru excel if target is achieved or not.

For couples, I would suggest that whoever is good in handling money, he or she will be the one in charge. Usually it is the wife who handles it, but if the husband is much better then let him handle the finances. Couples should combine their income. Some are kanya-kanya. Pwede din but it's better to combine to know the real financial standing of the family. As they say, two is better than one.

Example: a family with 1 child is earning a total household income of P20,000 net of taxes. They are not paying any rent but rather paying a pag-ibig housing loan of P7,000 inclusive of MRI and fire insurance. Estimated transportation allowance P50 (fx/jeep)x2x24days (6working days x 4 weeks)=P2,400x2 (husband and wife) = P4,800. Food allowance, nagbabaon sila so food allowance would be for the whole family. Assuming a weekly grocery of P2,000 per week x 4=P8,000. Electric and water bill at P2,500 per month. Child allowance including fare at P150x21 days=P3,150. School supplies at P2,000 per month. Parents allowance since they are taking care of the child at P2,000 per month. Total expenses - P7,000+P4,800+P8,000+P2,500+P3,150+P2,000+P2,000= P29,450 which is way beyond the total household income of P20,000. That's why many of us have debts. Some keep the 30% right away, however, they end up spending it at month-end. Why? Because they do not know how much they are really spending and that their income is not enough to cover even the basic expenses.

So what's your financial status? Are you rich, good or bankrupt?

  
*Fixed expenses are expenses you cannot avoid or if you avoid there will be penalties.
** Operating expenses are expenses incurred in carrying out day-to-day activities


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