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Letter from a Reader: Do-It-Yourself Financial Planning Part 2

Letter from a Reader: Do-It-Yourself Financial Planning Part 2

http://www.financiallitnow.org
We’ve featured Mr. R, a reader who sent an inquiry on financial planning via email, in our post Letter from a Reader: DIY FInancial Planning. I loved his inquiries, I felt my planning for my own financial life in that detailed manner too – like thinking about future kids’ education, retirement and seeking mentors to enhance trading/investing skills. You know, it feels great to help other people in their planning dilemmas as any individual experiences that. I was happy to receive his feedback and found the answers to my pending questions. 
You can also post comments if you want to share any knowledge or experience that can help Mr. R. 
To Mr. R, thanks for trusting me with your queries. I did not disclose your real name here to protect your privacy. Again, I am glad to be of help!
Let’s look at his follow-up answers and questions:
__________________

Dear Ma’am Krissy,

Good day! I would like to give a thousands thanks to you for giving me a very good advice to my recent email regarding financial planning! I am very much appreciated your effort, response those questions with full details. You are a good financial mentor!

Below are my response to your questions recently.

1.How much is your estimate monthly expenses and how much are you saving per month

I’m earning 85,000 pesos a month. A 20,000 pesos is my family’s expenses and 60,000 pesos is my monthly savings.

2. How old is your daughter and where do you wish to send your daughter for education?

I have 1 daughter and she is 2 yrs and 3 months old now. I wish to send her to a private good school until college. Let’s say DLSU is her future university for college days.

3. What is your ideal house to retire here in the Philippines?

I owned a house and lot in Davao del Sur (my parents-in-law place) where we stayed there for a year. It has a big area 110 m2 and located along the highway and a seashore but we decided to sell it for 350,000 pesos to any interested buyer. Right now it is a vacation house. We moved out to Bacoor, Cavite after my wife gave birth and rented a small apartment for 2,200 pesos per month. It’s walking distance to my parent’s house.

My ideal house is located in Molino Daang Hari road worth 2.7 million pesos. It is accessible to nearby communities and landmarks especially Alabang. I don’t have millions of pesos but I only love to purchase it for permanent settlement. So far I have earned 360,000 pesos for 6 months. Every year is my working contract in abroad and my earnings will be multiplied.

Is it wise move to purchase my ideal house right away without an instant budget? or should I wait to have 2.7M in my pocket? But that amount will takes me 3 years to earn plus expecting to sell my house in Davao soon for additional income.

4. How much do you think you would need for your retirement i.e. what kind of lifestyle do you wish to sustain?

A 30 million pesos or more may satisfy our retirement. This is only my assumption and wish because my dream is to retire with lots of money and no worries for whatever happens in the future.

5. Since you are looking at investing in stocks and based on your inquiry it would be your first time to dip into stocks investing, do you have other investments such as mutual funds, time deposits, rental properties, etc.

I have 150,000 pesos time deposits in BDO. I have also coconut investment in Davao (my wife’s birthplace) worth 120,000 pesos for 5 year contract. I read that you are also engaged with this kind of investment. Harvest time takes every three months and my income is not consistent but ranging it 5,000 to 8,000 pesos. The income I got from it is deposited to my daughter’s account for her future educational fund. I have also 4 cows so far but hoping them to multiply for future income.

My wife doesn’t have a job but she is engaged in a small business like selling of Avon, MSE, Dakki, celphone loads and other personal products that have commissions and rewards. But she has plans to work soon in Dubai for more income.

6. Since you are looking at the Easy Investment Program of Citiseconline, would you be committed in infusing regular, monthly funds into this kind of vehicle?

I am very interested to learn stock market investing because I want to retire with millions of pesos and enjoy retirement pleasure as the rich people did. Time is the most important to me since I am now 36 yrs. old. That is what Bo Sanchez’s maid did, invested their own money in a stock and now they achieved high returns and rich than other managers (based on his popular book).

How much is the total fund required of me when I started investing in stocks thru Citiseconline?

Is it good decision if I infuse 50,000 pesos for 5 stocks that i am going to choose and do investing other than trading? (That is Bo is saying: investing in a long term and not trading for a short term). Maybe I will follow what stocks that Bo had chose for his maid. Or can you please help me to choose and invest? I also like to invest in UITF or in equity funds since it is less risky compare to stocks.

Could you please advise me better so i can have a guidelines to avoid losing money and end up with good retirement with millions in my pocket?

Again thank you very much and God bless! Happy millions!

Respectfully yours,

Mr. R

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http://i.istockimg.com
Now, let’s get some facts we can use to come up with Mr. R’s financial plan.
Facts & Figures
  • Mr. R earns Php85,000 – Php20,000 remitted to family, Php60,000 is for monthly savings, Php5,000 miscellaneous/tax.
  • Mr. R wants to secure his daughter’s education. His daughter is less than 3 years old as of today.
  • Mr. R wants to have a residence worth Php2.7M in Molino, Cavite. Currently he has a vacation house in Davao worth Php350,000. His family is renting at Bacoor, Cavite for Php2,200.
  • Mr. R has Php150,000 worth of time deposits at BDO. He also has a coconut farm worth Php120,000 which earns him a quarterly income of Php5,000-8,000.
  • Mr. R has savings of Php360,000 which he was able to save in 6 months.
  • Mr. R is willing to invest Php50,000 in the stock market.
  • Mr. R dreams of retiring with Php30M in his pocket.

Financial Goals

There are three main goals that Mr. R has mentioned.
  1. Retire with Php30M.
  2. Send daughter to good schools and to DLSU in college.
  3. Acquire his dream property.

Highlights

Here are my initial observations around Mr. R’s case:
  1. No debts mentioned – no cash outflow expected! Only increasing expenses when his daughter starts schooling. His wife also does business on the side and might go to Dubai for work.
  2. 23.5% of his income goes to remittance. Based on his savings, he saves about Php60,000 per month (Php360,000 savings for 6 month). This is actually very good!
  3. He’s got passive income from coconut investment. I always hear from my parents saying, a coconut farm is a lifetime investment. He’s got a property to sell too worth Php350,000 in Davao – good location, along highway and seashore (I think I’d love it!) which can be good source of passive income again if rented.
  4. He’s 36 years old now. Not sure though if he’s got plans of coming back, or when he is coming back for good. Say, he would work abroad for another 14 years (assuming he’d come back home to retire at age 50). That means for 14 years = 168 months ~ 10M if he consistently saves Php60/month. Not bad, Mr. R!
  5. Not sure if he has some ailment concerns for himself or family. Not sure again if he has some medical coverage or insurance. I do personally believe in investing in insurance policies and having a separate health and life plan fund or savings. Not sure also if he has vices such as smoking and drinking but seems like he’s got none since he’s able to save a lot. (Congratulations!)
  6. 15 years from now, his daughter would step into college. He needs to plan for this, assuming also that she’ll be the only kid in the family.

Recommendations

This is the exciting part – let’s create Mr. R’s financial plan. 
To begin with, I’d first like to stress that Mr. R is the ideal overseas Filipino worker – someone who thinks about the future, prepares for it, asks the right questions, saves and is willing to invest. Every Filipino, whether in the Philippines or outside, must learn financial literacy. Given the vast resources available, there’s no excuse in not learning at all. 
  1. Emergency Fund – Mr. R has a Php150,000 time deposits in BDO. Assuming that household expenses is amounting to Php20,000/month in 6 months he and his family are fully covered, even more than that. He is only required Php120,000 (Php20,000 x 6). He can opt to re-invest remaining Php30,000 to other investments or keep it as further cushion. For me, I still choose to place emergency funds in savings and time deposits such that I can withdraw or preterminate anytime. 
  2. Insurance Fund – Mr. R has Php360,000 savings – what shall he do with it? I suggest securing you and yourself first by purchasing an insurance policy. Choose to pay the annual premium so you can have savings compared with paying quarterly or monthly. I would think it is better to pick an investment-linked insurance. I would assume that your annual premium would range from Php30,000-Php40,000 per month you can take out from your savings.
  3. Real Estate Fund – As an OFW, Mr. R is qualified to avail of cheap mortgage loans such as thru Pag-ibig. If in case the property you desire is developed by an accredited real estate developer, it is wise not to buy in cash since the money you use to buy a house can be allocated first to investments which will earn more through time. Say, the housing rates would be ranging from 4-7% per annum in Pag-ibig, and mutual funds and stocks can give you about double-digit returns such as 10-40%. Please assess Mr. R if the Php2.7M property is worth it – lot size, location, amenities, security, home owner’s association fees, property taxes, number of rooms and fixings that come with buying a house. Developers normally ask for 10% down payment which can be paid in 6 monthly instalments. That means you need to pay about Php270,000 or Php45,000/month in 6 months. The remaining Php2.43M you can loan from a bank or though a Pag-ibig. I think for OFWs the max loan amount is Php3M – will verify this one. To be honest, renting is cheaper in your case since it’s only Php2,200/month but of course everyone wants to have a home of our own. If there’s necessity to move to a bigger house, you can start processing your housing loan and get the first two instalments from your savings, and the remaining 4 instalments from your future savings. Why two months? Since it would be enough time for you to prepare mentally and financially that hey, I’ll be having to pay loans two months from now, what preparations do I need, what legal documents do I have to sign, etc. You can check out my post related to choosing a property
  4. For the coconut farm and the vacation house – you can choose to keep both as sources of passive incomes, or try renting out the vacation house in Davao. If income is good, you don’t have to sell the property (if in case I want it, please sell it to me at favorable price! Hahaha! I always dream of having a house near the seashore. I thought I was a mermaid more than a banker). Also, I want you to have a buffer – if in case of emergency, you have a property to sell, either the coconut farm or the vacation house. Remember that you’ll have a housing loan, and it is truly a headache if in case of emergency you got nothing to turn to.
  5. Health and Medical Fund – I know this isn’t one of the main financial goals but I stress it’s equally important to save up for this. What I want you to do is convert Php100,000 of your savings to mutual funds. Nope, not in 1 mutual fund. Break it further. Php50,000 to a balanced fund and Php50,000 to an equity fund. Why? I want it to be a little aggressive but not too much since I want the funds to grow double-digit, and take advantage of the fact that you seem to have a healthy family.
  6. Education Fund – Approximate DLSU annual tuition fees plus miscellaneous would be Php130,000. 

Php130,000 x 10% (compounded annually for 14 years assuming 10% increase in school rates)
= Php493,674.78

Php493,674.78 x 4 (4 years of education)
= Php1,974,699.12
This means you need atleast Php2M for your daughter’s education!
But wait, I got good news for you.
You have Php360,000 savings and Php150,000 in time deposits, right?
Php150,000 = emergency fund
Php100,000 = health and medical fund
Php60,000  = insurance fund (more or less)

You still have Php200,000 which you can invest in mutual funds or stocks.
Our goal is to earn 15% annually, which is achievable, depending on market conditions.
Using a future value calculator, your Php200,000 in 14 years at 15% compounded interest (meaning you re-invest your earnings and the earnings earn another 15% and so on) will give you a whopping Php1,415,141.15! If you read my mind, that means adding more funds to it will help you reach your Php2M target for your kid.

And for the Php30M retirement fund, please allow me to tackle that in my future posts. It’ll be a lot more exciting to put it separately!
Of course there may be circumstances that will get in the way, such as sudden expenses like fixing areas at home, new electronics, appliances or gadgets that need to be bought, health issues, unexpected travel expenses, etc. But keep in mind that you need to stick to the plan. It’s not gonna be easy, but it’s possible to get there.
Again, many thanks, Mr. R for trusting me with this.
Hope 14-20 years from now, or sooner than that, we’d be able to meet personally to share how our financial goals have been.
Never miss the money rush!
Be in the money know.
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Happy millions!