Common Money Pitfalls and How to Avoid Them
Most people save by taking out all the expenses first and then placing whatever is left of their salary in the bank.
Most people save by taking out all the expenses first and then placing whatever is left of their salary in the bank.
However, if you’re like most people, there’s not much left by the time you get around to paying all of your bills and spending on food, transportation, clothes, medicine, and so on.
Henry Ong, chairman of Registered Financial Planners Philippines, says it is more efficient to set a target amount for savings and then deduct this amount from your money every month before doing everything else.
Better if you can set it up so that your company automatically deducts this amount and sends it straight to your savings account.
Some people like having a written budget, with everything categorized from bills to food and transportation. Others, however, prefer having a small amount in hand per week, which they then live on.
Whichever way you like it, Ong tells the Inquirer business staff in a round table discussion, pay yourself first and then live within the budget that’s left.
“If you don’t see the money, you can’t spend it,” Ong says.
It’s also a good idea to set aside about six months? worth of living expenses as an emergency fund. It’s for all those unexpected expenses’anything from a gift-to-yourself vacation to a medical emergency.
It may seem like a huge amount, but with small, steady savings, you can build such a fund and arm yourself in times of emergency.
Borrow Wisely
Credit cards have become a ubiquitous, convenient way of managing cash flow, but it must be handled with care. Using a credit card means you are essentially borrowing, or using money you don?t have on hand.
“If you have good income, say a single person earning P50,000 a month, it’s probably OK to have a card for installment plans and for convenience when traveling, especially abroad,” he says.
He recommends keeping one card that you use regularly plus an extra card for emergencies.
“It’s better if you have separate uses for each card. That way, you avoid confusion,” he says.
Apparently, you can negotiate with your credit card provider so that you don’t have to pay annual fees for the card that you don’t use much.
Ong also says it’s best to make purchases using your credit card just after the so-called cut-off period. That way, you have more time before having to pay for the purchase.
It also pays to use credit when buying things that depreciate quickly, such as a car.
“First of all, a car is not an investment. It’s a mistake to think that. A car is an expense that does not really pay for itself,” Ong says.
Secondly, he says, cars depreciate steadily, so it’s best to borrow rather than pay for the car in cash.
“This way, it’s like you are just paying for the depreciation of the car. The money you didn’t use for an upfront purchase can be invested where it will earn you interest,” Ong says.
Building wealth
Reinvest any extra money you have, outside of the emergency fund that’s stashed in the bank, in a range of investments.
Bonuses are good sources of investment funds. Try investing in stocks, mutual funds and bonds.
Stocks are risky but can be particularly profitable for young workers since you can make small, monthly purchases of stocks. Over some time, the earnings from such investments would probably be better than if you tried to, time the market.
“You’re more likely to earn by averaging,” Ong says, referring to the recommended practice of buying selected stocks every month regardless of price.
If you are able to build another P100,000 or more, invest in Special Deposit Accounts with your trusted bank and enjoy much higher interest compared with a regular savings account.
Real estate
Ong recommends buying an apartment or house that you can rent out instead of a lot. Or if you are renting, consider owning an apartment, townhouse, or condo unit if your rent is just a little cheaper than what your monthly amortization would be using real-estate financing.
What about Jewelry and Art?
“There are markets for these, but the value of such objects is very subjective and the so-called income is mostly psychological,” Ong says.
When investing in jewelry and art, consider also the upkeep and storage costs.
“If you buy art and your house gets flooded, like when typhoon Ondoy happened, that’s a lot of money down the drain. Jewelry, on the other hand, you can keep in a safety deposit box at the bank. You have to consider such things before taking the plunge,” Ong says.
Overall, Ong says, consider your age and lifestyle when managing cash and making investments.
“When you are young, say, in your twenties or thirties, you can be aggressive and take risks with your money. But as a person grows older the inclination is really on saving, so it’s best to have a long-term plan. Over time, you can really build wealth and avoid a lot of mistakes when it comes to managing your money,” he says.
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Riza T. Olchondra
Philippine Daily Inquirer
Source: http://business.inquirer.net/money/topstories/view/20110213-320086/Common-money-pitfalls-and-how-to-avoid-them
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