Thursday, October 18, 2012

Before you start investing

If you're a working middle class like me, or a rich kid who doesn't want to depend on your family's wealth, or an employee who has a hard time saving, this is for you. This is a prelude to getting started with investing; like a quick checklist before you put your money where it will work for you.

Many say that business is where the money's at (or "Nasa negosyo ang pera"), and many condescend people who work their ass off to earn money. Being an employee doesn't mean that you can't become a millionaire on your own. Everyone has his or her place, whether you enjoy having a business or you're happy being an employee, it doesn't matter. What matters is that you find contentment in what you do, and you can use your existing income to generate more money.

But before you can be a millionaire, it is wise that you develop a mindset that will increase your success rate towards financial freedom. Let's start with the basics first. The following are the things you may need to contemplate upon before you start putting your money in different investment instruments.

Get out of debt
I'm not a fan of "utang" (debt), especially debts with high interests (yes, credit card, I'm looking at you). In many articles or seminars the first step to financial freedom is to get out of debt. Personal debt that is, some debts are instruments to making more money, like if you need a capital for your business, but if your debt is the kind that only sucks the money out of you, then you have to pay it fast and get out of those high interests. Credit card is not bad, misuse if it is! Do not spend the money you don't have, I use my credit card as a debit card, I put credits in it that I can consume.

I wasn't very wise when I made my first major purchase. It's a condominium unit and it will be my first debt when it is constructed (bought it in pre-selling). But hopefully by then I'll have more enough money to pay the whole amount. Right now, I'm paying the downpayment at 0% interest, so technically I'm not giving more than I should.

Cut your unnecessary expenses
Spending your hard earned cash on fancy food, Starbucks, traveling, R&R, shopping, or luxury items is not bad. It's overspending that's not beneficial for you.

I lowered my Starbucks / CBTL consumption from twice a week to once every two weeks or if I have a free coffee from HSBC promo. There are many ways to cut back on your spending, like cooking instead of frequently eating outside, or walking instead of taking the taxi for short distances.

Save a fixed amount of money every month and commit to it
When you are finished with all your debt issues and you're living within your means, it's time to come up with an amount you're comfortable with to save every month.

Normally, we only save what we have left. I was advised by my mentor that this is not a good practice, because we humans tend to consume what currently have. It's better to set a fixed amount and stick to it.

Compute all your expenses and tally it against your income per month. Commit it to it like you're paying a debt; like it's something very important that you need to pay. Discipline yourself not to go lower than the amount you have committed to. Of course, going above is more than fine.

Food - 100/day = 3000/month
Transportation ~ 50/work day = 1050
Rent = 5000
Bills = 3000
Misc like toiletries, etc = 500
Luxury/ other expenses = 2000

Total of 14,550, let's round up to 15,000 a month.

Say you're earning 22,000 a month, you'll have 7,000 Pesos left. Let's further cut that back to a more comfortable figure of 5,000. Start committing to 5,000 Pesos a month, and no less than that. If you exceed it, then better, but make sure you set aside that amount for your savings.

Equip youself with knowledge on what you can do with your savings and proceed to the next step.

Build your emergency fund
Emergency fund is a highly liquid fund (in most cases, you put this into your savings account) that anytime you can use in case of, duh, emergencies or unexpected circumstances. Like if you're hospitalized, or when you need to contribute to family emergencies, etc. These are inevitable emergencies, it never fails that money is needed for an emergency. Thus, you need to be prepared and  this is the purpose of this step.

So how much money to put into an emergency fund. Some say to put 1-2 months worth of salary, some say 6 months, but the problem with this is it depends on how much you earn. Personally, I think 80,000 - 100K is enough for an emergency fund.

When you've done all of the above and start being wise with your income, it is time to start investing! Follow me in my journey to financial freedom. I'll post more of my finance-related adventures. Personally, I put 30% to my savings account and the rest to various investment options. I'll discuss more in my future posts. Don't forget to subscribe to receive updates.

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