Our mindset conversion, which was the first step in our resurrection from debt, wouldn’t have much impact if we didn’t proceed to the next step: the execution part. You need to act because the “aha” moment doesn’t last long and means nothing unless you put your learnings into action.
How do you plan and execute? Imagine building your dream house on weak foundations. What do you think will happen if an earthquake shakes it up? Could your house withstand the tremors? Will it stay erect? The answer is definitely a resounding no. The same goes with executing a financial strategy. It must be founded on solid rock, covering the possibilities or the “ifs” of life.
The first “if” is: What if I die too soon?
The second “if” is: What if I live too long?
Here are Six Elements of a Solid Financial Foundation:
A. LONG-TERM AND SHORT-TERM HEALTH-CARE
The base of a solid financial foundation is Long- Term and Short-Term Healthcare. When Fely and I were employed, our entire family was covered by our company’s short-term healthcare program and benefits. And like many people, I didn’t invest on our long-term healthcare, which is a coverage beyond retirement. This is basic and the first priority in building your financial foundation. Why?
When the company we worked for opted to give us early retirement, our health insurance ceased. This was a big lesson for us because we don’t want to experience the financial struggle of countless Filipinos because of a medical crisis in their life.
This was the first step that we acted on: We got ourselves and our children long-term healthcare. Should any member of our family have a health crisis — God forbid — Fely and I won’t have to sell properties or incur debts to pay for medical bills. We calculated how much we would need in case of a medical crisis, as well as for basic medical needs. Basic includes maintenance medicines, vitamins and supplements. We calculated the future value of what we spend today to the year we project we actually will need it. We used an inflation rate of 7%.
I’ve seen many families go bankrupt because of a medical crisis. One of them is June, a retiree from a prestigious local company. He had cancer in his retirement years. All their lifetime savings and properties were wiped out in just a matter of months. He even had to ask financial support from family and friends as well as borrow money. He finally succumbed to the disease not because there was no cure but because he had exhausted all his resources and his family could no longer support him. He died penniless and in debt.
Jose, a seafarer with a high salary, had lots of money. Whenever he arrived from months of sailing as captain of a chemical tanker, he would celebrate with the whole barangay with days of feasting and drinking. He lived the life of a multimillionaire. But one day, he was diagnosed with a heart ailment. On the first year, his company and his savings covered his medical expenses. But that soon ran out. And because he could no longer ably steer the ship, his company retired him, leaving him without health insurance. Today, Jose is not even 60 but he can’t even land a lower-ranking post because of his health. His drinking buddies and even his wife have abandoned him. He is lonely, penniless, jobless and cannot afford to care for his health.
Another guy we met was Juan, a young training manager for one of the fast-food chains in the Philippines. Even before he reached 30, Juan had a stroke that left half of his body paralyzed. Like Jose, his company took care of him for a limited number of months. Eventually, he was also asked to resign. Since he had no short- or long-term healthcare of his own, he had to pay for his physical rehabilitation from his own pocket, and with the the help of his family. This caused a terrible stress on the family’s finances.
Peter is another example of one who had a successful career, had a high position, and a good, short-term health coverage. He often traveled overseas as a manager in a semiconductor manufacturing company. But one day, he contracted a kidney problem that necessitated medical attention.
Initially, he was covered by the company he worked with. But like what usually happens, the company covered him only for a limited time. This left him to shoulder his own expenses, especially for regular dialysis which he needed. Since he didn’t invest on long-term healthcare while he was gainfully employed, he didn’t have any back-up plan. Now, in his early 50s, he is unemployed and survives through the income he gets from his small business as well as asking help from friends and former co-workers to cover for his health bills that have run up to the millions.
We’ve met many Joses, Juans and Peters of different ages, who went through a Calvary in their finances due to medical crisis. People really go bankrupt if they don’t have basic short-term and long-term healthcare. It doesn’t matter whether you are in the early part of your career or in the last quarter. The lesson we learned from these people is clear: We have to ensure that in building our solid financial foundation, we must start by securing our own long- term healthcare. And if we don’t have a short-term healthcare, we must have that too!
When we finished paying for our five-year investment on long-term healthcare, we supplemented it with another seven-year Kaiser Ultimate HealthCare Plan. With just the interest earnings of our long- term healthcare coverage, we can sustain our daily basic maintenance medicines or even a medical crisis, which we pray won’t happen. But in case it does, we have more than a million pesos to cover for that. We won’t need to sell any property or borrow money. Better yet, we expect and claim that we will be healthy and, thus, would be able to use the interest of this invested money to help other people like Juan, Peter and Jose who are in desperate need.
B. LIFE PROTECTION INSURANCE
The second thing we prioritized was to have insurance protection. Most Filipinos either do not have life insurance or is underinsured. You can do your own survey to find out that only about one out of 10 Filipinos welcome the idea of putting aside money for insurance protection. But, let’s face it. All of us will die, we just don’t know when.
Think of life insurance like renting an apartment. If I buy an apartment, it will cost me a million pesos or more for a low-end studio-type apartment. To rent, it will cost me about P10,000 a month. I can live in the comfort of the apartment by renting it at P10,000 while I still don’t have the million to own it. The cost of owning an apartment per month in this example is about 100 times the cost of what you pay as rent. The cost of insurance is about the same. On the average, those who start young in buying insurance protection just pay about one peso for every P100 insurance coverage. We pay this to have peace of mind. In case we die too soon, our family will financially survive our loss.
Later, I’ll discuss why we need to prioritize insurance in more depth when we get to the X-Curve Concept.
I believe that investing in life protection or insurance is a priority over investing in other investment instruments. The cost of insurance increases as we grow older; so the earlier we start, the better. The amount of insurance we need depends on two things: the amount of responsibilities, and the amount of savings and investments that generate passive income we already have.
When the size of our passive income is already equal to the size of our responsibility, then, insurance is no longer a need. Thus, the Insurance Coverage I recommend is equivalent to the Amount of Responsibilities minus the Amount of Passive Income.
If you are young with not much responsibilities, then you do not need that much insurance. The amount of your insurance must at least be equal to your expenses. But if you are a breadwinner, insurance protection is a priority item in your fund allocation. Insurance can also supplement your estate planning needs when the time comes that you have to transfer your inheritance to your children or loved ones.
The insurance I got is simple and pure term insurance. This is cheaper and allowed Fely and me to manage the difference in cost compared to what is commonly called bundled life insurance with investment. Moreover, we bought only a 20-year term insurance for we expect that if we build our investments in 20 years, then we won’t even need insurance.
Fely and I also got additional coverage for accident insurance. Cost of accident insurance is relatively cheap. We took an accident insurance for the entire family that covers us for a million pesos, and we only pay about P5,000 annually for this protection. We have this on top of the travel insurance we get every time we travel outside the country. It’s really much better to be prepared for any eventuality. Peace of mind is priceless.
The problem with people in general is that we do not believe in insurance. Sometimes we even use our faith as an excuse by saying we need not worry about our future because God will take care of us. Before I was enlightened about the need for insurance, I would cringe every time an insurance agent approached us to sell his products. I believed that insurance is a sign of insecurity in the love and protection of the Lord. What a wrong mindset! Yes, the Lord loves me, but I still have to get insurance to protect my loved ones. That way, if I die, there’s instant money for the family that they can use to live on.
Among Asians, Filipinos are probably the least insured. In many other countries, families are able to maintain their lifestyle and survive even without the breadwinner because they’re insured. Not so in our country. Many die penniless, or worse, leave a lot of debt behind.
In one seminar I attended, Rex Mendoza, one of the best, if not the best fund manager, in the Philippines, said, “We do not have any right to invest if we are not properly protected.” In short, we must not even think of investing if we are not yet amply insured.
C. DEBT MANAGEMENT
This is the third priority in building a solid financial foundation. We have already shared our harrowing experience with debts. I know a lot of people can relate to our own story.
Debt has to be managed; otherwise, it will manage us. Managing your debt comes after you’ve secured basic protection, but it is a priority over building emergency funds and investing for the long-term. Why?
Say you have P50,000 cash on hand and you also have a debt of P50,000. Do you invest the P50,000 or do you pay your debts? You need to first check the interest payment on the debt you incurred. Then check how much the projected investment return is.
If I place P50,000 on an investment that earns me more than the interest payments I have on the P50,000 I owe, then this is “good debt.” My coach told me, “The top priority in debt management is the bad debts. You can leave the good debts to pay for itself.” So classifying our debts into good and bad debts was the first thing Fely and I did in our own debt management. Second thing we did was to prioritize payments for bad debts that had high interest rates. Then we created an elimination plan defining the amount to allocate for each bad debt so we could pay them off following a timetable. Fely and I considered all of our credit card debts as “bad debts” because they had a 3.5% interest per month that none of the investment vehicles we knew could match in earnings.
Debt consolidation is also a way we expedited payments of our bad debts. This means that we moved all our existing debts into a single loan with the creditor giving the least amount of interest charges and longest payment terms. One example is a P500,000 loan that we moved from the credit cards charging us 3.5% monthly to a bank loan that only had a 7% annual interest charge. Consolidate debts into lower interest rate loans.
I will share other ways to get out of the debt trap in Chapter 6. For now, it should be clear that we must prioritize managing bad debts before we even embark on investing for the long term.
D. CREATE EMERGENCY FUNDS
There were times when we had emergencies involving even extended family members and we didn’t have funds deliberately set aside for this purpose. So we had to borrow money. Our go-to solution was our credit card, relatives or friends. The obvious solution to our dilemma? We had to create an emergency fund equivalent to three to six months of our monthly expenses. An example of an emergency is when your company unexpectedly lays you off. You’ll then have funds to tide you over for three to six months until you find another job. Other emergencies include repairs of a leaky roof or a car that breaks down. Take note that medical emergencies do not fall under this fund. That’s what your healthcare is for.
Fely and I saved our emergency fund in an instrument that can be easily withdrawn. Savings account is the easiest and fastest way but it also gives the least growth for our money. There are time deposits and mutual funds which make your money grow faster and can be easily withdrawn. At the beginning, we used a savings account while we were building our long-term healthcare with investment and emergency fund. Eventually, we invested more on mutual funds after we finished paying for our long-term healthcare, which is actually also an emergency fund.
We have met many people who didn’t think about saving for emergencies and ended up with more debts. An emergency fund is the surest way to avoid getting back into the debt trap.
To complete our Solid Financial Foundation, we invested for our long-term needs. Fely and I couldn’t stop at managing debt or creating emergency funds. We learned about different investment vehicles we could use, depending on our financial goals. We became aware of the different mutual fund companies and the online stock brokerage, COL Financial. We had to invest for our major needs in the future. We learned that investments must always be tied up to financial goals. This means investing with a purpose.
We also learned that investments need not be in big sums of money but that small amounts invested consistently grow into millions over time.
The top three major needs that we prioritized are:
Long-Term Healthcare (LTH), Income Replacement (IR), and the Education (E) of our children. You may have other needs or purposes for investing, like buying a new car or a house. Or it may be traveling abroad or going on a luxury cruise. So you have to invest with a purpose, and understand the friends and enemies of investing. Fely and I tied up our investment to a purpose and we defined the timing and amount of the said goal with a clear understanding of the friends and enemies of investing. We educated ourselves and got guidance on the fundamentals of investing and having correct and safe investments. Our previous experience in investing got us into trouble so we wanted to make sure we didn’t fall into that same trap again.
*This excerpt is taken from Debt Destroyers by Benj and Fely Santiago.
Benj and Fely are debtaholicswho thought that they were doing OK. They had great jobs, earned well and spent evenbetter. They treated every new credit card they acquired as an additional income source. They squandered money they hadn’t even earned. In no time, they were buried in seven-digit debts.
In this book, Benj and Fely share their horrendous experience of financial disaster, but even more importantly, how they rose from the debt. Today, they are financial advisors who’ve helped many families break free from the debt trap.
Here, you will learn how to:
– Craft your own financial plan
– Build a solid financial foundation
– Manage and eliminate debt
– Invest with a purpose
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– And many more concepts that will set you on the road to financial freedom!
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