Here’s an opportunity for the Davaoenos to learn the basics of personal finance for free! Catch me on June 22, 2012. This program is brought to you by Victory Davao.

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Question: How much of my income should I save? How much of my savings should I allocate for retirement, education, emergency funds and other future costs?—Allan Magtoto, corporate employee via e-mail

Answer: There are no hard and fast rules when it comes to these things. Personal finance is very personal and concerns like these are relative and subjective. Ratios and formulas are broad gauges and theoretical in nature. A more thorough personal analysis is the best approach to answering your queries and a professional financial planner is the best person to answer your query. It will be in your best interest if you see one.

I can give you some suggestions that may provide some broad stroke answers to your questions.

In my talks and seminars, I often talk about the 70-30 rule at great lengths. It means that for every 100 percent of your net income, you limit your spending to 70 percent and save and invest the remaining 30 percent. In the past, we have heard about saving 10 percent of your income and you will be OK. I’ve done the math and 10 percent will simply not cut it. Considering inflation, accumulating just 10 percent of your income will not be enough for the many life events that you will need to prepare for financially. However, 10 percent is indeed a good start especially for those who are having a difficulty setting aside money on a regular basis. As you get a better handle on your finances and as your income goes up over time, increase the percentage allocated for your savings and investments until it reaches the ideal rate of 30 percent. For the younger ones with no dependents yet, a higher percentage of savings will be a great idea and will allow them to get a much-needed head start in an uncertain future. The 30-percent savings can be used for the many events that we need to plan for.

For emergency funds, allocating three to six months’ worth of your expenses would be a great hedge against whatever emergencies you may have to deal with, including sickness or loss of employment. Many of us do not have emergency funds, which is unwise. I recommend you start with building your emergency funds first before tackling the other concerns. Once you have done this, then you are ready to start preparing for your other life events.

As to education, it is best if you can compute estimates of the escalation of tuition costs and match those with appropriate investment planning, which a professional financial planner should be able to help you with. Again, and for the interest of this column, I would give you a ratio that can be a good broad rule: allocate 10 percent of your income for future educational needs of your children. Savings for education should be invested properly so that the growth of the funds will overtake the rising cost of education. You may want to do regular investing for the next 10 to 15 years of the child, which should be able to cover future education costs. Pooled funds like UITF or mutual funds might be a good choice as an investment instrument, among others. If the funds exceed the actual educational costs of your children, you may want to divert the excess to other needs like retirement funding.

For retirement, 10 percent of your income is also a good theoretical ratio. Retirement, like most things in life is relative. If you plan to have a very comfortable and luxurious retirement, then it will take you more than just 10 percent of your income. However, a decent retirement should be able to be achieved with regular retirement investing for at least 20 years. Retirement is a long-term need so it is best financed by long-term investments like real estate, stocks, mutual funds, UITF and business ventures. The longer you prepare for retirement, the better it will be for you to grow your capital. Long-term investments will allow you to wait out the volatility of the investment environment. As a general rule, investments, though fluctuating, should go up over time.

Another 10 percent of your income can be for a general savings fund, which you can use for other plans like equity for your home, family vacations, seed for business capital. Just make sure that you invest your savings properly and you understand the relationship of risks and returns.

Let me reiterate that what I wrote here are merely broad stroke allocations and should only be followed as a general rule. We all have individual needs and preferences; therefore, we should have individual planning. Certain financial requirements may take precedence over others—a home might be a priority over retirement during the earlier periods of your life.

This column appeared at the Philippine Daily Inquirer.

As I was about to write this blog, I had what writers call a ‘writer’s block’ which is really a lame excuse for not writing, haha! I wanted to write something the readers would like to read about so I asked my Twitter followers for suggestions for a topic. I got quite a number of nice tips but the suggestion of Abie Aquino caught my fancy — she asked “where should OFWs invest their money?”

We all know how the country’s economy is kept afloat by the OFW remittances which continue to grow despite the odds. In fact, many experts feel that remittances should have been in a decline for the last few years. Yet, year after year, we are amazed that the amount of money being sent home still continues to surge, notwithstanding the situation of many of the countries that employ our brothers and sisters. Credit to this phenomenon can only be given to the OFWs themselves, their unbelievable resilience and unrelenting spirit. One needs to look beyond the numbers to truly fathom this phenomenon — we need to really to spend time with our OFWs and their families to better understand them and I am blessed to have done so, in quite a number of occasions.

In my time with the OFWs, I see something that is quite consistent with all of them. Our brothers and sisters abroad have a keen ability to endure adversity and make sacrifices for their loved ones. The longing for their families, long work hours, unfair labor practices, hostile & dangerous environments and discrimination are just a few of what an OFW endures on a daily basis. All of these, an OFW endures so that he can uplift the standard of living of his loved ones and he can finally achieve some financial freedom. In other words, sacrifice heavily now for a secured future.

We all know that a disturbing number of our OFWs do not end up having a secured future. While they may experience improved standards of living, it is normally unsustainable. The moment an OFW stops being employed, contracts get cut or not renewed, everything seems crashing down for many of them. Further, stories of OFWs who clocked in decades of servitude overseas yet experiencing near poverty levels during retirement continue to hound us. It is sad that all the years of labor and sacrifice will be in vain, so it seems.

What can the OFW do then? Here’s a formula that I recommend to OFWs and to everyone as well. Spend less than what you earn, invest the difference and do it over a long, long period of time. It starts with money management and prosperity really starts with savings. As the OFW builds up his savings, he can start to put his money into work and build up his nest egg. Where should the OFW should put his money? That depends on many factors: investment objective, time frame, acumen, and risk tolerance to name a few.

I notice the favorite investments of OFWs are real estate and small businesses. They are great investments that can really build capital and provide a steady stream of income. For a small (or big) business, it is crucial that the OFW or his spouse should have both the mindset and the skills of an entrepreneur. Business is never easy and it requires a lot of dedication, yet it is one that can really generate the most growth. The nature of any business is also a speculative one so one should realize the risks inherent in a business venture.  Real estate is a less volatile investment as compared to a business and can likewise generate good capital growth and income. However, real estate locks liquidity and can be difficult to acquire since it requires a lot of money to own a property. Further, many investors end up locking all their money into a property only to realize later that the growth and income derived may not be as much as he wanted it to be.

The OFW can also look at financial instruments and there’s a lot to chose from. Debt instruments like time deposits, special deposit accounts (SDA), treasury notes and corporate bonds can and should be part of the investment – they are relatively low risk and great for liquidity purposes. However, debt instruments have unappealing returns and may not be a good hedge against inflation.  The stock market is also something that they can consider, they are great for capital and a fantastic way to hedge against inflation but the investors must always be mindful of the many risks involve. Capital loss should be expected as much as capital gains while investing in the equities market. Pooled funds are also great vehicles for the OFWs. They come in the form of Mutual Funds, Unit Investment Trust Fund (UITF) or Variable Life Insurance (Investment linked). Such pooled funds have low entry amounts and they can benefit from professional money management. They are relatively liquid and depending on the fund, they can generate good capital growth. Downside in investing in pooled funds is that it carries an investment management cost and it carries no guarantees.

So, where should the OFW put his money? I say that he should try several and learn to diversify. It is foolish to think that one investment can answer all our needs and to be frank, having only one kind of an investment can be too risky for my taste. Here’s another suggestion I urge the OFWs (and everyone else) to make – invest in financial education. Financial education will answer the many financial questions we ask.

To our dear OFWs, make your sacrifices count and chose to live a life of freedom.