Savings: Foundation of wealth

CEBU, Philippines — Achieving a stable financial health appears to be a very challenging task among Filipinos considering the social pressures surrounding them and their seemingly fatalistic or easy-go-lucky attitude.

Saving is the first step towards ensuring one's financial health.

Personal finance blogger and self-made millionaire Tyrone Solee said savings is the foundation of wealth as money begets money.

"People should save and invest early. As the saying goes 'The early bird catches the worm,' the earlier they save and invest, the better because time is their ally through the power of compounding," Solee said in an interview with The FREEMAN.

'Make it a priority'

Discipline and commitment are definitely keys to stay on the savings path.

Saving should not be deemed as a chore and as something people can do in the future when they have more money, as the habit of saving ensures a more secure future for them and the people they love.

In order to save, people should prioritize their needs over their wants.

"Since most of us are employees, they should pay themselves first by implementing the equation income less savings equals expenses. That is, every time they get their income from their job, they need to save first before they spend," advised Solee, who advocates financial literacy through his personal finance and investment blog millionaireacts.com.

A very good gauge in saving is the Pareto's Principle of 80/20, named after economist Vilfredo Pareto.

"A good gauge is to set aside at least 20 percent of their gross salary first before they can spend the rest for needs," Solee shared.

With regards to expenses, a nice model to implement is the so-called envelope method.

"Once they have set aside first at least 20 percent of their salary for savings, the rest should be budgeted prioritizing the needs. This can be done by having envelopes with names on it corresponding to the expenses. For example, one envelope for electric bills, one envelope for water bills, etc," the personal finance blogger said.

"Now after they had set aside for savings, they need to fill in these envelopes with the amounts due. What is left can then be used for wants. Of course, if they can increase the 20 percent they allot for savings, the better," he also added.

Solee believes if people do these, they will eventually become their habits, which determine their destiny.

"Surely, with consistency, they can afford to retire earlier than their peers," he said.

Income trap

But a lot of people today are caught up by the so-called income trap.

"When their income increases due to a promotion or they got a lump sum windfall of money from a bonus, they usually increase their expenses too. They upgrade their cars and smart phones, they buy new clothes, they renovate their houses, they go on luxury vacations, the list goes on.

"Little did they know that these are all liabilities piling up on their bank mortgages and credit card debts. The result is, even if they have larger income, they still end up with little or no savings at all. They are trapped by their income," he explained.

Also, the attitude of instant gratification is another "mindset mistake" among Filipinos.

"Filipinos want to live by the so-called 'YOLO' or You Only Live Once without thinking about their future. Since they worked hard to earn that money, they feel they are entitled into it and they can do whatever they want to enjoy it. The result is that when a certain emergency arises, they would need to borrow from friends and relatives," said Solee, who became a millionaire in his 20s by being so frugal, living below his means, having a sideline business, and investing in various financial investments such as bonds, equities and mutual funds.

The Philippines has one of the lowest savings rates in Southeast Asia. According to a 2014 Bangko Sentral ng Pilipinas survey, only 1 in 4 Filipino households has savings. This would imply that in the event of an emergency or sickness, majority of Filipinos have no means to fund their needs. It would also mean that they could fall into debt or worse, not be able to cover their emergency needs.

Changing mindset

Solee urged people to have a mindset of earning more and desiring less.

"Earn more by having multiple sources of income. Upgrade your skills so you can take on a higher paying job. Learn different kinds of investments so that you can make your money work for you. Desire less means you need to downsize your consumption. Prioritize the needs versus the wants. Learn how to budget and live way below your means. Don't go broke trying to look rich," the financial literary advocate emphasized.

People must also learn the difference between assets and liabilities. In school, particularly in accounting, we are told that assets are resources or things owned by a company or individual that has economic value while a liability is an obligation or debt that needs to get paid.

Solee quoted the definition of Robert Kiyosaki, the famous author of "Rich Dad Poor Dad" book, which says that assets are anything that puts money into a person's wallet while a liability is anything that drains that money out.

"A simple way to distinguish between assets and liabilities is to ask yourself 'If I lost my job, will this eat me or will it feed me?' Assets will feed you while liabilities will eat you," he said. (FREEMAN)