PIME 002: Where to Start Your Journey to Financial Independence?

Starting something always feel difficult and uncomfortable. That’s same for any life experience as it is in money.

In this session, we’ve tackled the first things that we need to understand and accept before really taking the road to financial independence.

Busting the myth: “Money is the root of evil”

Blaming money for most terrible things that happen in life is one of our favourite excuse in failing to manage it correctly. After all, most of us believe that Money is the root of evil.

Contrary that, we have to understand that money is just a tool that does not have life on its own. It is whom who use it has the morality of being good or bad – it us, people.

It is about being a good or a bad person, not a good or a bad money.

In this session, I compared money to a knife.

A knife is a tool often used in cooking our meals – used in cutting meat, chopping vegetables, etc… However, that same knife is used by some people to commit murder and some use it in threatening other people.

Again, there are good and bad people, not good and bad things (money).

The Pillars of Financial Foundation

Once we have accepted that money is just a tool. The next best step is to educate ourselves on how to manage it and how to make it work for us, and not against us (debts).

I. Build an Emergency Fund

We have a habit of giving our own definition of emergencies. The need to buy a luxury bag that is on a DISCOUNT is not an emergency!

Emergency fund aims to safeguard your investments by being the second line of defence in case emergencies happen – the REAL emergencies. I’ve mentioned “second line of defence” since insurance are really the first line defence.

As a rule of thumb, we have to keep at least 3 to 6 months worth of our monthly expenses.

II. Get Protection through Insurance (Life, health, and the necessary non-life)

Insurance stands as our first line of defence to Financial Stress.

During time of need, say you will be hospitalized, or in a vehicular accident, what comes first thing to mind? Insurance, definitely.

Insurance protects us from spending a huge chunk of money during sickness, accidents, and other life’s contingencies. It protects our emergency fund from being spent, avoiding any unnecessary financial stress in the process.

Once both insurance and emergency funds are in place, you’re now ready to invest.

III. Make Money Work for you by Investing

Investments aid us in making our money work for us. We worked so hard to earn money. It’s just right to make money work for us, real hard.

There are various forms of investments. We can invest in our own business, stocks, mutual funds, etc…

Let’s discuss them in future sessions.

IV. Prepare for transferring wealth (Legacy)

After accumulating these wealth, at one point in our lives, we have to transfer them to our heirs/loved ones. If transferring wealth is just as easy as abc, then there’s no need to prepare.

But this is a complex aspect of personal finance, especially if the government is involved.

In the future sessions, let’s talk about Estate Tax.

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Life Insurance: One of the Best Tool in Estate Planning (by Atty. Angelo Cabrera)

There are only two things that are certain in life – death, and taxes.

In this video, Atty. Angelo Cabrera pointed out great topics that are prevalent in today’s market.

Let’s get down with some basics and understand what Estate Taxes and Estate Planning are.

What is Estate Tax?

Upon death of an individual, all his properties should be transferred to the heirs (sa mga tagapagmana). That will only possible after payment of a transfer tax called estate taxes.

Estate taxes are unavoidable, thus, it’s necessary to plan for it.

This leads us to the second term.

What is Estate Planning?

Estate Planning is the act of proactively seeing (and foreseeing) the requirements and the needs in the transfer of assets should a property owner dies. Through estate planning we will be able to prepare what is bound to happen anyway (though timing is still uncertain) without having our loved ones worry about where to get the money to pay off estate taxes.

Disadvantage of Donation and Incorporation as way of avoiding estate taxes

In this video, Atty. Cabrera raised the usual practices of many in avoiding estate taxes and pointed out that Life Insurance is one of the best way to plan for our estate. In particular, he mentioned the disadvantages of the following for the sake of trying to avoid estate taxes.

1) Donating properties to the heirs while we are alive.

This premature transfer may destroy the character of our children because of instead of relying on their own God-given abilities to produce their own wealth, they no longer have to since they got the wealth from us.

2) Incorporation

This will push the children in a co-ownership regime that might lead them to a conflict situation, or inequitable situation where one ends up domineering and controlling while the other children/heirs suffer in silence.

As a result, many of the properties that are co-owned are left idle or uproductive.

Life Insurance and Estate Taxes

He also advised to load up as much life insurance possible until we’re still insurable. Insurability has the following considerations:

1) Age
2) Health
3) Financial Capacity

Do I Really Need to Purchase Life Insurance if I Already Have That Benefit From My Employer?

Most Filipinos in the working class are employees. And since a very common benefit from employers are life insurance and health cards (HMOs), the need to purchase a separate individual life insurance is no longer necessary, right?

Besides, if one already own a car, why does he need another one? That’s luxury! So if I already have a life insurance policy from my employer, why would I need another one?

WRONG.

Let’s put it this way (oh I love metaphors!).

Does having a job necessarily say we have enough resources to sustain our lifestyle?

Not necessarily. Few questions needed to be answered. First, how much do we earn? Second, how much do we spend? Third, how far do you want to go with life?

Or say you have one set of clothing (shirt, undergarment, pants, etc…). Does having a set means you have enough? Obviously not since you needed to be “covered” for the rest of the week.

For both comparison, answering the question “How much do we need or how long do I need it” is very crucial before we can say we have enough.

Life Insurance is not different, and definitely investments (but let’s reserve that on a different conversation).

Understanding the Need

Life insurance plays different vital roles in the way we plan our finances. We have to understand that the question is not if we have life insurance, the question is how much coverage do we have.

Let’s take a look of the most common uses of life insurance to help identify whether what your company provides is enough.

Life Insurance for Income Replacement

Alright, before you leave this page after reading yet another financial jargon, allow me to explain what this alien term means.

Income Replacement generally refers to the ability of life insurance to provide income to the family during an untimely death of the family’s breadwinner. Life insurance “replaces” the lost income of the breadwinner caused by an untimely death..

Now, say your company gives you P500,000 life insurance benefit, will that amount continue to feed your family, pay the bills, bring your children to school, and shoulder their lifestyle in the next say 5 or 10 years.

If you answer no (and I’m sure you will), then adding up more life insurance coverage is necessary.

Shouldering the Cost of Death

Everyone is different, we have different lifestyles, different views in life, different likes and dislikes, and a very long list of things we do differently.

There are two life experience that we are 100% sure that we share – we were born, and someday, at our own time, we will face death.

For people who are in the stage wherein they are still building their wealth, life insurance provides a safety net to ensure that an untimely death will not compromise the journey to financial independence of the family left behind.

Simply put, we take responsibility to fund the costs relating to our own death (morbid, I know, but it’s one thing we should openly talk about). Let us not be a burden to anybody else.

Now, does your P500,000 life insurance coverage from your employer would suffice the cost of death? Well, studies say it could take around 1M to 1.5M to cover the cost of death in the Philippines.

Protecting the fruits of your Hard Work – Your Assets

There’s one scary thing about dying with too many assets named after us. We call these horror Estate Taxes (Alright! I might be exaggerating too much).

When a person dies, all the assets/properties he have accumulated over his lifetime will be frozen by BIR until appropriate taxes are paid be the heirs. We refer to these taxes as Estate Tax.

“Frozen” means your heirs won’t be able to access your bank accounts, investments, and real estate properties. Without having the ability to access your assets, how could they be able to pay the Estate Tax?

That’s where life insurance comes in.

Using the same example, is your P500,000 life insurance coverage provided by your employer enough to pay the estate tax? Let’s put it this way, if you have successfully built your wealth through your lifetime and have accumulated P20,000,000 worth of assets (savings, investments, and real estate), P500,000.00 is not enough.

At most, you’ll be needing P4,000,000 life insurance coverage.

Add the fact that your life insurance coverage from your employer usually does not extend after retirement.

Now, is having life insurance benefit from your employer enough?

Given the above considerations, it’s not in most cases.

Having a life insurance benefit in your company doesn’t necessarily mean you have enough. You are dressed today, but not for the rest of the week.

Remember that the question is not if you have life insurance. The question is how much life insurance coverage do you have.

In the next articles, let’s talk about how to compute the ideal life insurance coverage that you should have in order to have a solid financial plan.