Start Saving Now: How to Plan Your Family’s Finances

Parents need to plan their finances well to afford future expenses for their whole family.

Aneth Ng-Lim, Citibank’s country corporate affairs director, advises moms to be wise with their money. For example, instead of spending on a grand first birthday celebration that the child won’t even remember, invest the money in mutual funds that could grow over time.

But how does one do it? Ng-Lim advises to first analyze the flow of your household expenses for three to six months. This way, you can decide where to cut costs in order to save more. Would it be more practical to bring baon to work instead of dining out? Is there a neighbor you can carpool with to the office so you can cut down on gas and reduce your carbon footprint? Can you give up your monthly gym membership and run or bike instead? Observe your lifestyle patterns and see where change is manageable.

When planning for future expenses, study all your options and determine the pros and cons before making a decision. For example, when buying a car, consider the make, your requirements, budget, and payment options. If the amount would require you to tighten your belt, decide if you are ready for such a sacrifice and commit to it. Discern which one you can manage: a brand new car that is expensive or a cheaper secondhand car that may mean more maintenance costs?

 

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Eyes on the prize!

Anticipated expenses such as birthday parties, school tuition, or car purchases can be categorized into short-term (one year), medium-term (two to four years), and long-term (five or more years) goals. Ng-Lim explains that your short-term goal could be to establish an emergency fund that amounts to six months’ worth of your regular expenses. So if your monthly overhead expense is P10,000, your short-term goal would be to save P60,000. Purchasing a car is a medium-term goal while saving up for your retirement or getting your own house are consideredlong-term goals.       

Goal-setting may be different for each one and may not necessarily follow a standard pattern of low- to high-valued goals. This depends on your means, lifestyle, and degree of determination. No matter how you prioritize your goals, it is a good exercise to create them so you have a clear direction of where you want to go. Below is an example:

Short-term
• Emergency fund
• Child’s baptism
• Family vacation (local destination)

Medium-term
• Preschool education
• Buying a car
• Renovating a room
• Setting up a business
• Trip abroad with spouse or friends

Long-term
• Elementary to college education
• Trip abroad with children
• Acquiring property
• Retirement fund

Cornelia Soto, M.D., chairperson of the Education Department of Ateneo de Manila University, advises young parents who are just starting out to plan wisely for the future as early as possible. 

“Even when we were just [newly married], my husband and I have always had a goal and we focus on it. For example, in the first year of our marriage, our goal was to save up for a piece of land where we could build our house. In our second year, our goal was to build the house. In the third and fourth years, it was to buy a car,” she says. 

 

Saving for a rainy day

When asked for a formula for saving money, Ng-Lim says there is one universal rule but no one-size-fits-all formula. “The first commandment of personal finance is ‘Pay yourself first.’ This means when you receive your paycheck, set aside something for your savings fund first. Some start at five percent, others at 10 percent. This can increase as your income grows,” explains Ng-Lim. If you can afford to stash away more, even better. 

“As for a formula to follow, it would depend on what you’re saving for, your chosen lifestyle, budget, and current cash flow.”  A debt (if your goal involves taking out a loan for a car or your dream house) is not necessarily bad, although Ng-Lim warns that you need to be cautious. 

“If your income is P20,000 and you own a credit card that has a credit limit of P20,000, it does not mean you could spend P40,000. A good rule is to check your debt ratio—the percentage of your monthly take-home pay that goes to paying debts and monthly obligations. The lower your debt ratio, the more money you have left to save or invest.” 

To calculate your debt ratio, get the amount needed to repay your debts each month, including rent or mortgage, and divide this by your take-home pay (your net pay after tax). Many experts recommend that no more than 15 to 20 percent of your monthly household take-home pay (excluding rent or mortgage) should be used to pay debts. And no more than 40 percent of your monthly take-home pay should go to paying all debts, including mortgage payments.

 

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Sample savings for some goals

Here are some money-saving tips from our experts. Please note that goal amounts can vary depending on the individual’s preferences.

Emergency fund: P60,000

• Goal date: in six months

• Amount to put away daily: P333

Smart tip: If you drive daily and pay toll, you must be spending around P300 for gas and toll or parking fees. Check if you could take public transportation instead to attain your goal after six months.

 

Family vacation for four in Palawan: P80,000

• Goal date: in six months

• Amount to put away daily: P450

• Smart tip: Carpool with officemates, skip the gourmet coffee at P120 a cup, and stock up on snacks from the grocery instead of making frequent trips to the cafeteria.

 

One year tuition for preschool education: P70,000

 • Goal date: in three years

• Amount to put away daily: P64 

Smart tip: Observe a car-less day to save on gas and parking. During lunch, opt for water instead of buying soda and do away with dessert. Keep saving this amount and build it over time to fund your child’s education.

If you miss your savings target and need to take out a loan to fill the gap, consider a short-term loan payable in three months but no longer than 12 months. Remember, this is an annual expense and you should avoid paying for a loan when you may need to take out another one to fund the tuition for the following year.

 

Brand new car

 • Goal date: in five years

• Amount to put away daily: P438.50 

Smart tip: Keep your eye on the goal. It may mean limiting your fast food fix or sacrificing a round of drinks with friends at the end of a work week. If you think you’d need the car sooner than five years, another option is to save up for the down payment, and get a loan to fund the rest. Make sure that your income can cover the amortization plus your daily expenses and savings.

 

Your own home: P1,000,000 down payment

 • Goal date: in eight years 

• Amount to put away daily: P342.50 

Smart tip: Think about it: You’ll have your own house in eight years. It will all be worth it. It may entail cutting down on those P150-a-ticket movie dates, and doing away with unplanned purchases and impulse buying.  

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Reaping the rewards

All the hard work and discipline in taking charge of your finances will pay off in the long run, as Dr. Soto attests. “Now that our kids are adults, we have fewer expenses. My husband and I are free to spend our salary any way we want because our investments in the past years are now working for us.” 

She recommends investing in real estate plus other liquid investments (because money is dormant in real estate). Diversify your portfolio and include investments such as a small farm and condominium or apartment units for rent. 

Dr. Soto also advises, “Keep yourselves updated. I read a lot and look for offers on retail bonds, mutual funds, and some equities. Since we’re almost senior citizens, my husband and I choose low-risk investments. We have many insurance policies; some purely for protection, others with investment options also.”

Saving for the future is worth the sacrifice. Giving up little whims or looking the other way when tempting sales beckon may pinch a little, but it is all worth it once you see your savings grow. Priority-setting is a fact of life we embrace as adults. After all, our children are our first priority. And they certainly deserve a bright future!

 

Photo by kenteegardin via flickr creative commons