The Truth About Your Financial Choices: Debt, Insurance, Savings, Payments and More

Sometimes, it’s easier when it’s all laid out for you… like taxes. You have to pay it. There’s no this or that about it. However, life throws you fuzzy, complicated questions all the time such as: Where do you invest your money? Or what’s a better way to pay for your child’s education? Below are a series of top financial questions couples are usually faced with, and what our finance experts have to say about them.


Should you pay off your debt or start an emergency fund?
“First of all, what kind of debt are we talking about?” asks Mayang Sison-Pascual, a personal and family financial consultant of Manulife Philippines. “There is good debt and bad debt.”
•    Good debt—builds your assets like a real estate loan or a business loan.
•    Bad debts—usually credit card bills for liabilities like unplanned travel, appliances, or a new cell phone

If you have “good” debt, Sison-Pascual recommends you proceed. However, you should still try setting aside some money for an emergency fund. If you are mired in “bad” debt, she recommends immediate reduction of debt first. Cut your credit card in half if you really can’t manage your debt.

Reynold Gan, unit head of RGAN Financial Planning Group, affiliated with Philamlife and Philam Asset Management Company recommends the following formula for paying off debt while still putting in some money for emergencies:
•    10 percent of your income should go to emergencies
•    20 percent to debt servicing (prioritizing the highest interest and lowest term first)
•    Live on the remaining 70 percent


Should you purchase an educational plan or just set aside the money in a bank?
Gan explains the history behind the stigma of educational plans. “These plans were designed to provide the actual tuition of the child upon enrollment in a university. This spelled trouble for pre-need companies since tuition deregulation allowed schools to increase rates by leaps and bounds, an action that pre-need companies did not account for.” However, today, educational plans are now “close-ended,” meaning the amount that the child receives upon entering college is already predetermined by the insurance or pre-need company. This type of plan allows for minimum risk on both parties.

Sison-Pascual gives a shortlist of advantages for an educational plan:
•    Immediately creates and guarantees in full the total amount needed for your child’s education upon first payment of your educational plan and for as long as you keep your promise to pay the premiums.
•    Ensures that whatever happens to the parent, the child is guaranteed an education.
•    Funds are never misdirected to other immediate concerns.
•    A lot of these plans have built-in insurance benefits such as credit, term life, accidental death and disability, aside from premium waivers.
•    Usually, the dividends from these plans are able to offset inflation so it maintains its value and earns.
•    It’s a systematic way of saving for your child’s future.

A typical bank product, according to Gan, may not carry all the built-in structures of an education plan and are subject to varying interest rates and economic changes.

 

Click here to learn more about investing in time deposit, stocks, borrowing money and bank loans.

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Read on to learn more about investing in time deposit, stocks, borrowing money and bank loans.

 

Should you put your money in a time deposit (TD) or invest it in stocks?
Sison-Pascual advises that you check what you’re using the investment for. “If your money is allotted for emergencies, then a time deposit would be appropriate for accessibility and liquidity. However, your money really wouldn’t work hard for you in such a tool.”

Gan explains that time deposits and stocks actually represent the two ends of a spectrum, the most conservative versus the most aggressive. These are not the only options in the market. He says time deposits are slowly giving way to mutual funds since time deposits  have been giving very low returns in the past years. Time deposits and savings accounts only provide you with marginal interest rates. He agrees with Sison-Pascual that their benefit is really in providing you with liquidity. Mutual funds also have degrees of risk with bond funds:
•    Conservative—bond funds
•    Moderate—balanced funds
•    Aggressive—equity funds

Stock market investing, though, if done with control over one’s emotions can also be very rewarding.

Gan gives the following rule of thumb in terms of diversifying your investment portfolio:
•    A chunk should go to TDs or cash equivalent for liquidity and cash flow.
•    Some should go to mutual funds for stable medium term growth.
•    Some should go to insurance or endowment plans for stability and protection.
•    Lastly, if you still have money for investment, some can go to stocks or other aggressive investments for more high risk but high return growth.


Should you borrow from family or take out a bank loan?
Sison-Pascual lists down the following advantages for both:

Borrowing from family
•    Convenient—no hassles with paperwork and shorter waiting time
•    Cost of money is lower, there’s no interest on the loan
•    May not require collateral and is based on trust and integrity
•    No penalties or surcharges when payments are late
•    Payment scheme can be flexible
•    Possibility of the loan being condoned or restructured (written off or reduced over time)

Borrowing from the bank
•    Convenient—transaction payments can be made online or through post-dated checks
•    A system is in place to remind you to pay on time
•    Borrowed sum can be huge
•    Incentives may be given to borrowers (like appliances, free travel, etc.)
•    Possible condonation or amnesty program—removal of interest or other charges
•    Restructuring of the loan

Sison-Pascual recommends that you only borrow from family if it’s a short term loan or a bridge loan. Big ticket items such as housing loans or car loans are better served by lending institutions. “With family, when a debt is not paid on time or defaulted, relationships become estranged as the borrower is expected to be understood while the lender is expected to be more compassionate, thus resentment and anger ensue; it can become complicated.” Gan agrees, “Borrowing from banks would typically give you lower rates than lending companies. By being a good payer, you also build good credit records which can help your overall credit standing.”

 

Click here to learn more about  health insurance plans, payment through credit cards and emergency funds.

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Read on to learn more about health insurance plans and payment through credit cards.

 

Should you choose a short-term health insurance plan with big premiums or a long term health insurance plan with low premiums?
Sison-Pascual recommends you evaluate your lifestyle first.

•    Do you have a high-paying job with an equally high stress level? You can allocate a bigger account for higher coverage during your peak earning capacity.
•    Is your earning capacity relatively stable and you do not see an increased need or lifestyle change? Then a long-term coverage even after retirement could be suitable for you. Gan says, “Filipinos typically like shorter paying years for almost anything, including health care plans. However, keeping to short payment terms may not be financially right for you.” As the years go by, the value of money also goes down due to inflation. If you secured a low premium with a long term paying period, inflation will play a big factor to your favor, provided, of course, that the premiums remain level. This is perfect for life insurance policies, fixed rate health care policies, and regular contribution investment programs.


Should you pay with cash at hand or delay payment through credit card?
“Cash is always king,” states Gan. Paying in cash gives you more discounts and freebies, plus it does not come with credit hangover (that “morning after” incredulity over your credit card bill).
When a credit card may be good:
•    For big ticket items like a TV or an oven, especially if you are uncomfortable bringing large amounts of cash with you.
•    Zero percent interest usually softens the blow of a big purchase.

Gan advises that you always settle your credit card in full when your statement arrives. Otherwise, it would be best to delay your purchase. Sison-Pasucal says, “The bottom line is: Do not use your credit card if you don’t have the corresponding cash in the bank to pay for it. You have no business owning a credit card if you can’t pay on the due date. Remember, you’re paying a higher price on your purchase if you let the bill slide for another month. So, what’s the point of getting something on sale?”

 

Click here to learn more about starting an emergency fund, borrowing from a bank and other financial tools.

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Read on to learn more about starting an emergency fund, borrowing from a bank and other financial tools.

 

Moms and Peso Matters

Paying Off Debt And Starting An Emergency Fund Together
Rochelle Bonifacio-Prado, writer and mom of three, says that the nature of her family’s debt is mostly from credit card use, mainly big ticket items they already thought through. “We’ve learned that in the current economic situation, having loans is part of financial reality. But knowing how to manage our loans and paying in small amounts regularly from our budget also allows us to have an emergency fund,” she says.

When Borrowing From A Bank Trumps Family
Tanya Titong-Medina, former banker and full-time mom, says, “When my husband and I were just starting out, we took out a mortgage to purchase our home. It was a bit of a stretch on a monthly basis. My dad offered to bail us out by paying out our loan and having us just pay him back when we could. We said no.” She and her husband didn’t want to seem irresponsible for taking out a loan they couldn’t afford. Also, they felt that refusing the loan would give them more freedom to make decisions about their home without having to consult with her father.

When Relying On Financial Tools Other Than An Educational Plan Makes Sense
“As a former banker,” Tanya shares, “I understand how the dynamics of an educational plan works and I know that there are other investment instruments that could give me a better yield, thus providing a better nest egg for my daughter’s college tuition.” However, she recommends that you get an educational plan if you feel that you need a ready-made structure to put away money on a regular basis for your child’s tuition fund. “But please make sure you sign up with a reputable and well-established fund provider.”

Stock Market Is A Winner But Use With Caution
“It really depends on your personal risk appetite,” Tanya says. “Given the rates for time deposits nowadays, you feel like you’re better off putting your cash under your pillow! The stock market seems like it can offer you better yields, and in a shorter time frame. However, this only really works if you understand the stock market, have a good broker or a mentor who can give you great advice.”

Health Insurance And Your Budget
Rochelle advises “to always consider your present budget. That should be the primary consideration when committing to financial obligations. Sacrificing your present needs by depleting your resources defeats the purpose of trying to make your life ‘easier.’” If you currently don’t have the money for a higher premium plan, then it would be better to invest in a long-term plan with low premiums but have an emergency line such as a credit card or bank savings as back up for any emergency medical expense.

Credit Card Is To Big As Cash Is To Small
Rochelle uses credit cards to pay bills since it’s so much easier to do it online. She reserves cash for small purchases at convenience stores, wet markets, or when paying for services rendered so she doesn’t need to run to the ATM every time.

 

Photo from sxc.hu