MANILA, Philippines – Retirement is possible in 12 years for a young professional who is following the ideal formula of saving and investing, a financial planning expert said.
Joe Ferreria, president of MoneyDoctors Inc. said any person can plan finances by doing personal financial diagnostics in five steps -- calculating savings potential,
calculating personal liquidity, calculating personal liquidity ratio, calculating expenses, and expense audit.
He said it is ideal to save 30% of income into a product that yields an average of 12% interest a year.
An employee can calculate savings potential by getting a percentage of monthly income, multiply that by 12 months, then multiply the product by 5 years.
“Compare how much you have versus what you aspire for. So therefore you will know that if the amount you have in the bank is greater than your potential to save, you’re doing very well. If it’s not, therefore you need to do a little bit more work in saving money,” Ferreria said on ANC’s “On The Money.”
Calculating personal liquidity comes from annual job income and annual income from investment.
The goal is for funds to generate income equal to your own.
For example, if annual income from your job is P200,000, and annual income from investment is only P100,000, this only equals 50% of the active income.
The passive income should equal the active income.
“You can continue to work, but you can slow down a little bit and enjoy your life,” said Ferreria.
The personal liquidity ratio, meanwhile, is the percentage of assets you should have in cash, which ideally is the figure acquired by adding 10 to a person’s age.
“If you’re 70 years old, plus 10, 80% should be cash assets because as you grow older, you don’t need more real estate but more cash flow,” Ferreria said.
For expenses, Ferreria noted that it should be divided into three categories: survival, lifestyle, and work-related.
He said it is important to stay within 10% of income for lifestyle and work expenses and within 50% for survival expenses.
“I admire the Chinese for their thrift and one of the things I’ve noticed with them is that to save on expenses, they will live above their stores, and you will see that even if their income has grown exponentially, they still live above their stores. It takes a long while before they move to a better house. They allow the income to go far ahead while the expense, they keep it at a very simple ratio over income,” he said.
To slow down the outflow of cash, Ferreria advises to cut back on expenses and divide the expenses into a weekly basis.
He added that amortizations should not be serviced with more than 15% of income.
“You add up all of your assets. For example it comes up to about P500,000. Six months later you add all your assets again, if it gets to P600,000 from P500,000, it means that you have started to succeed. If it did not, then you need to be more honest with yourself,” he said.
After sorting out the diagnostics and with enough savings, employees can begin investing.
Ferreria said one month of expenses should be placed into disbursement account, another month of expenses into time deposit for unforeseen circumstances, and 30% of income into a fixed income mutual fund yielding 8 to 12%.
“You can’t go wrong if you stay with the top 3 banks. On a regular basis, whatever is in excess of your income, you just put it there,” said Ferreria. -- With a report from Melissa Gecolea, ANC