The Power of the 'Latte Factor'

Photo source : subdollar.com

"How can I save if what I'm earning now is just exact to cover for my expenses? I'm living paycheck to paycheck. And I have debts to pay.  "

This is the one of the questions that I often hear. And in fact, this was also my dilemma before I learned to manage my finances.

The 'aha' moment was when I learned about the power of the 'latte factor'.

The Latte Factor is a term used by the author David Bach and is based on a simple idea that all you need to to do to finish rich is to look at the small things you spend your money on each day and see whether your can redirect that spending to yourself.

When I learned about this, I started to assess my spending patterns by giving myself a 7-day challenge which includes tracking the things I spend on.

Monitoring your expenses requires writing down every purchase you make no matter how big or small (including candy bars, coffee, softdrinks, transportation fare).

According to David Bach, the trick in this 7-day exercise is to be yourself and don't change your behavior. You should also spend money as you always have but you need to record or write all your expenses..

When I studied my expenses list, I quickly got the whole picture of where I'm wasting money. Then I decided on where it makes sense to cut back. It would help if you ask this question for each purchased item, "Do I really NEED this? Or do I just WANT this?"

An example of a list would be:

Date : March 1, 2012
Expenses

Items Purchased	Amount	Want or Need?
Bus Fare	12.00	Need
MRT Fare	14.00	Need
Starbucks Caffe Latte	110.00	Want
Starbucks Croissant	70.00	Want
Chicken and Rice Lunch	70.00	Need
Chocolate bar	50.00	Want
Frozen yogurt	130.00	Want
Softdrinks	30.00	Want
Chips	30.00	Want
Fashion Magazine	100.00	Want
Blouse	1000.00	Want
Milk Tea	95.00	Want
Movie fee	150.00	Want
Popcorn	50.00	Want
Food for Dinner	80.00	Need

I know some find this exercise too tedious but I think the writing part is necessary to give you a better understanding of where your money is going and to know the percentage of  your income you can allocate for your necessities. Can you live with 60% of your income or maybe lower it down to 50%?

After you accomplish the 7-day challenge, you can stop jotting down your expenses (if you hate doing it) because when you know the percentage of  your income that goes to your necessities, it would be easier for you to implement the money jar or the envelope system.

Let's go back to the above mentioned example. From the expenses list we can see that many of the purchases were just 'wants' and can be cut back to save a few pesos. The amount of the total expenses incurred is P1,991.00.  The items that the person thinks she NEEDS would amount to P176.00 only. Therefore, the difference of P1,815 is the amount of cash that can be saved and can be put to an investment vehicle that could yield a higher returns (i.e. stocks, bonds, mutual funds, etc).

Now, I'm not saying that you have to be a miser or a stingy person  in order to be financially free. Of course, we want to enjoy what we are earning and give ourselves a treat once in a while.  The point of this exercise is we need to learn to be conscious with our spending habits and see if there are things we can do without or replace it with something that costs less as not to deprive ourselves.

For example, if you are the type of person who can't start a day without coffee, you can consider drinking office coffee which is free or buy from a vendo machine that would cost less than P20 compared to Starbucks that costs more than is  P100 per cup.   
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In summary, the lesson we can derive from this money-saving strategy is that the thing that keeps us living from pay check to paycheck is that we spend more than we make on stuff we don't need. And putting aside a little as a few pesos a day for your future than spending it on little purchases such as lattes, bottled water, cigarette, magazines and so on can can really make a difference.


So, are you up for this challenge? Can you make the power of the Latte Factor work for you?

Takeaway Lessons from Celebrities Who Went from Rich to Broke

 photo source : thegooddrugsguide.com

When I heard about the death of the famous singer, Whitney Houston, I was saddened by the news. She was one of my favorite artists way back in 'The Bodyguard' days because of her exceptional talent and grace. I witnessed her rise to stardom and fortune to being broke. And as I pondered upon her dramatic life of  fame, broken marriage, drug addiction and financial crisis, I realized that  making lots of money or a celebrity status is not a key to financial security. And Whitney Houston is not alone...

Other celebrities who were reported to have filed for bankruptcy are as follows:

Photo source : hdmusicvideos.org

• M.C. Hammer - Remember the 90s hit “U Can’t Touch This!,”?  the hiphop star was a huge money earner but was forced to file for bankruptcy in 1996 with $13 million in debt. M.C. Hammer earned more than $30 million in one year , but after purchasing a $12 million mansion in Fremont, California with 200 paid staff, and 40-plus entourage, he soon found himself unable to support his lavish lifestyle 

photo source : hollywoodreporter.com

• Mike Tyson - Once the most feared world boxer who earned more than $400 million during his boxing career. But Mike Tyson's extravagant lifestyle  - filled with mansions, wild animals, and a large entourage combined with an expensive divorce led to his bankruptcy in 2003, with debts reaching $27 million.

By studying the life of these stars, we can see common patterns that led to their bankruptcy:

• Lack of Financial Education - Often, when you go from having nothing to having substantial amount of money, a financial education is not part of the package.This also holds true for lottery winners who have lost their money after winning millions of dollars/pesos. Many celebs think that they won't lose what they have since they are earning a lot. Their attention is focused more on buying the biggest house or luxury car than learning how to handle their finances.
• Lavish Lifestyle - Celebrities, like the rest of us, can get caught up in having the finer things in life. The more you earn, the more you think that you have every right to justify expensive purchases. 

Since many celebrities don't have long-term financial goals, when the money stops coming in, they become vulnerable to financial struggles. These famous stars are living testimonies of the common misconception that you have to earn more to save more.

With this, it is important to note that the reason most people fail financially is not because their incomes are too small, but because their spending habits are too big.  As we simply say, spending beyond one's means.  This may sound very basic, but it's true.

Controlling your spending is just half part of the solution, the other half is learning and committing to saving and investing a portion of your income no matter how small or big your paycheck is.

Do You Know Where Your Money Is?

The answer to this question may be obvious but in reality most people don’t have a clue where their money is spent and where their money is invested. 

I often hear people saying, “Parang dumaan lang sa palad ko ang sweldo ha…di ko alam kung saan napunta” (I don’t know where my salary was spent).

This was also my dilemma before I took conscious effort in managing my finances. As a typical office worker, happy days would be right after payday. We eat in expensive restaurants, watch movies, clubbing, travel, salon visits, shopping to our heart’s desire and the list goes on. Then a few days before payday, there’s nothing left. We seem to be clueless where our money went.  

I am not saying that we should totally deprive ourselves from these pleasures. In fact, like a typical woman, I enjoy engaging in these kinds of activities because they give me joy.  I love pampering myself!  I also believe that you don’t have to be a miser and live a boring life to be wealthy.

The key here is to create a balance -  know first where you stand now in terms of your financial situation, get organized and have a goal where you want to be. I know that getting organized can be difficult especially if you are not used to monitoring your finances. But once you’ve started it, the next steps will be relatively easy.  

The Personal Statement of Income and Expenses sheet you can see at the bottom can be your guide to determine where you are now. Fill out the sheet so that you will have a better grasp of your financial situation. 

Personal Statement of Income and Expenses

But in order to accomplish this, you need to find first the necessary documents and have an organized filing system.

Here’s what you need to do. Use an expandable long folder with dividers inside. You can buy this in any bookstore. Then, based on the tips given by financial planning book author David Bach, label each divider as follows:

v     Tax Returns – place your yearly Income Tax Returns (ITR)

v     Investment Accounts – stocks certificates, mutual funds, and UITF statements.

v     Savings and Checking Accounts -  monthly bank statements

v     Household Accounts – house title, home mortgage, etc.

v     Credit Card Debt  - all credit card records and statements

v     Other Liabilities – these would include other liabilities such a college loans, care loans, personal loans, etc.

v     Insurance -  insurance policies such as health, life, car, homeowners or renters, disability, long-term care, etc.

v     Family Will or Trust – copy of your most recent will or living trust, along with the business card of the lawyer who set it up.

v     Children’s Account (for those who have children) - put all statements and records pertaining to college saving accounts or other investment you have for your children

Once you’re done, keep this in a file cabinet and feel good that you have achieved the first step to financial security.

Budgeting in Style - The Envelope System

My Cash Envelope System

I know that many people hates budgeting. I understand that listing down all your expenses everyday to the tiniest detail can be a tedious job. 

I too feel the same way. When I tried that technique before, it only lasted me for a week then I was back to my old routine of being unconscious with my spending.. 

But I learned another budgeting style that worked for me. In this technique I don't have have to list down my expenses everyday.  I also find it easy to implement because I only do it once or twice a month right after I receive my paycheck, after each pay period. But it definitely helped me from overspending, it organized my finances and now I spend my money more wisely.

This is called the Cash Envelope System. 

There are different varieties of this system. Others call it the Money Jar System. But the concept is just the same. 

Both systems entail separating your income into different accounts for specific purposes.

To implement this system you need to :

• Have several envelopes or you can buy a cash envelope with several dividers inside like the one I'm using (refer to the picture above). Or you can also use several jars

• Decide what categories you will be using for your budget and label you envelopes/jars accordingly. 

          Let me share with you my categories and the corresponding percentage based from my total income. This was derived from T. Harv Eker's Money Management System:

        

          A. Financial Freedom Account (FFA) - 10%

          This is the money that you will NEVER spend and can only be used to purchase passive income streams or investments that will grow your money. Examples of these investments are stocks, mutual funds, UITF,  insurance, government securities or capital for your business. This can be your retirement account. Think of your FFA as the golden mother goose that lays you golden eggs! 

          B. Long Term Savings for Spending (LTSS) - 10%

          This is my emergency fund. The money I put in this account are kept in the bank for easy withdrawal. This can also be used for major expenditure like house repairs, children's education, hospitalization expenses and for other emergency purposes.

           C. Give - 10%

           Giving back to God is my first expense. I allot 10% of my gross income for tithes and for 
donations to my chosen charity and foundations.

Envelope System

           
            D. Necessities - 50%

            This is the account I consume to settle all my essential bills such as phone bills, electricity, food, clothing, transportation, gym, etc. If you can't survive on 50% of your income, then perhaps you have to analyze your spending habits... simplify your lifestyle. 

            Remember to ask yourself when purchasing things - "is this a want or is this a need?" I have found that i want a lot of things but i do not need them. This has saved me a lot of money.

             E. Play - 10% 

             This is my favorite account. It's my favorite because I believe that you don't need to be a miser in order to become rich. You have to feel good about yourself and have some fun!  

              I spend this account every month to pamper myself. Like having a haircut, massage, manicure, pedicure, eating out in my favorite restaurant, watching movies, etc. I spend all of this Play money every month so that I will feel good about having money and spending it! However, if I need to save up for things such as travels or gadgets that require a little more money, I accumulate my Play money for  few months before I use them.

             F. Education - 10%

              I love learning new things. That's why I have an account that would finance my need for continuous education, such as for books, seminars and trainings.  

That’s it!

Anyone can use this system regardless of how much money they earn.The percentages are not fixed and can vary depending on your spending needs.  What makes this system effective is that it enables you to develop a habit of managing your money. It may take some time to get used to this new way of budgeting but you need to have the discipline to stick to this plan and to make it work. 

Getting Started...

"I want to start saving but the amount I'm earning now is just enough to pay for my expenses and I still have credit card debts to pay...I have nothing left to save! How do I start?"


Sounds familiar?


This is my line before which I know some of you can relate with. A lot of times I tried to build up my savings but my efforts were in vain.


This was my old money management method:


INCOME - EXPENSES = INVESTMENTS/SAVINGS


Every payday after I receive my salary, my old habit was to pay off my expenses/bills first then go to the mall to look for interesting things to buy or spend for the activities that I enjoy doing, such as watching movies, dining out with friends or traveling. There was no conscious effort on my part to control my expenses because I thought that I had enough cash to last up to the next payday and some pesos left for savings.  However, if you will ask me, "How much were you able to save?" My response would be "zero!" There was nothing left! And this was a never-ending cycle for years.


But through financial education, I realized that for the longest time I was managing my money the wrong way.


When I became a member of the Truly Rich Club and from reading financial literacy books, I learned that the right formula to become rich is this:


INCOME - TITHES & INVESTMENTS = EXPENSES

We need to make a conscious effort to form a habit of allocating a percentage of our income first for tithing and investments before our expenses.


TITHING 

photo source:
http://powerofleadership.wordpress.com/

I admit that I don't give tithes before purely out of ignorance. I didn't understand why people gives 10% of their income to the Church which I felt was way too much! I even had negative feelings toward that act. 


But when I attended a session in The Feast where the talk was about tithing, everything became clear to me. 


I realized that tithing is not a law but a symbol of love. Our first expense should be given to our Almighty Father because everything that we have, including the source of our income came from him.  It is a symbol that our lives belong to God and we are thankful for all the blessings that we continuously receive from Him.


When I started giving tithes to the spiritual family that nourishes me, I received a lot of blessings and opportunities and I want you to experience that too.


There are several verses in the bible that talks about tithing. One of these is from Malachi 3:8-10.


Will man rob God? Yet you are robbing me. But you say, 'How have we robbed you? In your tithes and contributions. You are cursed with a curse, for you are robbing, the whole nation of you. Bring the full tithe into the storehouse, that there may be food in my house. And thereby put me to the test, says the Lord of hosts, for if I will not open the windows of heaven for you and pour down for you a blessing until there is no more need.


Give back to God, and you will receive blessings ten folds! 


INVESTMENTS

photo source:
http://powerofleadership.wordpress.com/

Next would be building up your assets. Robert Kiyosaki defines "assets" as things that generate cash inflow or that will put money in you pocket, such as rental properties, businesses, and other forms of investments that would give you passive income such as stocks, mutual fund, UITF, and government securities.


After allocating a portion of  our income for tithes and investments, then the remaining money can be spent for our expenses. 


In my next blog, I will teach you a simple technique I'm using to manage my expenses. 

What's Your "Emotional Why" ?

"Why do you want to become wealthy?"

This is the first question that you should ask yourself in order to achieve financial success. As what Bo Sanchez said, "You need a fierce emotional reason to become wealthy - or it won't happen."

This "emotional why" will give you the fire to succeed!

This may result from the painful or unforgettable experiences you had in the past that made you think, "If I'm rich, then I can achieve/have this...."

When I made a decision to undertake this journey, I spent some time reflecting why I want to become rich. This process was not easy because I was torn between the desire of financial freedom vs. security. These 2 concepts are not the same.

Security means that you have enough money to pay the bills or some extra to have a comfortable lifestyle or enough funds for retirement. But my dreams go beyond that.

So I said to myself, "I won't settle for security. I want to achieve financial freedom so I can fund my dreams."

Let me share with you what these dreams are:

DREAM # 1 : TO BUILD AN ORPHANAGE

with the kids of Virlanie Orphanage

When I was in college, my thesis in Psychology was to study adolescent orphans and how their identities were developed.  We constantly visited 2 orphanages for 3-4 months and spent a lot of time with the kids and teens who lived there. From our study, we discovered that orphans have a hard time trusting people because of their painful past wherein they were abandoned or abused by the same people they trust - their family. At first, I had difficulty gaining the trust of my respondents but after some time, they broke that thick wall and revealed to me their innermost feelings, fears and dreams. By the end of our study and when we bid them goodbye, some were crying. Then one orphan approached me and tearfully said, "Lahat na lang ng napapalapit sa akin nawawala." (I lose all the people I care about). And those words crushed my heart!

So I said to myself, "Someday I will have my own orphanage where these kids will have a happy home."

And this dream never left me.

DREAM # 2 : FINANCIAL EDUCATION FOR WOMEN AND KIDS

I dream of having an institution that focuses on teaching financial literacy and money management to women and kids.

www.myddnetwork.com/Teach-Kids-to-Save-Money

Why women? I heard a lot of sad stories where wives let their husbands take full control in matters related to money and finances because they believe that money management is a "man thing" and were left peniless in cases of separation. Or a story of  a single woman who is drowning in debt because she doesn't know how to handle her finances. These are just some scenarios where women are left in the dark and want to cry out for help but don't know what actions to take.

Why kids? I believe that forming the habit of saving and properly handling money should be taught to children because they will be bringing these skills as they grow older. And sad to say, this is not part of our current educational system.

DREAM # 3: ENJOY LIFE! 

After I watched the movie "Eat, Pray, Love", I imagine myself having that kind of adventure. I want to travel around the world, see beautiful places and experience different culture. I also dream of having a beautiful house that is surrounded by a lake. I want to explore the world and enjoy life to the fullest!

Publish Post
These are my "Emotional Why"

What's yours?

The Book That Started My Journey

It was last November 2010 when I purchased the book that changed my life.

Actually, that was not the first time I noticed book, "Rich Dad Poor Dad" on a bookstore shelf or heard about it from other people. But I didn't bother to take a look at it, more so, buy it.

But God shows us the way during times when we are seeking for answers.

Again, I stumbled upon this book during that time I was looking for direction in my financial life. And something inside urged me to purchase it.

Before I read the book, I was nagged by the thought that at the age 32 and with 8 years experience working as an employee, I had no savings and investments. (please read my first blog entitled My Past to learn more about it). I felt like that I was just going through the motions - without a direction.

I thought that a bigger salary will solve my dilemma. But transferring from one company to another that offers a higher pay or having a salary increase was not the answer. Ironically, my expenses and credit card debts even became higher!

Little did I know that a single book would change everything.

Rich Dad Poor Dad by Robert Kiyosaki is a fascinating story of how the author's Rich Dad taught him the lessons he needed to learn to make himself financially independent. 


This book opened my eyes that some things that we thought are assets are actually liabilities - for example : a house or a car. Moreover, because of my addiction to shopping I even  justified to other people and to myself that my quality/branded clothes, shoes and bags are assets!

While reading the book, I encountered a lot of "Aha" moments when it comes to money management, investing and personal finance .  It provided the basics to my quest for financial literacy and opened my mind to new possibilities. 

Because of this book, the lady who used to be a "bargain-holic" became addicted to learn the ways and the means to become financially free.