Archive for the ‘Wealth’ Category

Spend Less, Save More

July 14, 2011
  • Find creative ways to spend less and save more.
  • Do not dine out. You can’t afford the tip.
  • Buy at Costco.
  • Drink instant coffee.
  • No to soda.
  • Buy toothpaste in bulk.
  • Buy soap good for one year.
  • Drink tap water. Buy bottled water only when you have guests.
  • Go for garage sales.
  • Avoid malls.
  • No movies.
  • No Netflix.
  • Shop once a month only.
  • Stockpile dry goods if prices are low.
  • Use coupons.
  • Live near where you work and the kids have their school.
  • Eat salmon, vegetables, turkey and chicken. Avoid red meat, hotdogs, ice cream, sweets.

More Laws for Wealth and Frugalism Here


Saving for the Future

January 1, 2009

Posted date: December 31, 2008

It’s the end of the year and by now all the gifts have been opened. That also means that our billing statements will soon be in the mail as well. No matter. It’s the season of sharing and we are just as happy to go through the shopping and the wrapping to remind family and friends that they matter.As I look at my nephews, nieces and godchildren comparing their respective “loot for the season”, I realize that I grew up in a very different, much more measured environment. I turn philosophical (it comes with the season . . .) and ask myself: what gift did I receive from my parents that had a lasting impact on me?

The answer is as corny as it is discerning: my parents invested into my future by saving.

My father’s mantra was “simple living” and he found every opportunity to recite it as if it was a pledge (he still does today). I thought it was just an excuse so we did not have to eat out or take family vacations (if we couldn’t reach a place by car, don’t count on seeing it). Dad was a disciplinarian and it was not a wise move to get the ire of an ex-military man either by being short ten centavos or “agreeing” to receive those green candies in lieu of the right amount of change.

But he also took on two teaching loads in a graduate school, carrying out this responsibility at night after his day job and giving up his Saturdays. Yes, he loved both the teaching part and the mind games of the case studies (I found my business subjects in college quite easy in part because I read cases at a young age). But I could not understand why someone who lives in Quezon City and works full-time in Makati will bother to teach in a school along Taft Avenue. It was simply “out of his way” which for dad was a major infraction on “simple living”. Eventually though, I understood the payoff: for as long as he was teaching and taking the administrative load, my grade school (and then my high school) tuition was discounted significantly.

The biggest hurdle to saving though is that it remains an abstract asset until it is actually deployed. I knew about the tuition discount as a young boy but it wasn’t something I could see or hold. Back then, saving felt more like “foregoing present-day opportunities” rather than an investment for the future.

I don’t think I understood, really understood, why my parents were so “measured” until I was accepted to graduate school abroad. Despite the school acceptance, we still had to show the embassy a bank balance. After that, the trip itself and having to start a new life in an alien environment required a sizeable treasure by itself. I was fortunate to have received an academic scholarship which settled my tuition but I became a working student by circumstance. Trying to match a $3.75-an-hour minimum wage with an $800-a-month rent in Brookline meant that I had to focus more on “working” than on the “student” part of the equation. This was no longer someone else’s saving but something I had to generate and then manage on my own.

What is the point of all these?

I am very sure that I am better off today because of the invaluable opportunity of studying in Boston at a top-ranked institution. Professionally, the academic training gave me a different perspective, if not a broader toolkit to work with. At the personal level, one does not forget the challenges of living alone in a foreign environment without the comforts of family and, more importantly, the consequences of not having savings that you can tap when you need them when the need arises.

All these gains were possible only because my parents had the uncanny ability to maintain the discipline of saving. I’m sure they heard my siblings and I whenever we grumbled at yet another facet of “simple living” but I am very thankful that they either didn’t hear very well or simply chose to lend a deaf ear.

I concede that saving is harder today simply because it is harder to manage today’s environment. Income streams are not as permanent and the cost of living depends a lot on volatile external factors.

But perhaps saving is harder because we have lost our way with this virtue. Saving is not preventing expenses to be incurred but striking instead a hard balance between income and expenses. With a few hugs from my family, we are off to our favourite eating place. It’s an added expense but it does not necessarily make us poor savers. It runs counter to my parents “simple living” rules but I think we can still be effective at saving even if we indulge ourselves every now. In fact my father likes to eat out nowadays, I suppose because he doesn’t pay the bill anymore. The point is that his “simple living” rules are actually not absolute but very much relative.

This is the nature of saving. There must be some rules but do not have to be the same for everyone to make it work. To make the discipline work, we have to be comfortable with it. And the ultimate gauge of whether we are effective in our saving is the ability to transfer purchasing power through time when and where it is most needed.

This is the gift of saving that I have been so blessed to have received. I live a different life because someone saved for me when I didn’t have the capacity to do so and instilled in me the discipline for it when I did have such a capacity.

A rubbish life for LA marathon recycler

December 23, 2008

LOS ANGELES (AFP) – Dave Chameides has spent almost an entire year living a life full of utter garbage, and hoping he can inspire other Americans to do the same.

The Los Angeles-based cameraman has lived in his comfortable Hollywood home without throwing away a single piece of trash, from wine bottles to chewing gum and pizza boxes.

Instead the 39-year-old Chameides — nicknamed “Sustainable Dave” — recycles his garbage or else stores it in his basement. He says he wants to show that it is possible to dramatically reduce his family’s consumption habits.

And he can show astounding results. Rather than the 1,600 pounds of trash the average American family produces each year, Chameides, his wife and two daughters have amassed only 32 pounds over the last 12 months.

“If I were the average American, this entire basement would be filled with plastic water bottles,” said Chameides, who chronicles his campaign with an Internet blog (

Chameides has shunned bottled water in favor of filtered tap water — except when on holiday in Mexico, but even those water bottles were brought back to his home, compacted and stored with other trash.

His war on packaging also extends to the family groceries. Rice and pulses are bought by the kilo and placed in containers, while fresh fruit and vegetables are purchased at a weekly neighborhood farmers’ market.

In fact, groceries was one of the easiest areas to eliminate packaging, Chameides said.

“The food is not so bad, but with DVDs, kids toys and so on, it’s packaging you don’t want, and it’s frustrating,” he told AFP. “What you don’t realize is that you’re paying for it, and pay for it again to dispose of it.”

“So I buy rice and beans in bulk, there’s no packaging. I pay less, it just makes sense. People need to wake up and say, this is not OK.”

Ironically, even Chameides’s rubbish will not go to waste. In January, his refuse will be sent to the Trash Museum of Connecticut to be exhibited.

Meanwhile, organic waste, such as banana skins and egg shells, is minced up by worms and used as compost. “Any kind of organic food and paper, except meat and fish. It’s a really amazingly efficient system,” Chameides enthuses.

His southern California home is fitted with solar panels while his car runs on used cooking oil. However, he insists that even if you don’t follow his example to the letter, “sustainable living” can be achieved without huge sacrifices to your quality of life.

“I’m eating fresher food, I’m saving money, helping the local economy, supporting farmers instead of corporations. For me that’s worth it. It’s just thinking about doing the right thing,” he says.

“It’s just little steps. I’m not living in a cave. People think that the US quality of life should be living in a house with lights on all the time. We live a pretty decent life, by many people’s standards we live a phenomenal life.”

Even wrapping paper for Christmas gifts presents an opportunity to recycle.

“If we wrap something, it would be either in comics or something useful, reusable,” he says.

Should you borrow to pay off debt?

November 24, 2008

Posted date: November 23, 2008

HERE’S a quick quiz for the financially enlightened Filipino:What’s easier: Earning P20,000 additional income in a year or paying off your debt from the paluwagan, the friendly five-six guy or credit cards in full and saving that amount in interest payments?

As more Filipinos entered middle-class status in the last few years (thanks to sister or cousin or aunt living and working overseas), credit cards and other forms of consumer loans have not only become a preferred way of juggling cash flow but also a matter of status.

But whispers of a global recession and creeping fears of a crisis are allowing both the nouveau middle class, and to some extent others in different strata, to re-embrace an austerity they thought they had been freed from. To many, that means finding holes in the budget they can plug, as well as moonlighting, a Filipino word for extra work on the side.

Here’s an idea, however. Before you look any further, consider retiring consumer debt. Immediately, you’ll free up cash. Instantly, you’ll benefit from lower blood pressure or more peaceful slumber at night.

Expecting a sizeable Christmas bonus? Don’t even think of throwing a Yuletide party for the Friday night videoke gang. Chip off a huge chunk from that consumer debt right away and opt for a potluck gathering.

If the Christmas bonus is not forthcoming, Augustus J.V. Ferreria, a registered financial planner, suggests simple credit substitution. Borrow money from the Social Security System or Government Service Insurance System, which give out salary loans at low interest rates and easy monthly installments, and pay off the credit card debt (and here we go again: Or the paluwagan or the friendly five-six guy on the motorbike).

If you choose to borrow from SSS or GSIS to pay off your credit card, you are most likely to get a congratulatory call from the call center agents of the company because you have qualified for a higher credit limit or a new promotion. Just say you’re not interested and hang up. Ferreria says you have to put your beloved plastic in deep freeze.

“Don’t use it anymore or else you will actually increase your debt instead of reduce it,” he explains.

Balance transfer, add-on rates
Lately, more and more credit card companies have been offering balance transfer facilities with what would seem to be very low interest rates. The idea is to transfer an existing debt with a credit card company to another company and pay the full amount in equal monthly installments at low interest. In effect, you’ll also be borrowing to pay off your loan.

What’s the catch? Balance transfer add-on rates are not simple interest rates. You do not simply pay 0.75 percent per month. That huge billboard ad has very fine print that, in effect, says that the add-on rate is not the final interest. Of course, you can’t see it from where you’re driving or waiting for the traffic to move.

Add-on rates mean the effective interest rate charged is added to your full payable amount, and that amount is divided by the number of months you want to pay your debt. A 1.5-percent add-on rate, for example, can have a final interest of up to 32.4 percent a year, depending on a certain “factor rate” used by the credit card company and the term of your loan.

The wildly confusing thing is that the computations are not uniform across banks. Finding that final interest rate is not as easy as multiplying by 12. Decoding it can be very tricky. The final interest rate will still be lower than the 42 percent per annum most banks charge, but they are not as low as those ads make them to be.

Managing debt
Credit cards and credit lines are useful personal finance tools for those who know how to use them. But if you feel like you’re getting flummoxed by all the variables, here are some more tips to manage your debt:

1. Prioritize. Writing down all your debt may be a scary thing to do, but you need to get a grip on how much you really owe. (Don’t forget the loan your mother or father extended to you).

2. Focus on where you’re bleeding the most. List down all your debt from highest interest to lowest. Then hack off the one with the highest interest rate first while paying the minimum on the others to avoid late payment charges. Once you’re done with the first, most difficult debt, add the amount you paid monthly on that account to the second debt, effectively pushing down debt at an accelerated pace. Proceed until you finish paying all your debt. This way, you focus on where you’re bleeding the most.

3. Avoid new debt. Credit card companies are aggressively looking for new clients, and old clients who will want to swipe more. Just remember that if you can’t pay in full, then you can’t afford to swipe.

4. Save, save, save. Keep a healthy emergency fund of three to six months of your monthly consumption so that you don’t have to borrow heavily when you need the money.

Philam, co-ops form special mutual fund

October 31, 2008

Philippine Daily Inquirer

Posted date: October 31, 2008

Philam Asset Management Inc. (PAMI) has teamed up with eight cooperatives to create a pioneering mutual fund for cooperatives.Called the National Cooperative Mutual Fund of the Philippines, the new fund would likely be launched in a month’s time, PAMI president Karen Liza Roa said Thursday at the signing of a memorandum of agreement with the founding cooperatives.

The mutual fund will have an authorized capital of P400 million, said Isfani Daba, chairperson of the First Community Cooperative (Fico), which will have a 45-percent stake in the fund.

The other cooperatives investing in the mutual fund are Amkor Technology Philippines Employees Cooperative, Peace and Equity Foundation, Coop Life Insurance and Mutual Benefit Services, Cebu CFI Multi-Purpose Cooperative, Novaliches Development Cooperative, San Dionisio Credit Cooperative and the United Sugar Cane Planters of Davao.

Although local financial markets are in the doldrums, Daba said the mutual fund offered a good opportunity for cooperatives to participate in a fund that could pick up securities at bargain prices.

The minimum investment in the cooperative mutual fund has been set at P100,000.

Roa said the new mutual fund will be a balanced fund or invested in a combination of stocks and bonds.

“Many people still view investing as the province of financially well-off individuals. Nothing could be farther from the truth—individuals, both the high net-worth and the regular Juan dela Cruz, must be able to maximize opportunities in the financial markets, and mutual funds certainly assist in leveling the playing field for all client types,” said Jose Cuisia Jr., president of PAMI’s parent company, Philippine American Life and General Insurance Co. (Philamlife).

Through its partnership with the National Cooperative Movement, Cuisia said the Philam group would like to encourage larger investments in mutual funds.

“We hope this will be the beginning of a long lasting relationship, irrespective of Philamlife and its affiliates’ future owners,” Cuisia said.


October 12, 2008

October 12, 2008

  1. Inauguration of nine-storey building.
  2. Membership – 37,153
  3. Assets – 1.818.049.788 billion pesos
  4. Net worth – 773.518.056 billion pesos
  5. Eight satellite offices: Bohol; Calbayog; Ormoc; Bayawan; Tacloban; Bais NegOr; Catarman


Americans should go on a diet, spend less, save more

October 1, 2008

At 41.6 percent, the state with the highest, adjusted corporate tax rate in the world, is Iowa.
Guess who’s Number 2?
That’s right: Pennsylvania. Is it any wonder that luring businesses to the Keystone State is a tough sell? Even high-tax California ranks below Pennsylvania, according to the Tax Foundation.
Meanwhile, states like Nevada, Wyoming and South Dakota charge no state corporate taxes.
The United States as a whole ranks just below Japan, which leads the world with an adjusted corporate tax rate of 39.54 percent. (The U.S. rate is currently 39.27.)
The high rate drives more than a few corporations overseas in search of lower taxes. Businesses are finding them in places as different as the Slovak Republic, Switzerland and France.
The lowest corporate tax rate in the world right now is Ireland. At 12.5 percent, it helps explain why Ireland’s economy has been booming the last few years.
This year, as in any presidential year, taxes are an issue – a big issue. And now, with the argument over a potential $700 billion taxpayer-funded commitment to providing liquidity to the lending markets still raging, it’s bigger than ever.
Whoever is the next president of the United States is going to be hamstrung with either a sluggish economy or a flat-out recession, probably the latter. Raising taxes on businesses in such an environment is probably the worst thing a president or Congress could do.
Here’s what makes sense: Cut the corporate tax rate at least 10 percentage points, and raise the personal income tax rate on at least the top 10 percent of taxpayers. Those individual taxpayers have done very well the past eight years under George W. Bush. They can afford to cough it up now.
The next president should also freeze spending at current levels on just about all discretionary programs.
For years, the U.S. economy has hummed along at a growth-rate that was as spectacular as it was unsustainable.
The Federal Reserve Board reported this summer that Americans carry $2.56 trillion in consumer debt and that the average household’s credit card debt is more than $8,500.
Instead of saving, Americans have been spending, spending, spending.
In 1968, Americans put away 8 percent of their disposable incomes in savings accounts. Today, 40 years later, Americans save less than half of 1 percent of that income.
We went from being a thrifty country to a gluttonous one. It’s time for a diet.
The spending spree was momentarily good for the economy, but bad for the future. Well, the future is here. And it ain’t pretty.
The only way out of this mess is a lot of painful belt-tightening. That means both government and citizens are going to have to consume less and save more.

For Stocks, Worst Single-Day Drop in Two Decades

September 30, 2008
September 30, 2008

Even before the opening bell, Monday looked ugly.

But by the time that bell sounded again on the New York Stock Exchange, six and a half frantic hours later, $1.2 trillion had vanished from the United States stock market.

What had started 24 hours earlier, with a modest sell-off in stock markets in Asia, had turned into Wall Street’s blackest day since the 1987 crash. The broad market, as measured by the Standard & Poor’s 500-stock index, plunged almost 9 percent, its third-biggest decline since World War II. The Dow Jones industrial average fell nearly 778 points, or 6.98 percent, to 10,365.45.

Across Wall Street, no one could quite believe what was happening on the floor — the floor of the House of Representatives, not the New York Exchange.

As lawmakers began to vote on a $700 billion rescue for financial institutions, the Voyageur Asset Management trading desk in Chicago went silent. Money managers gaped at a television screen carrying news that seemed unthinkable: the bill was not going to pass. Shortly after 1:30 p.m., the rescue was rejected.

“You just felt like the world was unraveling,” Ryan Larson, the firm’s senior equity trader, said. “People started to sell and they sold hard. It didn’t matter what you had — you sold.”

Frustration, and then panic, coursed through the markets. Investors feared the decision in Washington would imperil the financial industry, as well as the broader economy.

At the Federal Reserve and other central banks, policy makers were also anxious. Even before the vote on Capitol Hill, central bankers tried to jump-start the credit markets. They offered hundreds of billions of dollars in loans to banks around the world because banks and investors were unwilling to lend to each other. But neither the stock market nor the credit markets appeared to respond.

Just 24 hours earlier, few imagined Monday would play out this way. Treasury Secretary Henry M. Paulson Jr. and the House speaker, Nancy Pelosi, announced Sunday afternoon they had agreed on terms of a bailout.

But while Congressional aides and lawmakers worked on the details, the credit crisis that began more than a year ago in the American mortgage market was setting off new alarms in Europe.

Shortly before 6 p.m. New York time on Sunday, Belgium, the Netherlands and Luxembourg agreed to invest $16.2 billion to rescue a big bank, Fortis. A few hours later, the German government and a group of banks pledged $43 billion to save Hypo Real Estate, a commercial property lender. At 2:50 a.m., news came that the British Treasury had seized the lender Bradford & Bingley and sold the bulk of it to Banco Santander of Spain.

“We will continue to do what is necessary,” a somber Gordon Brown, the British prime minister, told reporters at 10 Downing Street in London.

In Tokyo, where stocks had opened higher in early trading on Monday, worries quickly set in. Traders returned from lunch to reports suggesting the financial crisis was taking a toll on the global economy. Markets across Asia began to sell off.

In Tokyo, the Nikkei 225 sank 1.5 percent. In India, stocks fell nearly 4 percent. In Hong Kong, where a big bank, HSBC, raised key lending rates because of the credit market turmoil, the Hang Seng tumbled nearly 4.3 percent.

As events unfolded in Asia, a major American bank was in trouble. Regulators in Washington were rushing to broker the sale of the Wachovia Corporation to Citigroup or Wells Fargo.

At about 4 a.m., Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, called Citigroup executives to say Wachovia’s banking business was theirs.

On Monday morning, before financial markets in the United States had opened, Federal Reserve officials were alarmed that credit markets in Europe and Asia had spiraled even deeper into crisis on Monday.

Fed officials could see that money markets were freezing up in every part of the world, even though the Fed and other central banks had expanded their emergency lending programs last Thursday. This time, Fed officials felt compelled to provide a true show of force by expanding their existing loan arrangements by an unprecedented $330 billion.

As investors in New York were getting up, the credit markets were again flashing red as banks reported higher borrowing costs. Investors continued to seek safety in Treasuries. The yield on one-year Treasury bills, for instance, fell to almost zero, meaning investors were willing to accept no return just for the assurance that they would get their money back.

When trading opened on the New York Exchange at 9:30 a.m., stocks immediately fell 1 percent.

Worried officials at the Fed announced at 10 a.m. that the central bank would increase to $620 billion its program to lend money through foreign central banks, up from $290 billion, to keep credit flowing. The central bank also said it would double the money it lends out domestically through an auction program to $300 billion.

Many eyes on Wall Street turned to National City, the Cleveland-based bank, which has a $20 billion portfolio of troubled loans it is trying to sell. National City’s shares plummeted 50 percent to $1.50 in early trading, prompting Peter E. Raskind, the bank’s chief executive, to assert that the bank was sound.

“It’s not overly dramatic to say that investors are panicking. You can see it in the market and we can feel it,” Mr. Raskind said in an interview.

In New York, 10 executives at an investment firm, Bessemer Trust, huddled to discuss the markets. A question arose: What would it take to restore confidence to the credit markets? There were few upbeat answers, though one said Citigroup’s takeover of Wachovia could pave the way for more consolidation in banking. “It is the type of solution that makes good sense in these challenging times,” Marc D. Stern, Bessemer Trust ’s chief investment officer, said as he recounted the meeting.

But Mr. Stern and his group would soon be dismayed by what was happening in Washington.

At 1:30 p.m. the House began to vote on the rescue package that Mr. Paulson and Congressional leaders negotiated over the weekend. About 10 minutes later, when it became clear that the legislation was in trouble, the stock market went into a free fall, with the Dow plunging about 400 points in five minutes.

At his home office in Great Neck, N.Y., Edward Yardeni, the investment strategist, received terse e-mail messages from clients and friends. “Is this the end of the world?” one asked. Another sent a simple plea: “Stop the world, I want to get off.”

Mr. Yardeni and other analysts said the action in Washington left many investors discouraged and feeling powerless. “You can come into the office and spend a lot of time researching companies, trying to understand them. You’ve got a portfolio that you think should do well,” he said. “And none of that matters.”

Marc Groz, chief executive of Topos Partners, a hedge fund in Stamford, Conn., put it this way: “It’s frustrating for someone like me because I don’t have a pipeline to what is happening in Washington, D.C.”

The stock market briefly rallied, then slowly lost ground in the afternoon. A flurry of sales minutes before the close sent the Dow down another 200 points, to its lowest level for the day.

Shortly after the closing bell rang on the floor of the Big Board, Mr. Paulson, looking exhausted, spoke to reporters at the White House. He lamented the vote, but vowed to keep pressing Congress for a broad rescue plan to help ease stress in the credit markets.

Six things you need to know to understand the financial crisis

September 29, 2008

Financial calamities have come in waves during the past two weeks, each one sending another jolt through the US economy.

These daily – sometimes hourly – developments have included continued declines in the housing market, government bailouts of troubled financial giants, and the disappearance of venerable Wall Street firms. Suddenly, Americans have had to become more familiar with financial terms and learn to navigate complex details about the inner workings of a US – and global – financial system that is in crisis.

Why mortgage-backed securities are a problem
During the housing boom earlier in the decade, many lenders relaxed standards and made subprime loans to homebuyers. These loans were risky and had interest rates that rose over the life of the loans, driving up payments. Wall Street bought up these subprime loans, put them into pools, repackaged them, and sold them.

Investors poured at least $1 trillion into these securities backed by subprime mortgages. Then the housing market slowed and home buyers defaulted in record numbers because they couldn’t keep up with mortgage payments. The value of mortgage-backed securities plummeted.

These losses are at the root of today’s crisis. As the housing market continues to decline and the economy slumps, losses are spreading to the traditional mortgage market and threaten to deepen the economic downturn. Investors – pension funds, hedge funds, mutual funds, and banks – have so far lost about $600 billion on securities backed by prime and subprime mortgages, according to Global Insight.

Credit default swaps: a time bomb like mortgage-backed securities
“Financial weapons of mass destruction” is what billionaire investor Warren Buffett called credit default swaps. These arcane financial products brought down the nation’s largest insurer, American International Group.

Credit default swaps are insurance contracts purchased by investors to protect them against losses on their debt-backed securities – AIG lost $18 billion because it had to pay up on policies on mortgage-backed securities.

Swaps became popular among speculators and hedge funds that did not own the underlying securities but used them to turn quick profits. Swaps are also backed by credit cards, car loans, business, and other loans, and a long chain of swap transactions links investors in this $62 trillion market. Many of these bets were made with borrowed money.

“It’s why we’re in this mess,” said Lance Pa, research director for Capital Advisors Group, a Newton money manager. “We understand how it works,” Pa said about the market, but “don’t know where the exposure could lie. That’s the problem.”

The financial market crisis leads to a credit crunch

As losses mounted, panic swept through the financial system. Loans – to businesses, banks, and consumers – become scarce and expensive, creating a credit crunch. Without loans, there is less spending, which causes the economy to slow.

Corporations are having difficulty tapping the credit market to fund daily expenses, from payrolls to truck leases. American Express reduced credit card limits for more cardholders. And one of the country’s largest auto dealers, Bill Heard Enterprises Inc., went out of business, because it couldn’t arrange financing for car buyers.

The credit crunch is the primary reason that Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke crafted a bailout plan, which Bernanke said was urgent to ease the credit crunch. A bailout allows the federal government to buy mortgages from financial companies. That in turn frees up capital in financial companies so that they can lend to businesses for investments and to consumers for purchases using credit cards and other loans.

“In light of fast-moving developments, it is essential to deal with the crisis at hand,” Bernanke told the Senate Banking Committee last week.

Bailouts could ease the credit crunch
The Bush administration devised a plan to spend $700 billion plan to buy back bad mortgages from faltering financial companies and investors. Add to that the $85 billion federal takeover of American International Group, the nation’s largest insurer, and another $200 billion will be injected into Fannie Mae and Freddie Mac, mortgage companies that support the US housing market.

In total, nearly $1 trillion could be the price tag on the taxpayer-funded bailout – that’s more than $3,000 for every man, woman, and child in the United States.

Nariman Behravesh, chief economist for Global Insight, a Waltham consulting firm, said the final cost will be lower, because the government will sell off many of the assets it is taking over. But even if the mortgage bailout costs $700 billion, that would be equal to just 4.5 percent of US gross domestic product, he said. By comparison, Japan’s bank bailout in the 1980s and President Franklin Roosevelt’s bailout of the US banking system amounted to 20 percent of each country’s GDP at the time.

Banking system remains a problem
The strength of the nation’s banking system – the foundation of the US economy – also is a chief concern for Paulson and Bernanke. Banks have been under severe strain as borrowers have defaulted on their mortgage payments, leaving lenders with portfolios of repossessed homes and rising losses.

While numerous lenders that made subprime mortgages began to fail in 2007, the problems accelerated in recent weeks as major banking companies failed.

IndyMac Bank in Pasadena, Calif., was seized by federal regulators in July. Last week, regulators seized the nation’s largest thrift, Washington Mutual Inc. in Seattle, which was teetering from its portfolio of subprime loans. JPMorgan Chase purchased the thrift for $1.9 billion. It was the biggest such failure in US bank history. Bank of America Corp., the nation’s largest banking company, also acquired Merrill Lynch & Co., the nation’s largest broker.

Going forward, there will be more market share in the hands of fewer financial institutions and less competition.

How bad is the economy: Recession vs. Great Depression?
While the events of the past two weeks were dramatic, they do not rival the Great Depression. Then, 1,500 banks went under, factories closed, and one in four Americans was out of work. The current crisis hit Wall Street hard but has not devastated the US economy. Unemployment in August was 6.1 percent, a historically low rate, and the United States is technically not in a recession, which is defined by two consecutive quarters of negative economic growth – the economy grew 2.8 percent in the second quarter, the latest data available.

However, many economists believe the country entered recession in the third quarter, and if the financial system does not stabilize the economy may enter a long, deep downturn. Next year, Global Insight predicted, the US economy would grow less than 1 percent, and the jobless rate could reach 7 percent – or higher. Things could be worse without an injection of federal bailout money into the system, which would offset some of the negative impact of the credit crunch, Behravesh, the economist, said.

Joys of tax-free saving and investing

September 29, 2008

Posted date: September 28, 2008

THE LAND OF SMILES CALLED the Philippines is no happy place for a small saver or investor. This is a sentiment that has often been repeated among low-income groups to academicians to Makati-type executives.It’s not just that developing the discipline to save regularly requires touch sacrifices; it is because the taxman’s bite on every peso your savings and investments earn is huge.

A new law called the Personal Equity Retirement Account (Pera) Bill is pregnant with promises to change all that. Financial professionals and ordinary Filipinos who are savings-conscious can hardly wait for the implementing rules and regulations of the law to be published and enforced.

Nest egg

Republic Act No. 9505 (full text available for download at at its core will allow Filipinos to have a voluntary retirement nest egg that lets money compound more quickly because of tax sweeteners.

Everybody knows that living on Social Security System or Government Service Insurance System pension alone means you have to cut it pretty close to the bone.

Also, Filipinos working and living overseas are not required to become members of SSS or GSIS, and while they may volunteer to contribute, most end up not doing so.

When you come home after working overseas, the Pera can serve as your ticket to comfortable golden years, says the bill’s main proponent, Sen. Edgardo Angara.

Yet, few realize what the bill will mean to ordinary Filipinos.

“At this point, frankly speaking, not a lot of people appreciate the Pera Bill. If the government does not do more to educate ordinary Filipinos, the only people who will benefit from this are those who are already saving and investing, when in fact this is for the low- to middle-income and first-time investors,” says Alvin Tabañag, a registered financial planner.

That banks and other financial services companies are not likely to go out of their way to teach the poor about how to get wealthy is expected, says Tabañag, who is also the founder and training director of AdvantagePlus Consulting and creator of “They can’t make money out of them,” he says.

Tabañag has made it his personal crusade to teach things like the Pera Bill and other aspects of financial literacy for free to schools, cooperatives and barangays. “The rich already have people working for them who will make them richer. It’s the poor who need this kind of knowledge,” he says.

Pera Bill

The Pera Bill has the potential to make the poor slide closer to financial health because even small amounts of money invested in a personal equity retirement account (Pera) grow much faster without the drag of taxes.

Based on RA 9505, there are three major tax sweeteners for long-term savers who put their money in Pera. One, all earnings from investments and reinvestments are tax exempt, two, contributors get an income tax credit of five percent of their total contribution up to a maximum of P100,000 per year and P200,000 for those working and living overseas, and three, at age 55 or in the event of untimely death, these funds go directly to the contributor or the heirs tax-free. No need for the funds to go into probate and for heirs to pay hefty estate taxes in case of untimely death.

For Filipinos working overseas who are not required to pay income taxes, the tax credit can be deducted from any tax they owe to the government.

Maximize benefits

Although the IRR for the Pera Bill has yet to come out, here are some strategies you can use to maximize its benefits:

1. Start early. The Pera Bill encourages long-term savings because contributors will only benefit if the money stays there until 55 years of age. “Just imagine if you are 25 years old, that would be a 30-year saving time period where you can allow your money to grow tax-free,” Tabañag says.

Based on his computations, Tabañag says the tax credit of someone who works overseas and contributes P200,000 to his Pera could grow to P1 million in 30 years time. If both spouses work overseas and do the same, tax credits alone could reach up to P2 million. “Granted, a million pesos will not feel as significant in 30 years, but a million is a million especially if it’s just a tax bonus,” Tabañag says.

The power of compounding—letting earnings and interest on your investments earn more interest—is a small saver’s best friend because allowed to work its magic over a longer period of time, say 30 years, it can build a bigger nest egg than someone who starts investing bigger amounts at a much later date.

2. Save regularly. Investing experts teach that how much and how often you save matters far more than what your funds return. This is the principle behind such strategies as peso cost averaging where you invest regularly whether the market is up or down.
Suppose you start contributing in January by saving only two percent of your P40,000 salary. But because you are such a brilliant investor, you put your Pera into top-returning funds every year. You would finish 2024 with more than P400,000 in your Pera.

Now suppose you were so clueless about investing that you picked mediocre funds year after year, but you were frugal enough to save a full six percent of your salary. You’d hit 2024 with more than P844,000. That’s right: More than twice as much as the brilliant saver.

3. Maximize your contributions. If you have the funds to invest for the long-term, maximize your contributions, Tabañag advises.

Earnings from bank deposits are taxed 20 percent withholding at source. Mutual funds, cash values from insurance policies and pre-need plans are also taxed at source. When you sell your stocks, you are slapped with a 20 percent capital gains tax and even dividends are taxed. Put all of that under the umbrella of your Pera and you get a lot of drag out of your savings’ sails.

Tax credits, while small at five percent of the total contribution, is also another incentive for putting as much as you can in Pera. Since both spouses can claim tax credits, a family can get a total of P10,000 deducted from their income tax.

4. Keep a healthy balance on your emergency fund. Carlo Cariño, senior partner at the Cariño and Mabalot Law Offices, says contributors should remember to stay liquid and maintain an emergency fund.

“Adhere to the advice to maintain three to six months of your expenses in an emergency fund you have easy access to. What you should put in your Pera account should stay there for the long term or else you will be charged with penalty fees and taxes,” he says.

The penalty fee will be set by the forthcoming IRR of the law.

5. Diversify. The Pera Bill allows contributors to set up five different accounts, and Tabañag says this will be good for contributors looking to diversify their portfolio and minimize their risks. By putting your funds in a good blend of stocks, bonds, mutual funds, unit investment trust funds and other kinds of investments depending on your risk preference, you earn more as well as protect yourself when the market goes south.

6. Don’t obsess about performance but rebalance regularly. It may be tempting to track investment returns on a daily basis and move your money in and out of the market, but this may entice you into the classic mistake of chasing yesterday’s winners. Experts advice rebalancing your portfolio once or twice every year.

This may all look daunting, but saving and investing has never looked more attractive for Filipinos who have long been discouraged from doing so by tax-depressed returns.