Another year begins – and as 2021 kicks off, it presents us all with a renewed opportunity for a fresh start.
Last year’s challenges should give us new purpose. If there’s anything 2020 has taught us, it’s that life is short but unpredictable, and so we must strive to live fully but not recklessly. For 2021, make the most of the new beginning: start by getting your finances in order.
Here’s one roadmap for taking care of your financial fundamentals: we hope it sees you through 2021 to many more years in the future!
Deal with the past: pay off or pay down your debts
First, get a bird’s eye view of your debt landscape. Make a list of all running debts, indicating the lenders, principal amounts, penalties, interests, due dates, and payment terms. Once you get a better sense of your overall debt situation, it’ll be easier to plan how to get out of it.
Personal finance website Pesolab recommends a few easy strategies to close your debts:
- Snowball – Arrange debts from smallest to largest amount, then pay bulk of the smallest debt, and only the minimum amounts for the rest, working your way through your obligations
- Avalanche – Similar to the snowball strategy, but beginning with the biggest amount instead of the smallest, helping save on interest fees by closing highest-interest debts first
- Consolidation – Get another loan with a lower interest rate or better terms in order to pay for loans that charge higher interest
- Snowflake – Enact cost-cutting measures to increase funds for debt payments
- Shovel – Increase cashflow by getting a part-time job, working a side gig, or finding sources of passive income (in other words, hustle)
- Settlement – When all else fails, you could reach out to your lender and offer to pay a lump sum amount, usually less than the total amount owed, in order to close or “forgive” the debt
Plan for uncertainty: build an emergency fund
Our brains are constantly fooled by optimism bias – the “it can’t happen to me” mentality that underestimates the likelihood of negative events. But emergencies do happen, whether minor (a gadget breaking down and needing repairs) or major (losing a job). Due to optimism bias, these events often catch us off-guard.
Building an emergency fund is one way to prepare for any scale of setbacks. Financial planner Randell Tiongson suggests we set aside the equivalent of 3-6 months of your monthly expenses.
If you spend P10,000 every month, aim to build an emergency fund worth P30,000 to P60,000. This may cover living expenses for a few months while you’re job hunting, or cover medical bills while waiting for any reimbursements, for instance.
Prepare for the future: create a retirement fund (PERA)
Did you know that the Philippines also has a retirement fund system similar to the US’ 401k?
The Personal Equity and Retirement Account (PERA) is a voluntary retirement savings program that offers Filipinos a tax-exempt way to supplement pension benefits from the Social Security System, Government Service Insurance System, or employers.
Contributions may be withdrawn, in lump sum or as a monthly pension, and exempted from income or estate taxes, when you reach the age of 55 and have been contributing for a minimum of five years. Your family may also receive the funds tax-free in the event of your death, regardless of your age or duration of contributions.
The Bangko Sentral ng Pilipinas in September 2020 also launched the PERA digital platform to make it easier to open and access accounts through a mobile phone.
Make long-term bets: invest in real estate
Despite disruptions caused by the pandemic, real estate is still a good investment because it increases in value as the years pass. “Real estate is one asset wherein your wealth grows a lot over time, as opposed to assets wherein the value depreciates over time,” said Ed del Valle, Avida Land business unit head, at a recent webinar hosted by Ayala Land and BPI Family Savings Bank.
On top of its value as an investment, real estate can also be leveraged for other uses. “It could be used as your residence, a place to nurture your own family, or as an investment for its leasing potential,” explains Dennis Fronda, Bank of the Philippine Islands’ head of retail lending. “Among the various investment vehicles in the market today, [real estate is] a very, very resilient industry.”
If you’re not quite prepared to purchase property, a Real Estate Investment Trust (REIT) is a less capital-heavy way to invest. These work similar to mutual funds and pay dividends to investors at regular intervals.
But if you’re ready to dive in and buy your own place, Avida Land has affordable options with reasonable financing terms, in many established and up-and-coming cities around the country.
For more information, visit the Avida website.