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Oct 16, 2013

How To Use Your Christmas Bonus Wisely

Within the next couple of months millions of Filipinos will once again feel richer because it’s time for their 13th month pay and bonuses.  As early as now many are already busy making plans on how to spend all that money.   A new smart phone seems a good idea or perhaps the latest tablet.  That 60” flat TV will look good in your living room.  What about an Xbox, Wii or PlayStation for your kids?  A new mountain bike, a motorcycle, or maybe a full body tattoo?  A trip to Hong Kong or Singapore would really be fun and exciting.  The possibilities are almost endless.  

As you daydream about all the wonderful stuff that you plan to buy with your money don’t forget some of the more important things that you and your family need.  Here are nine possible uses of your Christmas bonus which will provide you with long-term financial benefits and help secure your family’s future.

1.  Share your blessings.  
Millions of Filipino families can do nothing more than watch the holiday season go by.  They don’t have anything to spend on Christmas shopping, parties, gifts, not even food for Noche Buena.  Share your blessings with the poor, the sick, the abandoned and the victims of recent natural and man-made calamities.  It won’t take much for them to feel that this season is for them, too.  Yes, you won’t get any direct financial benefit from doing this. But remember that a good deed will always be rewarded, either in this life or the next.

2.  Establish an emergency fund.  
This is standby money that you can use in case a financial emergency arises like your child getting injured by a firecracker or a stray bullet and have to be rushed to the hospital.  A financial emergency is any unexpected and unfortunate event that will require a significant amount of cash to cope with. Some common examples are sudden death of a family member, losing your job, a serious injury, a major illness and emergency home or car repairs.  

Your emergency fund is one of the key components of your financial safety net.  It will provide for your financial needs while you are fixing or adjusting to the situation and keep you from falling into a serious debt problem.  The ideal amount of emergency fund is three to six times your monthly expenses.  So if you still don’t have at least three months worth of emergency fund, now will be a good time to use some of your extra money to increase it.

3.  Buy a life insurance policy.   
If you have dependents who will suffer financially when you are suddenly recalled “upstairs,” then you should have adequate life insurance protection.  It’s another key component of your financial safety net.  The recommended life insurance coverage is 5 to 10 times your annual income.  A smaller coverage is still okay as long as it is sufficient to sustain the family you leave behind for a few years.  Use part of your bonus to purchase a life insurance policy.  If you are already covered by your company, check if it is adequate and consider buying additional coverage if it is not sufficient.  Talk to an insurance agent to learn about the different types of plans and payment options.

4.  Buy a medical insurance/healthcare plan.  
You are more likely to get sick or seriously injured first before you eventually die.  You have two options to avoid paying for the huge costs of treating an injury or sickness.  One is to simply choose to die without seeking treatment.  If that’s not acceptable, the other option is to get a medical insurance. Don’t just rely on your PhilHealth coverage because in most cases this will not be enough.  If your company has an existing healthcare plan for employees, check with your HR to see how much coverage you have and if family members are included.  You might want to get an additional personal policy so you are still covered once you leave the company.   A medical insurance also forms part of your financial safety net.

5.  Insure your home.  
If you own a home you should have it insured to avoid a financial disaster in case it’s damaged by fire, typhoon, flood or earthquake.  No property is immune to a devastating natural disaster which can strike anytime.  For only a few thousands your home will already be insured for a year.  This is really just a small amount to pay in exchange for the peace of mind you will get.  With a little extra payment you can include in the coverage the contents of your home.  You can also include protection against explosions, damage by vehicles, smoke damage and robbery.

6.  Pay-off your debt.  
After you have established a comfortable financial safety net and you still have plenty of money to spare, consider paying off some of your debts.  Wouldn’t you want to welcome the New Year with a much smaller debt?  Also, there’s no point in saving or investing your money if you have debts to pay because the interest you’re charged is often much higher than what you earn from your savings or investment. Pay your credit card debt in full if you can so you can break free from its high interest charges. You can also consider paying extra on your real estate or car loan so you can pay it off faster.  Strive to lower your total debts so you don’t use more than 20% of your monthly income to pay it off (36% if mortgage payments are included).  

7.  Invest in your education.  
Investing in knowledge is one of the smartest uses of your money. Attend a seminar that can give your career, business or personal life a much needed boost.  Consider also personal finance seminars that teach you how to properly manage your money and help you plan to secure your family’s future.  (Check out www.mymoneyadviserph.com for our practical financial planning seminar-workshop on Nov. 30.)  The amount of money you spend seminars is small compared to the potential financial benefits you gain by applying the lessons.   If you can afford to pay thousands for a ticket to a basketball game or concert then spare some for your education.  Still, if you find seminars expensive you can always buy the next best thing: good books.

8.  Open a savings account.  
If you are a NSSB (no savings since birth) or haven’t been saving lately, now is a good time to start.  Open a savings account and keep adding to it every month (ideally, 10%-20% of your monthly income).  Forget about investing for now. What you need to develop first is the habit of saving regularly.  Where exactly will you get the money to invest if you don’t have any savings?   And if you don’t have the discipline to save, whatever you’ll earn from your investments will just go to waste because you will likely spend it all.   When you have consistently saved for four to six consecutive months then you can start looking at different investment products.

9.  Invest your money.   
You are ready to invest once you have done all the previous items in this list.  At present there is a wide array of investment options available to you. These include long-term time deposit accounts (technically, a deposit product rather than an investment), pre-need plans, investment-linked insurance (VULs), government & private securities, mutual funds, UITFs, stocks, forex trading, real estate and your own business. Remember that all investments have risk.  Some are relatively safe while others are very risky.  Choose the one that matches your risk tolerance.  Just be aware that there is also a downside in being too conservative – you will have to save more and it will take you longer to achieve your financial goals. 

Study an investment carefully or seek the advice of professionals before you invest your money.  The bigger the money you plan to invest the more time you should spend studying it.  Never make any hasty investment decisions (that’s what scammers want you to do). Follow this simple rule to decide whether to invest in something or not:  when it doubt, don’t!

Enjoy your Christmas planning and Happy Holidays!

Alvin T. Tabañag is a personal money management coach and registered financial planner.  He is a member of the US-based Registered Financial Planners Institute, the Financial Planning Association (USA) and the Association of Registered Financial Planners of the Philippines.  

He is also a member of the Professional Speakers Association of the Philippines.  He is the founder of Pinoy Smart Savers Learning Center, an internationally-recognized organization and “Best Provider” of employee financial education in the Philippines.  Mr. Tabañag’s center is at the forefront of a campaign to promote a culture of saving and responsible money management among Filipinos. 

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