You probably heard of the Savings Formula that says:

Income - Savings  = Expenses
as opposed to
Income - Expenses = Savings.

The idea is to take savings from income before one deducts the expense. While this make so much sense because it moves you from being a spender to a saver I believe this is incomplete and will not work in the long run.

In one study, 6 out of 10 Filipinos would like to save using a bank account. But BSP made a study in 2012  and found that only 2 of 10 Filipinos has savings account. What is worst the average savings is around P6,000 only.

These are stagering numbers which has implication of the failure of the "saver's mindset". Yes the Saver's Mindset fails and for one good reason - Savers and not taught to be Investors.

Personally, I was a saver and when I was able to save, I didn't know where to put it. Should I invest it in a business? Should I put it in the bank? I ended up putting it in a business that I didn't understand and ultimately lost all that money.

This is the case of many Filipinos who does not know what to do with their savings.

So don't just be a saver be an investor. Invest your money in a vehicle that will yield higher return than the bank.

So what should be the new formula?

Income - Investment - Emergency Fund = Expenses.

We will talk about Emergency Fund later. But you can do your own research online what an Emergency Fund is. For now even this formula will help:

Income - Investment  = Expenses

I hope this article helps you!

A friend once shared that he is now earning passive income through multi-level marketing. He said he does nothing but share his business and when he gets someone to sign up, he earn money. Like him, I used to think that this is a passive income, but the true test of a passive income is when you ask this question, "if you stop working/sharing/talking will you earn anything?" If the answer is "eventually" or "no" then it is not a passive income at all. It is still an active income because you need to be "active" for the income to continue to flow.

You might be a beginner in personal finance and you don't know what an active or passive income is. By definition, an active income is any income coming from anything where you need to be physically be involved to get that income. A good example is salary and business where you have to be there for it to run. Passive income on the other hand, is any income coming from anything that does not need you to be involved for you to get the income. A good example of this income is returns on a business investment, interest, mutual fund, and equity investment.

Simply put, active income needs your activity while passive does not need your activity.

Why is this important and how this concept will help you in your personal finance? Think about it what will happen if the income that does not need you to be present will exceed your expenses?

Let me ask it in another way, what if you put money in the bank and the interest from your money in the bank will be able to pay off every single expenses in your life?

The result is called Financial Freedom. You don't have to work to pay your bills. You now can work because you are passionate about it.

Now, the bank will probably not give you the result that you need. Right now, banks are giving 1% a year of interest and the government actually take 20% as tax. :-) 

Plus there is this thing called inflation which eats the value of your money. We will talk about this later. :)

You need a better investment vehicle if you are putting your money in the bank.

One such vehicle is what is called a VUL or a Variable Unit Linked. This is a life insurance that yields interest on the side because part of it is invested in equities, bond, or both.

Here's less than 2-minute video that quickly explains a VUL:

May your passive income grow that it exceeds your expenses.

Cheers!

If you are coming from typical Filipino family, you probably heard it from your parents to save your earnings. And you probably tried to save some of it only to find yourself spending your savings.

According to the survey conducted by Bank Sentral ng Pilipinas (BSP) in 2012, 8 out if 10 Filipinos does not have a savings account. This is probably still true now. Which makes you wonder how is this possible if the most common financial advise that an average Filipino is to save their money.

The truth is, setting aside money for SAVINGS is  NEVER ENOUGH. I would like to share why on this article. But very quickly, let me give you Top 3 Reasons why People Fail Financially even though they save part of their income. It's a little morbid to discuss this but I hope these will disturb you enough to act on it. :-)

Here are the reasons:

#1. You are SAVING to SPEND not to INVEST.

When your parents told you to save, you probably do not know what for? At the back of your mind you are probably thinking, I will save so I can buy things that I could not buy with my current budget. Your money has a persona and it has to go somewhere. The question in the back of your mind every time you set aside money is, "Where is this money going?" Or "How and when can I spend this money?" Your mind might already been programmed to spend. Programmed by who? The ads/celebrity endorsement/peer pressure. Much can be said about this. 

When I realised that I could not help but spend my savings, I thought that the best way to spend is to buy ASSETS (anything that add more money to my pocket) and not LIABILITIES (anything that removes money from my pocket). So what can we do? Save your money so you can buy investment. I suggest you take part of your money and split it for life insurance and a mutual fund. If you have time to study the stock market, go ahead and invest part of your money there.

#2. You don't know how much to set aside.

When your parents told you to save, you probably didn't ask how much? Saving less and less as your income increases lessens your resolved to set aside money. 

Personally, when I saw that my money is actually growing through an investment, my resolved improved and it created a desire for me to invest more.

So how much should you invest? 20-40% of your income should be set aside for investment. If it is hard to start 20%, start anywhere and then when you get a raise, invest 50% of it. You will soon find that you are already investing significant part of your income. If you single and you don't need to help your parents out financially, I suggest you target a higher percentage.

Why 20%? Let's talk about this later.

#3. You don't have a goal why you want to SAVE and/or INVEST.

To me, this is the biggest reason why people who are saving part of their money actually quit. This is similar to #1 reason above but slightly different because we are talking about the ultimate goal of savings and investing. Why do you actually save money? We reasoned that we save to invest. But why do we actually invest? 

You need to find this within yourself. Personally, I believe that at some point investing will give me financial freedom. What is financial freedom? It is when you actually don't have to work for money but the earning from your investment  is paying for your lifestyle. A long shot, I know but we all have to start somewhere.

Whatever your reason will be, it has to be there to motivate you to move forward with your  saving and investing. And you can in turn share this to your children and your children's children. No longer will they hear an incomplete financial advice to save part of their income but they will hear a complete advice for financial freedom.

:)