X – Curve

In wealth building one must understand the importance of the relationship between our responsibilities and the amount of wealth we have created. This concept is called the X-curve concept. What is the X-curve concept?

The X-curve is a graph showing two major lines in our lives: the wealth or savings line and our responsibility line. It is shown that ideally from younger to older years, our wealth and savings line should go up while our responsibility line simultaneously should go down.

The X-curve is divided into 4 quadrants. Quadrants I and II represents our younger years while III and IV represents our older years.

1. QI: shows that when we are young, we have very high responsibility. One of our major responsibilities is our income from our job or business. The challenge is that our income is usually temporary (nobody works forever) and our needs like food, shelter, clothing, education, etc. are permanent.

Thus, temporary income supporting permanent needs. It’s going to be very difficult to say:

“I’m now retired! I have no more income. I will also retire eating and taking a bath! What a comfortable life!” (sarcasm intended)

2. QII: in quadrant II, typically when we are young, we have little to no savings at all. That’s why we work hard for money to provide for our family and ourselves.

During our younger years, we are very less secure. The question we need to consider is:

what if we die too soon? Are we prepared? Is our family ready? Who will take care of them?

3. QIII:due to the challenges in our younger years, we need to solve this dilemma by moving to quadrant III. From younger to older years, we need to build wealth, we need to build our savings and investment lines. The goal is to accumulate enough savings that will support us during our retirement years. With enough savings and investments, we pair it with the right financial knowledge we can then move to quadrant IV.

4. QIV:in this quadrant having the right financial knowledge and enough savings and investment, we can enjoy a life of zero responsibilities. Why? Because this time, we now let money work for us. How?

During our older years, it should be expected that following and understanding the X-curve concept, we should be more secured at this time. The challenge would be:

what if we live too long and don’t have enough savings? Who will take care of us?What if we are not financially educated and we don’t invest our 3M savings? In 3 to 5 years time, it will be depleted and retire broke at age 65 and beyond. Ultimately, the key to wealth building is having the discipline to save and taking the time to learn financial education. Make sure to follow the x-curve concept in wealth building.

X – Curve

Financial Life Cycle

The fun stage usually is between ages 20 to 30. This is the stage where people just graduated and would want to enjoy few years to compensate for the years of hard work during the schooling years.

1: The Fun Stage

The fun stage usually is between ages 20 to 30. This is the stage where people just graduated and would want to enjoy few years to compensate for the years of hard work during the schooling years. Everyone is excited with their careers and their first paycheck. They spend here, food trip there, travel here and new gadgets everywhere. Their favorite motto, “you only live once” a.k.a. Y.O.L.O. Saving and learning about investing are never a priority. Are you one of them?

2: The Married Stage.

From ages 30 to 40. After years of fun, a lot of couples in the late 20’s or early 30’s would then want to settle down. They will be preparing for one of the biggest expenses in their lives, the wedding day! Saving might then be a priority, but saving to spend a chunk of money in one big day. While some never develop the habit of saving, they may even resort to go into debt just to spend a lot for a grand wedding day. After the wedding day, expenses will almost never seem to cease as one might then think of creating a family, raising a child, finding their dream houses and buy their own cars. Everyone has the reason not to save and invest for the future.

3: The Education Stage

From ages 40 to 50. This stage the children have grown up, getting ready for higher education relating to higher tuition fees. Parents now are juggling expenses, the mortgages of their houses or cars are taking a big chunk in their budgets. College (the biggest investment for our children) is just around the corner.

4: The Health-Conscious Stage

From ages 50 to 60. This stage, due to the stress in work or business, our body will start to demand from us through sickness and illness. Muscle pains here, knees starts to swell and moving seems to be very uncomfortable. Medicines are for maintenance, and expenses still seem to be forever.

Our productive lives end at stage 4 as we retire now at age 60 and beyond. When we look back, we never were able to set aside money for ourselves, we were never able to create wealth. That’s why a lot of Filipinos retire broke. Truly when we look back, the best time to save and learn about investing is during our younger years.

What stage we are right now in our productive financial lives, the best time to save was yesterday. The second best time is today! Tomorrow will be the worst time. Life is a choice: sacrifice now and enjoy later or enjoy now and suffer later. The choice is yours to make.

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Financial Life Cycle

The fun stage usually is between ages 20 to 30. This is the stage where people just graduated and would want to enjoy few years to compensate for the years of hard work during the schooling years.

Rule of 72

Everyone has some idea of what it means to be money smart - however, whether or not you've acted on that idea is a different story! There are a few nuggets of financial wisdom that have become clichés, albeit practical ones.

Everyone has some idea of what it means to be money smart – however, whether or not you’ve acted on that idea is a different story! There are a few nuggets of financial wisdom that have become clichés, albeit practical ones. Curb your spending. Pay off your debt. Contribute to your savings early and often. Compound Interest is your friend. Start saving now and watch your money grow.

Being financially responsible starts with putting some of those clichés into action, but in doing some research into saving strategies, you might be in for an unpleasant surprise. You might do some quick calculations with current interest rates and come to the sobering realization that the effects of saving your money aren’t as mind-blowing as you thought. Why is that?

The economic landscape has changed a lot in the past 20 years. Our parents saw a time where it was possible to put your money away in a certificate of deposit (CD) with interest rates upwards of 10%. Strategically utilizing investments with that kind of return was a smart move and a great way to grow your money over time.

Unfortunately, those days of 10% interest rates seem to have disappeared along with the era of acid-wash jeans and Troll dolls. Current interest rates are at historic lows, and the Federal Reserve predicts that the trend is going to stick around for a while. Saving is, of course, still a crucial part of your financial well-being, but what’s the best way to grow your money and beat inflation when interest rates are low? Consider the following strategies:

Check Your Expectations.

There’s no way to sugarcoat it; interest rates are low right now. As a result, your investments – even with the mighty power of compound interest – just aren’t going to perform as well as they would have in the past.

Countering the effects of inflation is another resulting challenge. But don’t get too discouraged—as a young investor, time is on your side.

Even low-yield investment products can generate significant wealth over long periods of time (we’re talking decades), but it’s important to stay realistic with your long-term savings goals.

Will your investment allow you to buy your own island when you retire? It’s highly doubtful, but with some foresight and planning, your investment can allow you to retire comfortably and with peace of mind.

The rich gets richer and the poor poorer. Most of the time, the missing link is “information.” The wealthy people know something that average people don’t and that is financial education. One of the secrets of the wealthy is that they know how to let money work for them.

However, most of us don’t know how to let money work, thus we work hard for the money. But the challenging part is that nobody wakes up at 6 or 7 am and says, “yehey! It’s time to go to work!” Unless we know how to let money work, we are doomed to work for the rest of our lives. So how does money work?

Money works through the help of interest rates. There are two types of interest rates: Simple and Compounding Interest.

Simple Interest:

Example: 1% interest on the principal per year.

100 (principal savings)

After 1 year: 101

After 2 years: 102

After 100 years: 100 becomes 200! Exciting!

Compound Interest:

Understanding the magic of compound interest:

Example: 1% interest compounded annually

100 (principal savings)

After 1 year: 101

After 2 years: 102.01 (because your 1 peso also earns 1% interest)

After 3 years: 103.03 (the magic of compounding!)

Experts have derived a simple formula to estimate the number of years your money doubles through compounding called the “Rule of 72.” The rule states that 72 (constant) is divided by the interest rate per year equates to the number of years your money will double.

72 / i = # years money doubles

Using the values above, 72 / 1% = 72 years.

Therefore: 100 becomes 200 after 72 years (compared with 100 years in simple interest rates)

Another interesting thing to note about the magic of compounding: small changes in the interest rate = millions in the end result of your savings.

Example: 100,000 invested in 4%, 8% and 12% at age 29. Using the rule of 72, the number of years your money will double is 18, 9 and 6 years, respectively. At retirement age of 65, see the big difference below.

Obviously, the bigger the interest, the bigger the result. But the not so obvious beauty of compounding is, the difference between 4 and 8% is 2 times but the difference of 400K and 1.6M is four times! The difference of 4 and 12% is thrice but the difference of 400K and 6.4M is 16 times!!! Now that is very powerful!

Rule of 72

Pay yourself first

Pay Yourself First means Invest or save first before making any expense. It is similar to save first and then spend. This means saving and investment should on your top priority list.

I know it is difficult to follow this rule due to psychological limitation. We are programmed to handle money as spender. We can easily plan to spend money. However, it is difficult for us to save money.

The similar concept can be explained by an analogy of doing exercise. Many experts recommend “Doing Exercise First in the morning”. Regular exercise in the morning helps you to stay healthy. However, due to psychological reasons, many people say that they don’t have time to exercise in the morning. Later in the day they may or may not do exercise.

Pay Yourself First is a similar concept. If you pay money to everyone else you may or may not save money for yourself. However, if you follow this concept very well you can be rich for sure.

How to Become Rich by Pay Yourself First?

Follow the step given below to become rich via – “Pay Yourself First”.

First thing is to find out your monthly outgo on mandatory expenses. Once you have this detail find out how much money you can save from your income? It is advisable to save and invest at least 10% of your monthly income to start with.
Once you decide the amount you need to automate your investment in the assets that provide sufficient growth or generate passive income. It could be mutual funds, stocks, PPF, real estate, IUL etc. Payment should go to investment as soon as you receive your paycheck.
By using this method you can establish a flow of steady passive income over the period. It could be either dividend, interest income or maybe rent. This passive income should reach a level where you can manage all your expenses from passive income. This is called as Financial Independence stage.
Once you reach this stage. You can invest your entire salary/income to buy an asset that generates additional passive income.

Savings

Saving money is a habit and so is spending. While most of us are already “masters” in spending, we need to understand that saving bears equal weight with spending and our saving habits can determine whether we are ready to accumulate wealth. When one receives income from a job or salary, a lot of people are using the wrong savings formula. How about you, what is your savings formula?

Here are 3 savings equations and see which one is yours.

(1.) Income – Expenses = Savings

After receiving income, majority of your funds are then budgeted and spent on your expenses including but not limited to daily expenses, food, clothing, transportation, bills: water, electricity, phone bills, mobile loads, schooling, vitamins and/or medicines, lifestyle, travel, gadgets, and the list may go on and on. And after all that, whatever is left is for savings.

Question: does this formula work? Most the time, there is nothing left to save!

(2.) Expenses – Income = Savings

This formula is what I believe the worst formula in saving money. Before receiving income, you already spent money through credit cards or loans. This is a very dangerous formula because there may come a time that after paying all debts, nothing is left not just for saving money but also for your daily expenses and may require you to go into more debts.

(3.) Income – Savings = Expenses

This is the better formula. Again, saving is a habit. Unless we automatically set aside money for saving, our spending habits will always prevail. Saving is a decision, and regardless how much amount you set aside, the act or “discipline” of saving money will create the habit that will eventually lead us ready in creating wealth.

Pay yourself first

Pay Yourself First means Invest or save first before making any expense. It is similar to save first and then spend. This means saving and investment should on your top priority list.

Financial House

A solid financial foundation means one must know his/her priorities. Just like building a house, one must build his financial house with the right foundation. No one builds a house starting from the roof, but from ground up. Here are the five layers in building a solid financial foundation.

1. Protect your Income/ Liabilities (Life Insurance Protection)

Before going into any type of investment, one must first invest in oneself. Life Insurance is the most neglected in United States. While we have not built enough wealth yet, what if something happens to us (esp. parents and breadwinners)? Who will take care of our family? This is where life insurance plays its role. Life insurance isn’t for us, it is for our family. However, life insurance is never a fun topic, that is why most are allergic to it. A lot don’t understand it, a lot don’t want to buy it, and for those who buy, a lot don’t even know their benefits. It is very important to know how to properly choose the right type of insurance that fits our needs.

2. Create Emergency Funds

It is quite ironic that a lot of people’s solution in cases of emergencies is “emergency loan.” We shouldn’t go into debt (another problem) to solve a problem. One must develop an emergency fund. Typically, an emergency fund should at least be 3 to 6 months worth of expenses and must be in a very liquid vehicle like banks.

3. Eliminate Debt

We should target zero debt. With the culture today, debt seems to be a norm. It shouldn’t be that way. A number of wealthy people were asked what is the most important thing that made them wealthy, they answered, “staying out of debt.” We must minimize and eliminate debt.

4. Investments (Retirements/ College Savings)

Nobody wants to work for the rest of his/her existence. We need to invest therefore in vehicles that can give us steady income even in our retirement years. Solid investments like businesses, education and properties are traditional and proven ways to build wealth. While liquid investments like stocks, mutual funds, UITF’s, bonds, IUL’s are the modern and also proven ways to build wealth.

How does your financial house look like right now? Are you saving the right way or the wrong way?

Financial House

Wealth Formula

It is good to understand the right formula in saving money. However, saving is not enough. One must understand that in order to build wealth, a powerful concept must be applied, the wealth formula.

What is the wealth formula?

The wealth formula states: money (+) time (+/-) rate of return (-) inflation and (-) tax = wealth. Let’s define each element.

(+) Money

No one becomes wealthy without money. Therefore, money is the number 1 ingredient in building wealth. This money can come from your income, savings or investments. However, money alone cannot make you wealthy; it requires accounting the other elements.

(+) Time

We believe that building wealth takes time, not a get-rich-quick scheme. Buying a property now and selling it tomorrow earning 10x your capital is impossible. Even playing the lottery takes time, people already died betting without winning. Nobody who bets for the first time and wins! Unless you have some kind of a miracle ointment.

(+/-) Rate of return

This shows the interest rate your money is growing. However, it is positive if the interest is an investment and negative if the interest is applied on debt.

Example: 10K invested in 10% interest per year, next year your money grows to 11K. But if you have a 10K debt from a lender offering 6% interest per month! you enjoyed 10K now but next month you need to pay lender with interest.

(-) Inflation

This is the rate of increase in the prices of commodities. In the United States, a 10-year average inflation rate is 3% per year. This means that the value of commodities increases by 3% of their current price. This shows a negative value in your wealth as inflation reduces the buying power of your money every year, guaranteed!

(-) Tax

They say change is the only permanent thing in the world, now, so is tax. From womb to tomb, there will always be tax. It takes a chunk in wealth building thus it is a negative.

Adding all the elements: money (+) time (+/-) rate of return (-) inflation (-) tax, whatever is left is your wealth. This formula is so powerful, once applied can guarantee us to be build wealth. One must therefore take the time to learn and acquire the needed skills to build wealth: learn to increase cashflow, have the patience to wait, understand different investment options that give better rates of return to beat inflation and know basic strategies to minimize (not evade) paying taxes.

It is important to note that wealth is subjective. One must define what wealth means.

Wealth Formula

It is good to understand the right formula in saving money. However, saving is not enough. One must understand that in order to build wealth, a powerful concept must be applied, the wealth formula.

Navigating the Financial Landscape

X – Curve

X – Curve

Financial Life Cycle

1: The Fun Stage

2: The Married Stage.

3: The Education Stage

4: The Health-Conscious Stage

Financial Life Cycle

Rule of 72

Check Your Expectations.

Simple Interest:

Compound Interest:

72 / i = # years money doubles

Rule of 72

Pay yourself first

Savings

Here are 3 savings equations and see which one is yours.

Pay yourself first

Financial House

1. Protect your Income/ Liabilities (Life Insurance Protection)

2. Create Emergency Funds

3. Eliminate Debt

4. Investments (Retirements/ College Savings)

Financial House

Wealth Formula

What is the wealth formula?

(+) Money

(+) Time

(+/-) Rate of return

(-) Inflation

(-) Tax

Wealth Formula

X – Curve

Financial Life Cycle

Rule of 72

Pay yourself first

Financial House

Wealth Formula

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Financial Landscape