The Basics of Building Your Net Worth
Four years ago, I was advised by my colleagues at work to start diversifying my portfolio because I am still young and it’s the best time to start – but I let time pass
I am a sales professional from the tech industry currently working my way to diversify my portfolio in the hopes of increasing my financial literacy and net worth with a little aid from tech.
The goal for this article is to inspire other people to kick-start their plans for the distant future. I am sharing my insights that I wish I knew four years ago from a perspective of a Filipino.
Your First Initial Investment Options for Peace of Mind
Now let me ask you this – Have you ever been approached by any Financial Advisor over Facebook or LinkedIn?
If you have already started your investment through the help of a Financial Advisor, perhaps you have already taken the first step towards Financial Freedom (sounds cliché - yes I know but that’s just the way it is). You may pat yourself in the back if you do, but you can challenge yourself to do even more.
Otherwise, If you are ignoring them just because you think you are better off without their help — think again.
Before you ignore these messages from any Financial Advisor, check if you have at least any of the following:
1. Emergency Fund which can cover at least 3–6 months of your average projected month on month expenses
2. An HMO plan from the company you are working for that’s supplemented by
3. Life Insurance Policy that you pay for (Could be a stand alone purchase, without HMO)
In my experience, you need to have those three things first before you start diversifying your portfolio through either Mutual Funds or investing in the Stock Market.
The best part is, even if you are still exploring your options, the consulting part from a Financial Advisor won’t cost you anything. Here’s a friendly tip — don’t be afraid to ask questions.
“Health Insurance? I don’t need it now. I’m still young. I am healthy and I don’t need this” – Anonymous
These are just some of the lines I commonly hear when Financial Advisors share stories of their prospects.
“Getting an insurance is expensive for me” — Anonymous
Quite guilty, because I have used these excuses too in the past. But the issue about this mindset is that it surprises you when something unexpected happens in our life (knock on wood, but we can’t really predict when will it happen).
We better be prepared ahead.
Rule of thumb: know that the older you get, the higher risk you have which translates to more expensive life insurance policies. Therefore, it really pays forward if you start way early.
But hey, should you stumble this article at this point in time and you haven’t started anything yet, it’s fine. It’s better late than never.
Reflecting on your Money Spend
Now let’s talk about how you spend your money. Ask yourself these questions:
1. Are you guilty of splurging your money by frequently visiting online shopping apps and checking out items that you don’t really need?
I mean there’s nothing wrong about doing this sometimes, but make sure you set aside a personal limit. As they say, if you can‘t buy it twice (or thrice), you can’t really afford it.
Looking rich but living paycheck to paycheck is overrated. Looking average but being financially independent is underrated
2. How does your expenses look like on a monthly basis? Do you still have savings after everything? or do you end up negative, hours before you receive your monthly salary? Do you spending more than your monthly earnings?
The lesson here is to ensure you have enough savings before you splurge big. Do not splurge until you set aside savings and money to pay your bills. Please let go of the one-day millionaire mindset which is a trend for the past few years which simply translates to your actions the moment you get your salary — that you splurge quite a hefty amount because your emotion tells you that “you earned it” —Trust me. It’s not healthy for you, long-term.
The mindset that I had back then when I was first introduced to my options was that I considered getting my first life insurance plan as an expense, that’s why it felt like a burden to me. But it is not the right thing to look at it.
I realized I needed to shift my mindset and treated getting a life insurance policy as an essential, then took the leap. Another alternative that I’ve had was getting an insurance policy that contains both health coverage and investment fund to the blue chip companies in the Philippines, therefore I was able to hit two birds with one stone without really breaking the bank — looking at it now, it’s a worth it sacrifice for my own peace of mind.
How to Boost Your Net Worth if you have just started your career?
Amazon Founder and CEO Jeff Bezos is now the world’s wealthiest individual with a net worth of more than $145.1 Billion advancing Bill Gates whose net worth is $103.6 Billion as of April 2020.
The poster above is our north star. But we need to progress and take our baby steps towards growing our net worth.
The first step for you right now is to know how to build your net worth if you are just starting your career.
Net Worth is defined as the value of all assets (anything that you own that appreciates overtime or increases its value), minus the total of all liabilities (anything you pay for or own that depreciates overtime or decreases its value). This means, your monthly spending could only fall in two categories only — asset or liability.
Before you complete your next purchase, make sure you define which category will it fall. Once identified that you are about to purchase any liability, ensure that you have an asset that pays for the liability.
Here’s a sample computation of an individual’s Net Worth:
- Monthly Salary (NET) — PHP 25,000 | PHP 300,000 Annual
- Monthly Average Expenses (Bills, Policy, Debt, etc.) — PHP 17,000 | PHP 204,000 Annual
- Life Insurance Policy — Coverage is PHP 600,000 but paid for at PHP 1,200 every month
- Sideline Job Monthly Salary (NET) — PHP 30,000 | PHP 360,000 Annual
The Net Worth of the individual from this sample is PHP 1,056,000. The Goal is to increase from here year on year.
Want to know the fastest way to increase your net worth? Get a Life Insurance Policy. That’s what you’ve seen from the sample computation above. Right off the bat, if you are approved for one, your net worth can increase from PHP 600,000 — PHP 1 Million (depends on the plan and its inclusive cash value agreed upon) instantly.
As a recap, here are your first few options to increase your Net Worth year over year:
- Getting a Life Insurance starting at an average of PHP 1,200 a month per policy in exchange of PHP 600,000 increase in your net worth.
- Growing your savings from your monthly salary. You can add these savings into your own emergency fund or put in a different savings account but bear in mind that banks do not give generous interest, therefore you can consider the third tip below.
- Compound Investing by shelling out at least 20% or below of your monthly earnings in the Stock Market or another Policy focused on Mutual Funds (watch out for our next article, we’ll deep dive into this on the next one). Yearly growth of your savings thru Mutual Funds or Stocks can range from 7% and if the Coronavirus will end soon, it can go for instant 30% growth because the markets are currently down.
- Take a side hustle aka your online business or second job that you can make online
In closing, allow me to end this article by sharing that in these times of uncertainties, we need to think twice before we spend our hard earned cash.
Zooming out a bit, let’s be grateful that we still have work today. But it can only go as far as how the economy will thrive in the new normal in the succeeding months until a COVID-19 cure is officially released.
Did you know that the Philippines has one of the lowest financial literacy rates in the world? We need to narrow the gap by learning more about keeping our finances intact and sharing it to others who need it the most.
“Quite an alarming rate of Filipino families are sadly one critical illness away from poverty” — Anonymous
It’s better to start acting and doing the right decisions when you are young, after all it’s for your future. Stop trying to live the YOLO mantra.
