Introduction to Investments

Opening Case

After years of hard work, Ben found himself having excess cash in his funds. He has been saving for a rainy day; he does not
really have anything he is saving for. However, realizing the amount that he had, he came to a resolution that he wanted to
make his money work for him. Ben wished to earn from his extra money, so that he could save more for his future. Or if the
need arises, he will be able to shell out the money needed.

What should Ben do with his money?

Introduction

In this chapter, we are going to take a look at the different opportunities open for people like Ben. Simply put, these
additional earning opportunities or resources are what we call investments. Investments help us earn apart from the usual
work that we do. They also help us exercise our business and entrepreneurial skills, because investments help us be keener
about the different business opportunities that are available around us.

It is not always enough for a person to have enough cash or assets in his coffers; part of being financially mature is having
that careful observation and being able to grab different opportunities to earn. This means that he will be able to maximize
his wealth more if he is able to earn in other business opportunities, even if they are outside his main line of business...
more so if the opportunities grabbed are outside of his main line of business or jobs.

One popular way to maximize wealth is through investments. Investments are assets that earn passive income. Basically,
passive income is an inflow of resources, more often money, which required very little effort from the person who earned it.
Investments help us earn more, and hence expand our personal wealth, apart from our main business. Not only do
investments help us produce more capital, it also helps us exercise our business skills as well.

So you ask how a person can earn without much effort from investments? Investments can earn dividends, interest, rents,
and other income. We're going to have a run down on the list of the common investments that we should know. But before
that, here are a few reminders regarding investments.

What You Need to Know

Investment opportunities should be grabbed only when you have extra resources available for such. Just because there is an
opportunity does not always mean. that it should be grabbed. Such opportunities should only be taken when you can. If you
are merely operating within your means, learn to prioritize; investments can take a back seat first. After all, these
opportunities are not always once in a lifetime. If you missed one today, you can grab the next one soon enough. You just
need to keep your eyes open.

Investments should not be your main source of income. Unless you are a stock broker, an insurance salesman, or an
investment banker, you should not heavily rely on the income coming from your investments. One good reason for it is that
your investments generate income and/or cash flows that are largely independent from your main line of business. Again,
prioritize; if you have your main line of business or work, focus on it. Aside from that, income from investments is not that
regular; they fluctuate, Heavy reliance on the inflows coming from these assets would create a feast or famine condition.
This means that by heavily relying on the resources that these assets might generate, given that they do not produce
regular cash flows, might make you very prosperous one moment and then very unfortunate the next.

Investments require additional risk-taking. Investments are quite a risky asset, so a person planning to invest must be able
to learn how to take risks. Actually, it is from these risks that the investor earns.

What are the different types of investments? We can classify them into these following categories: deposits, funds, bonds
and stocks, and hard assets. Let us go through each category one by one.
Deposits

The first type of investment that we would take up can generally be termed as deposits. These types of investments
basically pool the resources of a person the depositor to a certain account, which may be withdrawn sometime in the
future. The deposit may be made regularly or just when the need arises. The availability of the funds also depends on the
investment that we opened.

Bank deposits are money placed in a bank for safekeeping. This is the mos common type of investment. For businesses,
maintaining a bank account is the norm; for individuals, maintaining a bank account is highly encouraged. The most
common types of bank deposits are as follows: current account, savings account, and time deposit account.

Current account, also known as a checking account, allows a person to draw checks whenever withdrawals are made. What
is good with maintaining a current account is that the bank normally gives a bank statement to the depositor at regular
intervals, usually at the end of each month. Bank statements present the deposits and withdrawals made by the depositor
for the current period. This allows the depositor to monitor his balance in the bank. Another advantage of maintaining a
current account is that the money we have deposited in the bank is secured. Larger banks are secured by the Philippine
Deposit Insurance Corporation or PDIC. The PDIC guarantees that part of our deposit made with the bank is secured, so if
ever the bank runs out of funds and needs to close down, the PDIC guarantees that we will still be able to recover our
deposit. However, current accounts normally do not earn Interest, so there really is no income accruing to the depositor
when he maintains a checking account. Current accounts do not earn; they are merely for safekeeping of our money.

Savings account earns interest, but not that significant. Normally, these types of accounts earn less than 1% annually.
Savings deposits are more common among individuals. These are represented by cards given by the bank to the
shareholders. These cards are normally called debit cards. The main advantage of maintaining a savings account is that in
times of emergency, the presence of the card can be presented as an instant payment to be deducted directly from the
depositor's account without the hassle of queuing up to get cash from an automated teller machine (ATM). Savings account
is a good way for us to start when we plan to invest. It is highly recommended for a person to maintain a personal savings
account because from the term itself, this type of bank deposit help us save money to be used in the future.

Time deposit accounts earn the highest interest among the three bank accounts that we mentioned, the interest increasing
as the term gets longer. Time deposit accounts can have a term as short as three months, and as long as ten years. Time
deposits earn income in the form of interest. Interest is the passive income earned on debts of the counterparty. However,
unlike current and savings accounts, time deposit accounts are not always available for withdrawal. The depositor needs to
wait for a certain period before the money deposited and earned in the account be made available for withdrawal Time
deposit accounts are evidenced by a certificate of deposit, which can also be bought and sold by the depositors themselves.
Certificates of deposit are a contract evidencing the time deposit that we have. They are usually transferrable, meaning if
we do not intend to hold our time deposit any longer, but we cannot withdraw anything from it because of the agreement
with the bank, we can sell these contracts, and the buyer now will be the owner of the time deposit account.

Funds

Insurance are accounts set up for some specific purpose or purposes at some future date. These are set up as a protection
against any losses that might be happen in the future. For example, entities set up insurance for the unexpected k or death
of their key management personnel, so that if ever that unfortunate event happens, the entity might still be able to get
something out of it. We can insure our houses so that if ever something undesirable happens, we would not have to dish
out a lot of money to build another house to replace it. Insurance not deposits, although they require regular payments
from the individual or the company.

The main advantage of maintaining insurance is the assurance of cash receipt upon the occurrence of the condition. For
example, we can subscribe to a health insurance. Given that, we need to pay a certain sum of money regularly, usually
every month. This regular payment is what we call premium. Health insistance allow us to be admitted to a hospital or
health clinics, and then pay a little or no fee at all, provided that such institutions acknowledge the health insurance that we
are subscribing.
On the other hand, insurance do not really earn per se. They do help us decrease our disbursements, like medical expenses
in the example that we had earlier, but the premiums that we pay do not earn any interest or other types of passive
income. The premiums merely say that we are maintaining our account with the insurance company.

Mutual funds operate like a time deposit account, but the one who keeps or takes care of our account is not always the
bank: they can be a mutual fund company, an investment bank, or an individual that we call a broker, Mutual funds require
the payments from the client (regular or discretionary), and the growth or interest already fixed by the fund itself. What
happens in mutual funds is that our deposit will be invested in a diverse range of portfolio or any other investments made
by the professional broker or the company from which the client will be able to earn income without going through the
process of studying which types of other investments to put his money ins. The returns produced by such funds are given by
the broker to the client, less any payments applicable, of course.

Mutual funds can be short-or long-term. The main advantage of maintaining a mutual fund is that it allows us to earn more
compared to any other deposits, without the burden of thinking which investment opportunities we should consider. But
one of its disadvantages is that if the client chose a weak broker, chances are, he might lose his money because wrong
investment decisions made by the broker might entail giving up the cash paid by the client.

Bonds and Stocks

Bonds are investments that allow the holder to earn regular payments in the form of interest from the issuer. These
financial instruments are a liability of the holder, and obviously an asset of the holder. Bonds are long-term investments
that pay regular interest payments, and from which the principal amount is due when it matures. Compared with stocks
(which will be discussed Inter) bonds are less risky, mainly because they have a maturity. But parties who plan to invest in
such securities must be careful. Make sure to study the background of the issuing company first before buying their
instruments. A potential investor or buyer of the bonds should know about the credit rating of the issuer, which basically
summarizes the riskiness inherent in the issuing company. Usually, the higher the interest rate stated in the bonds means
that the instruments are riskier. More risks entail a larger probability of the principal not getting paid by the issuing
company. Still, compared with other interest-bearing investments like current and time deposit accounts, bonds do earn
more.

Stocks most probably are the most famous form of investment. These instruments represent an ownership in the issuing
company. Unlike bonds that represent a liability of the issuer, stocks represent ownership. One main advantage of stocks is
that it allows us to have a "power' over the issuing company. The holder of the stocks, whom we call the stockholder, does
have voting powers in the company, depending upon the percentage of his holding Of course, the higher the holdings, the
higher the voting power, the greater influence of the stockholder over the company. But the holdings depend on the
investor. If the investor would only want payments arising from the stocks, termed as dividends, which are declared by the
board of directors of the company, representing the returns on the investment of the stockholders, a small percentage of
holdings may suffice. Dividends depend on the number of stocks we hold. The more stocks that we own, the more dividends
that we can receive. Still, we have to take note that unlike bonds, dividends are not regularly given. It is the company's
decision if it is going to pay dividends to its stockholders or not. But if the stockholder would want to exercise his influence
over the issuing company, it would be advisable if he buys more of the company's stocks.

Another good investment strategy with stocks is to monitor the changes of its price in the market, but this would only apply
in stocks that are traded in the Philippine Stock Exchange. If the investor would want to take advantage of the changes in
the price of the stocks, then what he could do is to buy stocks, wait for it to increase (prices of stocks in the exchange
fluctuate by the minute), then sell it immediately once it does, simply put as 'buy low sell high' strategy. The main problem
with this strategy is that the investor needs to monitor the stocks closely, which would probably take a toll on him, since
this would take a significant amount of time. And not just that, the short-term profits that might be realized from the short-
term fluctuations of the price of the stocks may sacrifice the mid- or long-term increases in the price of the stocks.
Whatever the investor intends regarding his investment in stocks, just like when he plans to invest in bonds, is to take a
good look at the background of the issuer as well A good company would pay dividends regularly, and its stocks would
probably not fluctuate that much.

Hard Assets
Hard assets are tangible assets used as investments. Instead of using other intangible investments to earn passive income,
tangible assets like buildings and land can be used to expand the wealth of the investor even more. While the previous
investments discussed above may earn interest and dividends, hard assets produce more wealth to the investor through
rents. So as we can see, buildings, lands and any other assets are not merely for the main business operations of the
company, they can also be used to earn other income largely independent of the income produced in our main line of
business or job. If the location of the property is good, then it would earn great amounts of rent (if it is a building) or
significant capital gains (if it is a piece of land).

However, investing in such properties require a lot of extra money, because buildings and tracts of land do not come cheap.
Another disadvantage of investing in hard assets, such as real estate, another term for properties, in their illiquidity, or their
inability to be turned into cash immediately. So when we need cash immediately, say when emergency arises, chances are
we might not be able to sell the land or building immediately. Another disadvantage of investing in real estate is the
fluctuation in prices. The prices of real estate properties are quite difficult to predict, so we have to make sure that the
property that we plan to invest in has good characteristics good location and environment, among others. Like all other
forms of investment, real estate investment has its risks many financial experts see the real estate industry in the United
States as one of the main culprits in the financial crisis that they experienced back in 2008.

Where to Invest

There are a lot of opportunities available for a person or a company to invest its extra cash or other resources. But before
buying an investment, certain factors must be considered.

Firstly, the amount of extra cash available should be considered. The investor must obviously invest within his means. And
not just that, not all of his extra resources must be used to buy investments, because there will always be circumstances in
which cash will be needed in case of emergency. Secondly, the risk inherent in the investment should be taken into account.
Higher risk entails higher return, but the question is if the investor is willing to take that amount of risk. Deposits are the
least risky investments, but they earn the least, too. Real estate investments do carn a lot, but they are so risky that they
could even cause a national economy to crash. So it depends upon the behaviour of the investor in which investment to
buy.

Not only that, we must be able to manage the risk involved in the investments that we are planning to buy. We must not
put all our money in one investment, to as to spread or diversify our risk. The good thing with managing risk, or diversifying
our investment, is if ever we are not successful in one of the investment opportunities that we grabbed, we will still have
other investments left which would still help us earn.

to

member why

Lastly, we should consider our intent. We should ask ourselves if the intent is short term or long term, because that would
greatly influence the kind of investment that we need to buy. If we would like to earn for a shorter term, maintaining a
short-term time deposit account is enough. We could also purchase some stocks, and then immediately sell them if the
price increases. Stocks and bonds can also be held as long-term investments. Bonds pay regular interest, and stocks do earn
dividends. Another long-term investment available is hard assets, from which we may earn rent.
Discussion Questions

1. What is the importance of investments

2. What are the factors that we should consider before putting our money in a certain investment 3. What are the inflows of
resources or income that we can earn from investments

4. What are deposits? What are examples of deposits?

5. Discuss the advantages and disadvantages of opening a deposit account with a bank

6. Compare and contrast the different deposits discussed earlier.

7. Give three examples of things that we can insure 8. What is the importance of buying insurance

9. Differentiate time deposit and mutual funds 10. What are the advantages and disadvantages of buying stocks?

11. What are the investing strategies with stocks??

12. Compare and contrast bonds and stocks 13. What are the factors needed to be considered when buying a real estate as
an investmen

14. Rank the investments discussed according to their risk, from the least to the most.

15. What are some handy tips that we should consider regarding investments

True or False

On the space provided, write TRUE if the idea being expressed is correct and FALSE if otherwise

1. Investments generally earn passive income.

2. Time deposit accounts do not earn interest

3. Banks issue bank statements on savings deposit accounts.

6. Bonds earn dividends

Shy

Shy Nieves

7. Dividends are always declared regularly

8. Stocks are generally riskier than bonds

9 Real estate investments earn rent

10 Hard assets are tangible assets

Identification

Identify the term/s being described by each statement 1. A bank account that is represented by checks when the amounts
from the

account will be withdrawn

2. A bank account that is restricted as to withdrawal for a certain period of time

3. A contract that provides evidence of a time deposit

4 Amounts paid to maintain insurance 5. The professional that manages a person's mutual funds

6. Investments that represent a liability of the issue

7. Investments that represent on ownership in the issuing company 8. Income earned bom stocks

9. A person who owns stocks

10. Income earned from letting another pony use a property owned by another party
Multiple Choice

Circle the choice that corresponds to the best answer 1. Which of the following investments do not eam interes

Smings account

c.

Bonds

d.

Time deposit

remember

8. What is the money to eam shome income from stocka

Buy high sell high

Buy high sell low 6 Buy low all high

9. These ore tangible assers heid as investments

d. Buy low sell low

a. Deposts b. Funds

Stocks and bonds d. Hard assers

com

10. What is the income eamed on a building

Case Analysis

Case 1

Mana has extra money, and she is planning to buy certain income-earning as to help her cam more. However, she wants to
make sure that when she needs the money she temporarily invested, she

will be able to get a part or whole of it immediately. What would you odvose Maria to invest on

Case 2

Mark has been planning to invest ha money. However, he has been expressing ha womes ha the money that he worked for
might be gone if he made the wrong investment decisions.

What are the pieces of odvice that you can give Mark regarding this mone

Case 3

May is nearing her refinement. She was able to save up a significant amount of money, and is now planning to invest a to
eam something when she has already retired Aber considering a lot of

facton, she come down with two choice buy stocks or construct a building as a domitory

Which option would work best for May and why

Case 4

Miko has been inched in buying and selling stocks in the past three years. However he is already

starting to think of other investment opportunities from which he could eam apart from the one that he

is currently involved in Which type of investment would you advise Miko to buy

Case 5
Mis does not really like to take risks, however she is willing to take a life of a because she plans

to eam more by buying investments Which investment should Ma start with

Internet Exercise

Go to the website of the Philippine Stock Exchange [Link] and list of lect ponies that have their stocks available
to the public

• Go to a website of any bank, then lat at least three products that the bank offers

Reference

htp://[Link]/terms/m/mutuofund cap

Managing Personal Finance

10007

Opening Case A s a young adult, Silver encountering struggles when it comes to managing her own finances. She receives a
weekly allowance from her -parents, from where she gets payments for her own expenses. She also makes it a point to at
least save a portion of her allowance so that she has her own money to buy her wants. Silver's parents have always
emphasized the importance of being able to manage her own money well. She knows how important money is and how
critical it is to have a sufficient amount of money whenever she needs it. As a young adult, Silver is therefore confronted
with the challenge of educating herself towards money management philosophies and practices that can definitely help her
improve the way she handles her own finances. Silver knew that later then on, she'll be earning her own money and thus,
she finds it necessary and interesting at the same time, to learn money management principles beneficial to her..

Introduction

Most of us would have a common understanding that becoming rich or wealthy is a goal that almost everyone aspires for.
Being rich with financial resources provides us with a deep sense of personal security there is available money that can be
used to pay for needs or expenses whenever they arise, most specifically, if they are unplanned. It is a relief to have a
sufficient amount of money to support our daily needs such as food, transportation, clothing, and even shelter. Although
money isn't really everything in the world today, it is a practical relief that in part contributes to our satisfaction.

The question to ask then would be, how will an individual manage his own finances well, that he is able to have sufficient
resources to meet his needs when they arise? Properly managing money is a product of an organized process referred to as
personal financial planning.
Personal Financial Planning is the process of sound money management that leads to personal and economic satisfaction.
Through personal financial platining, an individual is able to control his financial situation, allocate financial resources
properly and match them with maturing obligations. It helps in organizing an individual's activities along with the necessary
resources needed in order to meet specific goals and needs.

Personal financial planning helps in enhancing an individual's quality of life. Through careful financial planning, risks and
uncertainties associated with money are being reduced. Below are some of the advantages of personal financial planning 1.
Increased effectiveness in obtaining, using, and protecting your financial resources throughout your lifetime.

Through financial planning, resources are properly managed. It helps in the

process of properly identifying sources of money and appropriate uses for such It helps in reducing money wasted with
unnecessary activities or money lost through personal negligence. 2. Increased control of your financial affairs by avoiding
excessive debt,

bankruptcy, and dependence on others for economic security.

Financial planning helps as individual assess and evaluate his personal

financial position. It is both a preventive and detective control that tells an

Individual if he has been going beyond his means and thus, already resorting to

excessive personal debts. A person engaged in his own financial planning will

be less dependent on others for his economic security. 3. Improved personal relationships resulting from well-planned and
effectively communicated financial decisions.

Most of the time, decisions that are not well thought of produces too much costs and repercussions. Often, it is an
unending source of conflict due to the blame that is constantly being passed on. Through financial planning, an individual is
led towards making sound and wise financial decisions, with all benefits and costs properly considered and evaluated. If a
financial decision is well-planned, an individual will be able to extract the benefits from such decision. And of course, sound
financial decisions uplift the morale of other individuals who will benefit from such decision, in most cases, a family. 4. A
sense of freedom from financial worries obtained by looking to the future,

anticipating expenses, and achieving your personal economic goals. We have always feared the unknown. Most of the time,
we are afraid of what is to come because we never anticipated such situation or we are not prepared as to how we'll handle
such situation. Financial planning reduces our fear of the unknown, it reduces our fears and worries for future unanticipated
expenses because we've already seen them through financial planning. If we are going to a war, financial planning helps us
be well equipped to survive the war.
giving

Personal Finance: Decision Areas Personal finance management involves a lot of decision making. In the process

of handling our personal finances, we encounter three main decision areas: 1. Spending when we talk about spending, we
refer to both our daily routinary expenses (ex. food, transportation) and our major expenses (ex. Purchasing a laptop,
purchasing a cell phone). It is where we use our money.

2. Saving-saving on the other hand refers to the portion of our money that we do not spend for future needs or mostly, for
financial security in case of need.

3. Sharing the portion of our money that we decide to give to charities, churches, or other institutions who are in need of a
financial support.

Personal Financial Planning Process Individuals are always confronted with the challenge of making sound financial
decisions every time. Provided below are logical steps for a fruitful personal

financial planning: 1. Determine the current financial situation.

2. Develop your financial goals.

3. Identify your alternative courses of action.

4. Evaluate your alternatives. 5. Create and implement a financial action plan.

6. Review and revise the financial plan. In light of discussing the personal financial planning process, let us use the case of
Silver as mentioned earlier. Silver is a senior high school student who is bound for college in the next school year. She plans
to become a Certified Public Accountant (CPA) once she finishes her degree in accountancy, Silver receives a P500 weekly
allowance from her parents that she can use to pay for her personal necessities in school. If there would be a need for
additional resources, her parents are willing to provide for her. Silver makes it a point that she gets to save 20% of her
weekly allowance. Aside from that, Silver works during weekends in their family owned grocery store. She works as a clerk
during Saturdays and Sundays if time permits her. She receives a P150 per day allowance form her parents for her grocery
store work. From today, it is only 14 weeks away from the start of the next school year. Silver would want to surprise her
parents, by deciding to personally pay for her college textbooks, in order to reduce the financial burden of her parents. An
older relative told Silver that P5,000 would be a sufficient allocation for her textbook expenses.

Step 1: Determine your current financial situation

In this process, you should be able to asses your current financial standing. This can be done by providing a list of all your
money sources and all your expenses By doing this, you can assess if your expenses match your money sources f you are
using more money than what you are receiving. More importantly, it will help you be aware of your current financial
condition which is vital in financial planning.

Silver has to determine her uses and sources of money. For her sources of money, we have her weekly savings of P100 that
sums up to P1,400 if she continues the same saving rate given that there is no change in her allowance for the next fourteen
weeks. She also has an income of P300 (P150/day) during weekends, that makes up a total of P4,200. For her uses of cash,
she has her textbook expenses amounting to P5,000.

Step 2: Develop your financial goals

Setting your own financial goals is very important in financial planning. Your financial goals reflect the vali you place on
money and how it is to be used. Achieving your financial goals is the key target in financial planning. Other people may
suggest or give you some financial goals. However, it is only you who knows what financial goals you want to achieve.
Failure to develop your inancial goal is like running around in circles, moving but there is no certainty as to where you're
heading.

For Silver's case, one of her financial goals would be to support her textbook expenses for the coming semester. Her dream
to be partially self-supporting is a part of her financial planning as she tries to finish a degree in accountancy and eventually
become a certified public accountant.

Step 3: Identify alternative courses of action

Since financial planning involves a lot of decision-making, a lot of choices is also to be made. In a specific situation, we are
more often than not confronted with different options to choose from-some of which are similar to what we have originally
planned, while some of which could be different from the original plan. It is important that in any situation, we identify
alternative courses of action. It challenges our capacity in making decisions by thinking beyond the current situation and
considering possible scenarios.

Silver also has her alternative courses of action. While she is in college, she has a choice of becoming a full-time student and
just focus on her studies. She can also work part-time, during summer or weekends perhaps so that she'll have her own
source of income so that she can spend her own money when she needs to.

Step 4: Evaluate Alternatives

Once alternatives are available, you must carefully weigh each alternative. An analysis of the benefits and consequences
associated with an alternative should be made. Remember, every choice comes with a cost and choosing one alternative,
most of the time, would mean letting go of the other. Gather evaluation of alternatives. At the end of the day, your goal is
to choose the many relevant information as possible so that you can arrive at a sound

best alternative possible. time student or work part-time during weekends and summers. If Silver decides Silver has to
evaluate her alternative courses of action: whether to be a full to become a full time student, the good side is that, she will
be able to focus more on her studies and prioritize her needs in school. However, she foregoes the chance of earning her
own money. On the other hand, becoming a part-time student allows Silver to have her own source of income to finance for
her needs and wants. However, this would mean that there is lesser time available for her studies and rest.
Step 5: Create and implement a financial action plan

This step involves the actualization of your financial plans. It involves identifying specific actions that are to be undertaken
so that your financial goals will turn into realities. For instance, if you would want to increase your personal savings,
reduction on your personal spending could be included in your plan of action. In this step, you may be needing the help of
other people in order to properly execute your plan.

Given the scenario that Silver decides to become a full-time student, she must then focus on her studies. Since she has no
other source of income aside from her allowance, she would need to cut down on her personal spending so that she has
excess money whenever a need arises.

Step 6: Review and revise the financial plan As you execute your financial plan, new information comes along the way and
situations could change, different from what you have originally foreseen. There might be life events that can lead to you,
changing your financial goals. It is advisable that you regularly revisit, review, and assess your financial plan. There might be
a need to modify some of the choices you have initially made, as new events happen and new information becomes
available.

Silver's decision to become a full-time student is temporary. What if a financial problem on her family arises? For sure, her
financial plans. would then change. She might then consider working part-time while she is studying.

Money Management Practices

Money is a very liquid asset, difficult to earn yet, very easy to spend. It is one of the most mismanaged resources in the
world. We all know how important money is in our daily lives. It is a medium that allows individuals to acquire their daily
needs and even their personal wants. Without money, it would be quite impossible, or very difficult for individuals to
survive on a daily basis. Provided below are some money management practices in order to maintain a sound financial
condition.

1. Save for a rainy day Most individuals struggle in saving their own money. More often than not, most of us are one day
millionaires-whenever we have money we make it a point to spend them all at once. However, we tend to forget that it is
not all the time that we have money. Therefore, we must learn to save some amount from what we receive. Saving allows
us to have a buffer during rainy days or at times when we will need money unexpectedly.

2. Demonstrate your spending ethics Individuals, when it comes to money management should learn that money doesn't
just grow on trees. It is but, hard earned from sweat, tears, and effort. Understanding how difficult is to earn money makes
individuals aware of its importance and thus, will not just waste it. It is important that from our childhood, we already know
the value of money. It is earned and therefore, must be spent wisely.

3. Understand Budgets

A budget is a very important tool in money management. We all know that we only have a limited amount of money, a
finite resource to be used in meeting our countless needs. Learning how to use a budget is then very important. It will help
individuals be aware of their financial limitations and eventually allocate them properly to ensure that each need is properly
met. At an early age, children should be exposed to budgets so that as they grow, they will learn how they'll manage their
own money in the future.

4 Compound Interest

Saving your own money in a piggy bank or something similar is good, for it facilitates personal saving. However, we must be
aware of the concept of interest and compounded interest. By holding our own money, we let go of interest. It is still best
to keep our savings at depository institutions that provide for interest payments, specifically those that are compounded.
Compounding allows the interest to earn interest. With that way you hit two birds with one stone-saving your own money
and earning while you save.

5. Be careful with credit

Nowadays, the use of credit cards has become too common. It facilitates an easier way to buy the things you need
whenever you do not have sufficient cash to pay them. All you need to do is swipe your card. However, credit cards do not
come without any cost. Most credit cards charge interest on top of the purchase price of the goods or services you avail.
They also charge annual fees on top of the interest. Credit cards are innovations, however, it necessitates careful planning
when using these cards in order to avoid excessive debts that you might end up not being able to pay.

6. Live below your means

The problem with most people when it comes to money is that they tend which require more money to support and sustain
such a lifestyle. A practical to spend more than what they earn. Some individuals would have lifestyles principle then is to
live below your means. Tailor your lifestyle with the amount of money you can have. Living beyond your means entail that
you would need external funds-more of debt, to support your daily activities. Living within your personal means allow you
to properly allocate and manage your own money, avoiding incurring unnecessary debts.

Key Terms

Spending

Saving

Budget

Personal Financial Planning

Discussion Questions
1. What is personal financial planning?

2. What is the relevance of personal financial planning in your daily life as a student

3. What are the advantages of personal financial planning? Briefly discuss each.

4. What are the main decision areas individuals encounter in financial planning? 5. What are the steps in personal financial
planning? Discuss each step.

6. What is the importance of money in our daily lives? 7. What are some of the common sound money management
practices? Enumerate and discuss

each

Case Analysis

Case 1

Margaux is a senior high school student who is at the same time, an aspiring professional photographer, in pursuing
photography, Margaux would definitely incur some expenses. For instance, a decent digital camera is a necessary tool for
photographers. Margaux is having some difficulties because she sees the need to have her own digital camera. However,
Margaux came from an average income family, whose earnings are just enough to support their family's basic necessities
and a few leisure Margaux has discussed the matter with her parents. The camera would cost P35,000 and her parents said
that it would be difficult on their part to purchase the camera since it is not part of their anticipated expenses. Margaux
understood the situation, however, she is seeking some possible options that she can take so that she'll be able to purchase
the camera, soon.

Margaux receives a weekly allowance of P1,000 from her parents. As of the moment, she has saved a total of P10,000.
Currently, she saves 20% of her weekly allowance and thus, Margaux finds it necessary to adjust her current saving rate in
order to raise sufficient funds to buy her own camera, Margaux is also being offered a part time job as an on-call
photographer for a studio, whenever there would be coverage of debuts and weddings, Margaux will be paid P1,500 per
whole day coverage of an event. There are currently ten events that Margaux will be covering if she accepts the offer.
However, Margaux is worried because accepting the offer would reduce her time for doing her school requirements. She is
worried that accepting the job might make things more difficult for her. Then again, if Margaux accepts the job, it will be
easier for her to raise the amount needed for her camera.

a. Help Margaux handle her personal finance problem. Evaluate which alternative, assess the pros and cons of each choice.
b. If you were on Margoux' shoes, what would you do? Defend your answer.

Case 2
Keep a list of everything you spend money on during an entire day. Categorize each expenditure, and then make a table
with one column for the categories and one column for the expenditures. Add a third column in which you compute how
much you'd spend in a year if you spent the same amount every day.

Case 3

Make a list of all the major expenses you have each year that you do not pay on a monthly bad, such as college expenses,
holiday expenses, and vocation expenses. For each ilom, estimate the amount you spend in a year, and then determine the
prorated amount that you should use when you determine your monthly budget.

Case 4

Create your complete monthly budget, listing all sources of income and all expenditures, and use it to determine your net
monthly cash flow. Be sure to include small but frequent expenditures and pro-rated amounts for large expenditures.
Explain any assumptions you make in creating your budget When the budget is complete, write a paragraph or two
explaining what you learned about your own spending patterns and what adjustments you may need to make to your
budget.

Case 5

Tonyo wants to open her own pet grooming business after she graduates from high school. How eve aher doing research,
she realizes that she needs to save P25,000 for the startup capital for her business Tonyo plans to make a series of deposits
of P4,000 every year for five years. She estimates hat she will earn an annual interest rate of 5 percent on her savings.
Evaluate whether Tanya's savings

will be sufficient to cover her desired start up capital. What suggestions can you give to Tanya in order to help her manage
her own finances?

Case 6

Jomar received P3,500 in gifts when he graduated from high school. His parents want him to save the money for college,
but Jomar wants to buy new clothes, a watch, some CDs, and a video game. He also needs new fires because the ones on his
car are badly worn Jomar asks you for advice. How should he spend his graduation money

Case 7

As an incoming college student, reflect on your personal finance goals. Through the help of your

parents, friends, and various media around you, prepare the following:
a Three shorterm goals

bThree long-term goals

c Plan of action to achieve those gools

Case 8

Ask some of your friends, family members, or other acquaintances you know about some of their life-changing situations.
Ask them to identify how each of these life-changing situations affected their personal finance goals. Examples of life-
changing situations would be Starting a new career, geming maried, having children, etc

Internet Exercise

look for an article about a well-known individual (celebrity, athlete, politician, etc.) discussing how he or she handles his or
her own finances. Extract some tips on how these individuals manage their own money. Prepare a reflection of the things
that you've learned from the article about handling your own finances

References

Gilmon, L. & Zuher, C. (2012) Principles of Managerial Finance, 13th ed., Boston: Prentice Hall

GLOSSARY

accounting cycle-series of recurring accounting steps or processes that spon from the start to the end of a particular
accounting

period adjusted trial balance-adjusting entries that need to be prepared

at the end of the accounting period to bring the ledger balances into amounts that are in adherence with the accrual
principle

adjusting journal entries-needed in order to present in the financial statements the balances of the accounts in adherence

to the accrual principle and time period principle administrative clerk-assisting in daily unit administration functions assets-
resources controlled by the business as a result of past
bansactions and events and from which future economic benefits are expected to flow to the business

average age of inventory-the time that lapsed when a good has been manufactured and eventually sold average collection
period the time when the sale was made

and actually collected

average receivables turnover-the quotient of the number of days per year divided by the average collection period

bad debts-possible losses resulting from uncollectibility of customer

accounts bank-on establishment for the deposit, custody, and issue of

money for making loans and discounts; for making the exchange

of funds easier bank teller-assisting customers with their banking transactions budget-a plan expressed in quantitative
terms, which emphasizes

the resource use and resource allocation of an entity over a

specified period of time

budgeted income statement shows all together the entity's

budgeted sales, budgeted cost of sales, along with budgeted

operating expenses in order to arrive at the projected net profit for that given accounting period budgeted statement of
financial position shows a projection

of the resources, claims, and residual interests in the firm for a

specific date

budgeting provides a detailed collection and reporting of the expenditures and revenues in a business or company
operations business acumen-edensive experience in dealing with business
mates and having the innate mental agility needed to deal quickly with business situations as they arise

capacity - the ability to repay debt based on his or her income and other obligations

Shy

Shy Nieves

capital - the net worth which can be arrived at by deducting total liabilities from total assets

capital budgeting the process in which a business determines whether plans or projects such as building a new plant or
investing

in a long term venture are worth pursuing capital expenditures analyst-estimating cash flows and evaluating

asset investment opportunities

capital markets - debt instruments with maturities longer than one

year and equity securities are traded

carrying costs - variable costs associated with holding one unit

of inventory

cash budget-shows the planned inflows and outflows of cash the entity for a given period of time

in

cash conversion cycle - the operating cycle less the average

payment period cash disbursements-shows possible outflows or uses of cash for

a given time period

cash management analyst - monitoring daily cash inflows and

outflows
cash receipts budget-focuses on all cash inflows expected by

the firm for a given time period

character-established based on the applicant's commitment to

repay previous loans

clearing float-time between deposit of the payment and when

spendable funds become available to the firm

closing entries-responsible for closing nominal accounts drawing account to zero balances

and

co-maker-another person who signs the loan and assumes equal

responsibility for repayment

collateral-an asset that secures the loan

commercial finance companies-organizations without a bank charter that advances funds to businesses by discounting
notes

receivable, making loans secured by mortgage, or financing

deferred payment sales

conditions-economic conditions and environment of the industry where the business belongs

contacts for references identification and contact information of existing employers, previous employers, or even nearest
relative
not living with the applicant controller-manages accounting, cost analysis, and tax planning

corporate governance-deals with the set of rules that an entity observes when conducting business

Shy

Shy Nieves

cost of borrowing-for cost of debt) shortterm or long term debt that usually comes with an interest and other charges

credit analyst - evaluating credit applications and collecting receivables

currency exchange markets - banks and institutional traders buy and sell various currencies on behalf of businesses and
other clients debt financing-being done through borrowing to raise funds for

business purposes

debt security-refers to corporate bonds

demographics - personal identifying information of the owner/s

derivatives markets - where derivative securities are purchased

and sold

dividends-returns on the amount invested in the stocks

entrepreneur - someone who exercises initiative by pursuing a venture to take benefit of an opportunity and, as the
decision moker decides what, how, and how much of a good or service will be produced

equity financing the sale of ownership interest, most often repre sented by shares, to raise fund for business purposes

equity security-refers to corporation shares examiner -performing compliance field work

finance-study of how the players in a financial system acquire, spend, manage, and make other sound financial decisions

concerning money and other financial resources

financial institutions-organizations or intermediaries that help the

financial system operate efficiently financial instrument - physical or electronic document that has

intrinsic monetary value or transfers value

financial management - involves financial planning, asset man agement, and decisions to increase the value of the
stakeholders financial manager - ensures that financial resources are being

used to increase stakeholder value financial markets-take the form of either a physical or electronic

medium

financial planning - sets out rood maps intended to guide, coordinate and control actions undertaken by the firm in order

to achieve its objectives

financial statements - written reports that reflect the financial standing and economic activities of the business

flexible budget- a budget that allows for varying provisions based on a given level of activity that have been sent the payer
but are not yet unable

float-funds funds to the payee

by

Shy

Shy Nieves

goal congruence-objectives of the entity's care functions is directed

at contributing to the achievement of common gool

income-(or revenue) refers to current personal revenue of employer employment and salary history, and business revenue
income statement-formal statement showing the financial

performance of the business for a given period of time

incremental revenue - the difference between the sales price of the product if it is processed further and its sales price of
splitoff

insurance agent-selling insurance policies to individuals and businesses and assisting them in the processing of claims
insurance companies-companies that offer insurance policies to

the public, either by selling directly to an individual or through

another source

interest rate - (or stated rate) typically are stated in terms of the

prime rate plus a risk differential investment research conducting research on investment

opportunities

investments-involves the sale or marketing of securities, the analysis

of securities, and the management of investment risk through porfolio diversification

journalizing the process of entering a business transaction in the

form of an accounting entry in the journal judgmental approach-firm estimates the values of some statement

of financial position accounts and uses its edernal financing as a

"plug" figure in order to balance the statement of financial position

lecturer -teaching basic finance subjects

lending institutions - make loans available to individuals and

liabilities are present obligations of an entity arising from past

transactions or events

loan analyst-evaluating consumer and commercial loan applications

long-term financial plan-supported by a series of shorterm

financial plans

mail float-time delay between when payment is placed in the

mail and when it is received master budget-represents the overall plan of an organization for

a given period

merchandising business-type of business that is commonly known as the "buy and sell business wherein products in this
business are being bought with a wholesale price and the businessman or entrepreneur sells the same product into retail
price money-means of paying for goods and services and for paying

off debts or liabilities

money markets-debt securities with maturities of one year or less

are traded

GLOSSARY

169

Shy

Shy Nieves

mortgage markets - mortgage instruments or loans, backed by

natural form-single-step way of presenting income statement

usually used by a service business

net working capital - the difference between the firm's current

assets and current liabilities a

operating cycle - begins from the time goods for sale are manufactured to the eventual collection of cash from the sale

of these goods

order costs-costs associated in placing and receiving on order

personal financial planning-process of sound money management

that leads to personal and economic satisfaction

post-closing trial balance-a trial balance that shows the balances of the accounts exactly the beginning balances of the some

accounts in the next accounting period posting-refers to the procedure of transferring journal entries to

the ledger accounts primary markets-financial instruments and securities are initially

offered or sold with the proceeds going to the issuer

processing float-time between receipt of the payment and its deposit into the firm's account

profit planning projects the firm's results of operations and overall financial position for a given period of time

purchases budget-estimated number of units the firm needs to purchase for a specific time period
real estate agent - marketing, selling, or leasing residential or

commercial property

relevant cost-differential and future costs that can produce an

incremental increase or decrease on our profit

reorder point-reflects the number of days of lead time the firm

needs to place and receive an order and the firm's daily usage of the inventory item

report form - presents assets, liabilities, and owner's equity in a downward sequence of the statement of financial position

research assistant-assisting lead researchers in data gathering reversing entries -literally the exact opposite of adjusting
entries rural and cooperative banks-represent the more popular type

of banks in the rural communities

sales budget-expected number of units to be sold by the entity sales forecast-a prediction of the firm's sales over a specific
period saving-the portion of our money that we do not spend for future

needs or for financial security savings banks-accept the savings of individuals and lend pooled

savings to individuals primarily in the form of mortgage loans

170 GLOSSARY

Shy

Shy Nieves

secondary markets - previously issued instruments or securities

are traded

securities - primarily issued by corporations to generate cash or

are sold and traded security analyst-analyzing and making recommendations on the

investment potential of specific securities

service business-type of business that focuses on providing intangible products, such as offering professional skills,
proposals,

and expertise share-represents an ownership interest in a corporation

sharing - the portion of money that we decide to give to charities,

churches, or other institutions who are in need of a financial

support

short-term financial plan-specily financial actions whose results or impact are expected to occur for a shorter period of time
spending-both daily routinary expenses and major expenses statement of changes in owner's equity-formal statement that

shows the movements in the equity accounts in a given period

of time

statement of financial position - the use of asset method and

liability method

stockbroker-assisting clients in purchasing stocks and bonds and

building investment wealth

sunk cost-costs that have already been incurred in the past, so whatever our decision is, they should not be taken into
account

thrift banks-represent noncommercial banks composed of savings

and loan associations

transaction analysis - thorough understanding of the business

transaction itself and its implication on assels, liabilities, and

owner's equity

treasurer - oversees the traditional functions of financial analysis

trial balance - list of accounts and their balances at a given time universal and commercial banks-represent the largest single
group, resource wise, of financial institutions in the philippines working capital-the firm's current assets, which represents a
portion

of investment that circulates in one form to another in conducting the ordinary course of business