For some people, however, they said that life insurance or any type of insurance is not for them.  A friend of the family said that she could put the money into good use in their business.  Others shy away from insurance because of the additional cost that won’t benefit them.

So.. what is life insurance?  Do we really need it or not?  While scouting the web, google pointed me to a website where it explained to me what life insurance is.  In short, it explained that life insurance is a financial instrument that is based on caring and love. (Sounds cheesy!)  However, it goes beyond that as the website provide educational video to assist you in understanding more about life insurance.

There are different types of life insurance such as term life insurance, whole life insurance, universal life insurance, return of premium life insurance and survivorship life insurance.  For me, I’ve already purchased a whole life insurance which they considered as the most common.

Still undecided or confused?  Here’s what I’ve learned so far with my life insurance.  First, get an insurance while you’re still young as premiums are lower.  Second, pay your premium annually not quarterly as annual payments are cheaper.  Save what you have to pay annually every month and you’ll earn the interest in the bank albeit small.  Third, it’s an investment in the future.  I took a life insurance with endowment fund which will give me money every two years after my fourth year.   What are you waiting for then?  Get a life insurance quote now!  The clock is ticking..

Article from http://www.abs-cbnnews.com/business/09/26/08/what-subprime-dummies-guide-credit-crisis-lingo; Photo from http://politicalhumor.about.com

With financial jargons leaping from business pages to front page headlines, here’s a guide to understanding the current US financial crisis better.

SUBPRIME or SUBPRIME MORTGAGES

Simply put, they are called subprime since they are below prime status. These are loans lent to borrowers who, as some put it, are considered “NINJA” (no income, no job, no assets). In other words, high risk borrowers: they have tainted credit history or cannot prove their incomes.

These loans were used to either buy properties (called subprime mortgages) or were based on loans against the increased value of borrowers’ homes, often to pay off other borrowings.

Originally, the intention was noble: to offer a consumer a way to purchase a home while they repair or build their credit history or employment status. It was meant as a good way for more people to build wealth since having a home is considered a form of savings. The assumption, however, was that banks would still be prudent in their lending.

Then a deadly element came into the picture: Banks became awash with so much cash and were competing with others in bringing in new business. They got sloppy. They started peddling loans to any takers, with little regard to the borrowers’ capacity to pay them back.

Of course, subprime borrowers lined up. Who wouldn’t want to buy a house even if they haven’t saved any money for a downpayment, nor could afford the monthly payments down the road? The banks were more than happy to take them in, anyway house values were “always” going up so who cared about downpayments?

In a mature US financial system, banks could “sell” these mortgages to investment banks, which pooled, then “spliced, diced, and delivered” these to investors who were looking for fat margins. Financial tools based on subprime naturally offered higher interest rates since the credit (or non-repayment) risks were also higher.

FANNIE MAE and FREDDIE MAC

No, they’re not people. The names Fannie and Freddie are based on corporate acronyms; FNMA (Federal National Mortgage Association) and FHLC (Federal Home Loan Corporation). “Freddie and Fannie,” however, sound much more personable and cuddly, so they inspire a false sense of confidence in home mortgage companies.

Fannie Mae was founded in 1938, during the Great Depression, when millions of families could not become homeowners or faced losing their homes. In 1968 Fannie Mae was partially privatized, and Freddie Mac was created as a wholly private company to provide competition.

They exist for two reasons: to keep the supply of money people borrow from to buy homes available and at a lower cost.

They did not lend directly to homebuyers. Instead, they created a secondary market for housing loans–or mortgages–by purchasing these mortgages and providing them fresh money to make new loans.

They repackage these loans as mortgage-backed securities, stamp them with government guarantees, turn these mortgages around, and sells them to investors. In effect, they were acting as the bridge between mortgage lenders (lending to those who don’t have enough money to buy a house) and investors (who have spare money to park and invest in the stock market).

Since the government guarantee assures the investors that the interest and principal will be paid–whether or not the original borrower pays–investors consider mortgage-backed securities from Fannie and Freddie as “safe” investments. The low interest rates these investors pay for these means the banks and non-banks can lend housing loans at low rates too.

Almost all US mortgage lenders, from huge financial institutions like Citigroup to small, local banks, rely on Fannie Mae and Freddie Mac for low-cost and available mortgage funds. They are giants in the US housing system since they guarantee or own roughly half of all the $12 trillion US mortgage market.

They eventually collapsed when, like a row of dominoes, defaults and repossessions ripped through the housing finance system and throughout the entire economy. They have to pay out if ordinary homeowners cannot pay back their home loans, which proved a huge drain on their finances.

How a MORTGAGE is pooled, spliced, sliced and delivered

Imagine a mortgage as stream of future cash flows. In less financially sophisticated markets (like the Philippines), handling and earning from these cash flows are a simple business. Banks and other financial institutions that grant these mortgages made sure they collect these cash flows (amortization payments) on time until the entire loan is paid off. They make a decent profit along the way.

But in sophisticated markets, like the US, these cash flows are bought, sold, stripped, tranched, and securitized. In the process, various players earn fees and profits everytime the mortgage is flipped. This created some very innovative and aggressive practices since the key to earning a fee is volume–the more you flip, the more you earn–rather than quality. In the end, the banks role changed from being the loan’s “quality controller” to a salesman. The more deals, the higher commissions. Who cares if the borrower stops paying the mortgage a couple of years later? That’s the problem of whoever is holding the mortgage-backed instrument now.

It could be the aggregators, like FANNIE MAE and FREDDIE MAC, or large INVESTMENT BANKS that have a “structured products” group. They collect thousands of mortgages all over, then pool them together. Pooling these mortgages allows them to command a higher premium, than if they transact these mortgages individually, since it gives the buyer sense of security that he or she is diversifying his risks. He is not buying mortgages all based in, say, California, or by borrowers who are all Latin American migrants.

But when aggregators pool the mortgages, they are on their own when they price that financial product. Usually though, they have a computer model where they compute the price based on general assumptions, such as where the real estate market is headed and some historical data on default patterns. Before the subprime market exploded, most probably the assumptions are all rosy: that the real estate market will go up as much as 10 percent every year, default rates will be low, interest rates will remain low, and refinancing will never be a problem. Unrealistic–and unchecked–assumptions will naturally result in a higher aggregate price much larger than its parts.

After the pooled mortgages are stamped with bloated prices, Wall Street firms then package them up with other loans (some quality, some not), and securitize them so they could slice and dice the pool into many tranches (products), before they eventually sell them to investors. Each tranche is a customized product, describing a specific class products within an offering wherein each tranche offers varying degrees of risk to the investor. The tranches can range from alphabet soup-like products: CMO, ABS, CDO deals.

Sometimes the embedded options are stripped out. Sometimes it is derivative on top of another derivative, and given fancy names with whatever square or cube. For example, a CMO offering a partitioned MBS portfolio might have tranches that have one-year, two- year, five-year and 20-year maturities. It can also refer to segments that are offered domestically and internationally, or based on rights to the interest payments only or to the principal repayments only.The more exotic the products, the more profits the firms could squeeze from the mortgages.

In other words, investors who bought IO, PO, or other exotic and complex derivatives have little or no idea anymore about the paying behavior of the underlying mortgages. Usually, the investors merely rely on the opinions of rating agencies and bond insurance firms, which, it appears, have unbashly taken the side of the Wall Street banks and investment firms. Almost all of these bundled securities magically became ‘A’ rated or higher.

Investors of these exotic financial products include foreign governments, pension funds, insurance companies, banks, and hedge funds.

ASSET BACKED SECURITIES

A financial security which uses any asset that has predictable and similar cash flows–such as loans, leases, credit card debt, company receivables or royalties–as collateral.

MORTGAGE-BACKED SECURITY

A type of asset-backed security that uses a single mortgage, or a pool of them, as collateral. Investors receive payments derived from the interest and principal of the underlying mortgages.

CREDIT CRUNCH

A situation created when banks hugely reduced their lending to each other because they were uncertain about how much money they had. This in turn resulted in more expensive loans and mortgages for ordinary people

LIQUIDITY

How easily an asset is converted into cash. For example, a time deposit account is more liquid than a house. To sell a house quickly to pay urgent bills would mean having to drop the price substantially to get a buyer.

SECURITISATION

Turning something into a security, a contract that could be assigned a value, and eventually traded. It could be a stock, bond or mortgage debt. For example, taking the debt from a number of mortgages and combining them to make a financial product which can then be traded.

When I logged on to my PC this morning, my friend who’s a business journalist in the Philippines was also online.  So, I asked her what advice can she give me during this time of crisis?  She said, save save save!  Hold on to your cash.  It seems like the forecast in the near future is gloomy.  Prices are going up but our salary can’t match its pace.

If I want to achieve my goal in 3 years time, I better start to plan how to do it.  If I need to learn a hobby and make money out of it, I probably should do so.  But.. does our life really revolve around money?  Shouldn’t we trust in God to provide for our needs?  I’d probably need to contemplate some more.  Right now, I can’t wait for the clock to hit 6pm and go home.

When I read it, I had to exclaim “WHAT?!” I thought I was doing great already but it seems like in order for me to retire comfortably I have to do more. What shall I do?? I’ve been saving money but I guess it’s not enough.

To top it all, my travel buddy Marco and I are planning our European Tour. We will be submitting our visa application this Wednesday and hopefully we will get our visa. If it pushes through, I will have to scrimp in the next couple of months in order to recuperate the cost of this trip. Oh well.. I’m willing to do that as I’ve already bought some Christmas gifts already. That means I won’t be able to go home for my cousin’s wedding.

A month or two ago, Inquirer’s Finance Blog “Money Smarts” featured an article about “What does it take to be a millionaire?” It listed down 7 tips to help this goal and let’s see what have I been doing to achieve this goal.

1. Treat money as something to save and invest. The minute you receive your paycheck or a windfall (example, an inheritance or a bonus), think of how much you can put away as savings. Then look for venues where you can invest your money. If you think this way, you won’t be tempted to splurge money.

Some people splurge their retirement pay on BMWs or Mercedes Benzes. But when they get really sick, they find themselves with not enough cash to pay the hospital. So save more, rather than spend more.

–> Save more rather than spend more. Hmm.. I save but I don’t save a lot. Is that a crime? On another article they mentioned how you segregate your savings.

• Emergency fund (at least 6 months of living expenses) = roughly Php 450k
• No touch savings (starting at 10% of your income)
• Investment/Retirement Fund.

Of the three, my emergency fund at present is only 10% of what I’m supposed of my goal. No touch savings, I’m starting to do it this year again as last year no touch savings went to investment. I have life insurance with endowment, which one of them I’ve halfway paid and added another to it. By the time, I retire, I have the endowment to add on my fund.

2. Assume some risk when investing. When you play safe in investing, you’ll get safe (but low) returns as well. Millionaires have gone out on a limb putting up businesses which they hoped would earn — nothing is guaranteed. But it is in taking calculated risks that they are rewarded.

When investing, look at higher-yielding investments. Sure, they may be more risky than regular ones (such as savings and time deposits), but you may earn more in the long run. Just be wary of get-rich-quick investment schemes. Remember the adage: If it is too good to be true, it is.

–> As mentioned above I invested 75k Php with Sunlife Balance Fund early this year out of my savings last year. Small but it’s a start. I’m planning to put the 13th month pay that I will receive January next year into another fund. It’s better to diversify. My No-touch savings will go to TD. I’m not much of a risk taker.

3. Live simply. If you keep your cost of living low, you will have more cash to save and invest. Some millionaires have lived in the same homes they have had for the past 30-40 years. Or they live in the homes they inherited.

You can also take a cue from the way millionaires live: not all party every night, nor do they buy every new car model that’s released. Instead, you’ll find these millionaires working at their desks at 8 a.m. and having just two cars in the garage.

–> Hmm.. I have to start this. I mean I don’t go out every night and party but my weakness is travelling. I have a separate travel fund which is bigger than my emergency fund

4. Have a goal. Don’t just dream; set financial goals for yourself. By being specific, you will be more motivated to reach your goal. For instance, make it your goal to have your own home by the time you are 35 or 40. It may be a studio condo unit or a three-bedroom home in a subdivision—it will depend on your income and how you save over the years. Having a goal will help you focus your efforts well.

–> Ok.. I’ll set a goal. To have my first million pesos by the time I’m 35 and my own home by 40.

5. Choose good debt over bad debt. Take out a loan only when the loan proceeds will be used to earn you more money. For instance, apply for a bank loan to expand a business that’s feasible. But to take out a loan to buy assets that depreciate quickly (examples: sports cars, yachts, etc.) may not be wise as these assets will not earn you enough to pay off the loan. If you really want to buy such assets, pay in cash so you don’t have to pay the cost of borrowing.

–> I don’t have debts!! I hate having debts. If I use my credit card, I see to it to pay everything on time. I sometimes advance pay the items I just used.

6. Share your blessings. There seems to be a unique mathematical formula at work: The more you give, the more you are blessed back in return. Help those who are in financial need, and you may find yourself blessed all the more. If you’re an employer, share profits with your employees; they’ll be more motivated to work for you, leading the way to increased productivity.

–> I do, through church. I also plan to buy some school supplies to distribute to the local school in my dad’s hometown.

7. Train children to handle money well. It would be sad if money you earned will just be spent unwisely by the next generation. Teach children the basics of money management, and caution them against vices such as gambling, drugs, and the like. Being responsible about wealth will be rewarded in the long run.

–> No kids but I’m teaching my sis to save as well.

So.. let’s see.. I want to be a millionaire by 35. In order to do that I need to save at least 200k a year. Also, I need to beef up my emergency fund to 450k and I want to have my own home by 40. I’ll keep you posted on how I’m doing. Do give me some tips on how to reach that goal.

1. Annualize your expenses – my former colleague take the cab everywhere she goes. That’s like RMB 10, one way at least for 30 days which is RMB 300/month or RMB 3600/year. When I told her about it, she was shocked to know how much she’s spending on cab fares alone. Trying to get the big picture makes you realize if something is worth it or not.

2. Don’t incur debt – it’s easy to say but hard to do. I learned this the hard way. My dad tend to borrow money to pursue an interest hoping it would earn money in the future. However, after a few months, circumstances change forcing him to leave this interest. He incurs debt that he cannot pay and tend to borrow money from family and relatives. So, I vow to myself never to incur debt or if I borrow something, I had to pay it right away. If I wanted to buy something, I’ll save up some money to pay for it.

3. Credit card is not for everybody – credit cards can be good and bad. It’s good that you don’t need to carry cash, you earn points in exchange of miles or gifts and you have at least 15 days to pay your purchase in full. Credit cards become bad if a person cannot stop buying something and has difficulty in paying. Some people have multiple cards which they use to pay off the other cards bill. It’s a vicious cycle that is never ending and difficult to get out of. It is never good to borrow money from credit cards.

4. Purchase something because you need it and not want it – it’s difficult sometimes to differentiate wants and needs. When people have money, the first thought which enters their mind is what they want to buy with it. I have a friend who loves shopping and sometimes purchase more than she can pay. She said she needs it but you can see she just want it. If you plan to buy something that you want, pause and reflect if you really need it.  It doesn’t help your pocket if you buy unnecessary things.

5. Carpool, cycle or take public transportation – As fuel prices hit record highs, it is not practical to use the car daily if you drive just by yourself. Also, you won’t help the environment by polluting the air. If you can, cycle to work as it’s exercise and will help you keep fit. No need to go to the gym!

6. Rent it – if you only plan to use something once or twice, rent it rather than buy it. It will help you save money and keep you from cluttering your place.

7. Attend garage sales – a garage sale is a good place to hunt for bargain stuff, gifts or household items that you might need. It is cheap and practical. In Beijing, every June and December, a lot of expats who are studying leave the country to go back home. Most of them have a lot of stuff which they bought and will sell for a fraction of the cost as they can’t bring it home. That’s the best time to hunt for items that you need for a discounted price.

8. Don’t go for branded/luxury items – A lot of teenagers and young adults tend to buy items which are well-known and branded. They tend to follow trends and purchase something which they would only wear once or twice. There are items which purchasing a well-known brand is good such as electronics and appliances. However, branded clothing and accessories will definitely dent and empty your pockets.

9. Cancel your gym membership – you don’t need to go to the gym to do aerobics or running. Buy yourself your own weights or buy a video which you can follow along every day. Try running at the park, who knows maybe lady luck will lead you to your better half.

10.  Make a budget and stick to it – this is the hardest to do but once you start it and discipline yourself, it will help you save a lot of money and headache in the future.  You can keep track where your money is going which in return help you to plan for the future.

11.  Eat at home, before you go shopping – it will help you save some money as cooking and eating at home is cheaper.  Also, bring a bottle of water to quench your thirst while shopping and go home before dinner so you don’t need to eat out as well.

12.  Have a goal – as my sister said on her comment, you should have a goal.  If you don’t have one, make one and discipline yourself to achieve it.  Start small but keep in mind that what you save monthly will go a long way in the future due to compound interest.

There are more tips out there but these are just some of what I’ve been doing in my life. I’ll add some more along the way to help you trim down your expenses.

1. Turn your hobby into income – If you’re good at cooking or baking, you can probably sell your goodies to your friends/colleagues/relatives. If you have a passion to teach, tutor people! If you are visually creative, try to create something that’s useful and unique. Sell your stuff in Ebay or Multiply.

2. Recycle – Bottles, newspapers, boxes.. they’re trash which you can sell. You may not earn much but each cent counts. In China, they don’t like bottles unless it’s beer bottles. The old lady in the street usually carries a bag and search for empty plastic bottles in the trash bin. As for me, I collect the free magazines which comes out every month and sell it when I have a lot along with my empty plastic bottles.

3. De-clutter your garage/room/house – do a spring clean or a garage sale instead of throwing items you don’t use or which catches dust. I haven’t tried this yet, but I might do it soon. I think I have a lot of stuff already and I’m planning to save more and spend less.

4. Stick to the budget – it’s quite hard to do a budget, let alone stick to it. But if you discipline yourself to follow it through, the sense of satisfaction is quite good. I have a budget every month and I sometimes go over it by a few yuan. It’s hard but I have to and I have a goal to achieve.

5. Stick to the list - if you go to the grocery or the mall, plan ahead of time and stick to the list. Go after you had a meal and come home beforehand. Leave your credit cards at home and just carry enough cash for your purchases.

6. Buy in bulk – Toiletries which you use daily and does not spoil is better to buy in bulk. You get to save a few cents when it increases monthly. Also, you don’t need to go back and forth which will save you fuel, time and headaches.

7. Compare prices – in China, I love going from one grocery to another and check their prices. I usually stick to one grocery to purchase certain stuff and the nearest grocery to purchase common stuff with same prices. The difference in price helps you save a lot.

8. Pay off your credit card balance in full – credit cards can be a pain and a relief. No need for cash and the option to pay several days in the future is good. Earning points in exchange for items or miles, can be used as gifts. However, abusing the use of the card will be a menace and difficult to overcome. It’s wise to pay of your credit card balance in full every month so that you won’t incur interest charges which is usually 3% monthly. Also, it’s good for your credit rating in case you plan to take out a loan in the bank.

I guess that’s it for now.. hope it will help you to weather this difficult times ahead of us. Don’t forget to save!