There are two kinds of Income:

Active/Linear – earnings from your time, skills, and hard work

Passive/ Exponential- earnings from your investments

*Many Filipinos today have only one income stream- their jobs- and jobs are linear jobs.

Some Filipinos are self employed (like doctors, dentists, lawyer’s – if they didn’t go to work or
run a clinic they will not earn) and running their small businesses.

*While it is good to have active Income, I encourage you to not rely on it entirely. When you
grow old you will need another source of Income – one that will not require you to work.

*Because here’s the reality: We can only become active entrepreneur for only a part of our life
but we can become passive entrepreneur for our entire life.

***

How to Protect our Families?

How much insurance do you truly need?

Here is the formula: Multiply your annual expenses by 10.

So if you spend 100, 000 a year, you need 1M insurance. If you spend 500, 000 a year, you need
5M insurance. I you spend 1M a year, then you need 10M.

Why that amount?

This is how it works: Let’s say each year you spend, 500k for your family’s needs. So you get 5M
insurance. In the event of your death, the insurance company gives 5M to the family you left
behind.

Now, your family could defend on it, little by little until it becomes smoke.

There are plethora of insurance products out there.

So the next big question is: what kind of insurance do you need?

- it depends on what age are you in.

- the best insurance is the term insurance and a good health insurance for yourself. You don’t
want to scramble for money when you need to be hospitalized.

***

There are three kinds of people in the world when it comes to money.

1. Spenders- they don’t even try to walk to their wealth.

2. Savers- walk to their wealth but they put their savings in the wrong places

3. INVESTORS- they ride bicycles, cars, airplanes to their wealth.

How to grow your money through INVESTMENT

Basic Guideline: Your investment earnings rate should be 2 to 4 percent above annual
inflation rate.

The higher the risk the higher the return and vice versa.

Every Investment has to be evaluated in important criteria:

a. Risk

b. Return

c. Liquidity
 d. Safety of Capital

e. Diversification

RETURN: what your investment will earn for you. It is also called EARNINGS.

Return in Pesos= Total Amount received at the end of the period – amount invested

Return in Percent = Total amount received at the end of the period – amount invested – 1

Example: 50, 000 in time deposit for 1 month. At the end of the month the bank gives you 50,
333. What is your return?

Return in PhP

=50, 333- 50, 000

=333

Return in %

=50, 333/50, 000- 1

=0.67% for one month or 8% per year.

RISK: the possibility of losing the amount you invested. It is also the possibility of not getting
the return you expected or you were promised.

LIQUIDITY: characteristics of investments that you can turn back to cash easily.
SAFETY OF CAPITAL: every investor must verify if there are any chances the company will get
into serious financial difficulties?

DIVERSIFICATION: “one should not put one’s eggs in one basket”. No matter how good an
investment opportunity looks, the investment should not put all of his capital into that one
investment.

Suggested average investment portfolio (Phil): 5-7

Available Investment Opportunities:

1. TBills/ Bonds

2. Time Deposits

3. Equities/ Stock Investment

4. UITF

5. Mutual Funds

Government Securities (bonds, tbills, tnotes)

- Loans to the government of the Philippines. If you buy a treasury notes, you have lent
money to the Philippine government. The issuer of a tbill is the Philippine government.

- The risk that the national government will not pay its loans is low. At worst, the
government can print money to pay its loans. However, the interest rate that the
government will pay is fixed.

- The interest rate of the national government will pay you mostly comes from the taxes
it collects.

- Because the risk is low, the return of tbills is not very high.

- Gove’t securities are liquid.

Time Deposit:
- Loans to the bank. The issuer of the time deposit is the bank.
- The risk depends on the bank in which you opened the time deposit. The risk that you
will not get your money back is reduced because the national govt thru Philippine
Deposit Insurance Corporation (PDIC) insures deposits up to Php 250, 000.
- The bank re-lends the money to other borrowers and collects interest from them. The
interest rate is not very high.
- Time deposits are liquid.

Unit Investment Trust Fund (UITF)

- A fund manager managed by a trust company or the trust department of the bank that
is invested on behalf of the contributors to the fund. If you have invest in a UITF, you
have pooled your money with other investors and allowed the trust company to invest
the money for all of you. The issuer of the UITF is the trust company
- The risk in UITF depends on the investment bought, the risk is high. You earn if the
investment of the UITF earn; you can also lose your money if the trust company makes
bad investment decisions.

Mutual Fund
- Similar to UITF mutual funds make investment in behalf of investors who pool their
money together.
- The risk & return depends on the investments the mutual fund bought.

Stock Market: An organization whose function is to facilitate the purchase and sale of stocks
and other securities like bonds.

Philippine Stock Exchange (PSE)

Man on the trading floor

1. Stock broker- execute orders in the market to the greatest possible advantage of their
costumers.
2. Dealer in securities: One who purchases and sell stocks for his own account.

Securities Traded:

1. Common: shares are usually purchased for participation in the profit and control of
ownership and management of the company.
If the corporation makes profit, he earns thru dividends.

2. Preferred: earn a fixed rate of dividend

Categories of stocks:

1. Listed: family owned or multi national corporation

2. Unlisted

Dividend: is a share of the profits of a corporation paid to the stockholders out of surplus in the
proportion to the number of shares owned by the stockholder

To compute % of the yield

% of the yield= annual dividend per share/ current market Price of the stock

Example: The common stock of the San Miguel pays annual dividend of 2.40/ share. If the Price
of the stocks is 36 per share,

2.40/ 36= 6.7% cash yield (expected return)