A recent study shows that majority of Americans are financially illiterate. This is most probably true, if not more true, for Filipinos, although this can't simply be attributed to the oft-cited plague of colonial mentality (which purportedly pulls us Pinoys to whatever is "stateside" or foreign), but to the relatively poorer condition of a large percentage of the Philippine population. Anyway, let's get back on track before we stray into political commentary.

 

The study reminds me of the first chapter in the book The Wealthy Barber: Everyone's Common Sense Guide to Becoming Financially Independent (David Chilton, Prima Publishing [1991], 200 pages), which is a novel-type discussion of various common sense principles in personal finance and investment.

 

The first chapter is about "The Financial Illiterate." The chapter is basically an introduction of the main character, Dave, who suddenly realized that he is financially illiterate after failing to answer questions in a "Self-Analysis Financial Planning Kit," including the following:

* Could your dependents live comfortably in the event of your death?

* If you plan to retire early, have you set up a suitable savings program?

* Well over 50 percent of Americans retire in financial hardship. What are you doing to guarantee you won't be one of them?

* Are your debts structured properly?

Seeking answers to these questions, Dave was referred to the most unlikely resource person -- his barber, Roy, who happens to be a millionaire (now, before you bring in that look of disbelief, remember that Ricky Reyes could be considered a "barber"). The first lesson dispensed by Roy, while cutting Dave's hair, is the "Ten Percent Solution," which is simply "paying yourself first"  at least 10% of your income (the trick is to get the money even before you have the chance to spend it). The major points in the books are summarized by one of the characters:

"Saving ten percent of your income and investing it in a properly selected long-term growth vehicle; making a will; buying the proper amount and type of life insurance; building a retirement fund -- these have three great features in common. First, they are easy to understand. You don't have to be a mathematical genius to grasp the advantages of something like dollar cost averaging. Second, they work. All of your financial goals can be achieved through the application of these principles. What's more, they can be achieved without a significant lowering of your current standard of living. Third, and equally important, the guidelines are easy to implement and easy to maintain."

If you think about it, there are two ways of being financially stable. First, save more. Second, earn more. There's of course, a combination of both. As between the two, however, the first is relatively less painful. A dollar saved is two dollars earned. Saving one dollar, which is relatively easier, is just the same as a gaining a 2-dollar increase in earning (after tax and other deductions). In fact, neglecting the first and focusing on the second is a bit problematic. The more we earn, the more we spend, such that there's usually no savings even with the increased earning. Worse, the increased spending brought about by an increased earning will usually trap the person to a high-pressure battle of maintaining the level of earning. This is just the first step, however, as savings may not be enough to cover certain expenses, and investments become necessary.

 

There are a lot of common sense tidbits, including those noted above, spread out throughout the book.Save early, pay yourself first. Live within your means. The convenience of credit cards and the weakness of human nature, combine to create a recipe for disaster. Common sense, but difficult to follow.