Money and marriage: what spouses should merge and what they should keep separate

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 Back in 2011, I found out that my wife cancelled her credit card as she had gotten into debt. I asked her how bad it was, and she said it was nothing she couldn’t handle. I shrugged and thought nothing more of it—it was, after all, her money. Or so I thought.

A year later, we received a letter informing us that our bank was turning over the debt, which had gone unpaid, to a collection agency. That was the only time I became aware we had a problem, and by the time we got to talking about it, the debt had ballooned to nearly three times its original size.

While we eventually paid off the credit card together, my takeaway from this is that, as a married couple, major financial problems were best handled together rather than apart. While some people disliked talking about money even with their loved ones, the truth is that in a marriage, your money decisions affect your whole family.

On the other hand, pooling all your money together seems to deny your independence and personal needs, and could fuel marital conflict. So where does one draw the line? Does tying the knot mean marrying your finances together, or does it make more sense to keep them separate?

Successful Savings: techniques that help you keep your money

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Do you find it difficult to save?

If yes, you’re not alone. The latest survey of the BSP indicate that less than 25% of the Philippine population has any savings at all, even for emergency purposes. Limited income and poor spending habits both factor in, but the rest of the survey reveals something more: a staggering 40% of those who save just keep their savings at home, instead of putting it anywhere that nets interest. Which leaves the financial future of many in serious doubt.

Given that it isn’t easy to save, how do you make it work? Aren’t there ways to help you keep what you earn and make it stay longer with you?

1. Define your goal

All financial experts agree that for savings to get anywhere, you must set a target. This goal provides direction and milestones that will show you that you’re making progress.

I recommend the following financial milestones, in this order:

•    6 months worth of emergency savings. In the event you’re unable to work, this may help you keep a comfortable lifestyle long enough to get back on your feet.

•    Health and Life Insurance. Famous journalist Roger Ebert once said, before he died of cancer, that “nothing cures wealth like illness.” You are your own greatest asset, so it stands to reason you should protect yourself first, ahead of your own car or house.

•    Medium-to-long term savings. This is for retirement and pension. Your later days may mean less work on your part and thus less income. Your savings now determine your quality of life later on.

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2. Understand compound interest

This is best illustrated by an example: a can of soft drink may cost an average of P25. If you didn’t buy that can and instead placed P25 in a UITF or mutual fund with 10% interest, after 20 years you would have P168.

That’s a tiny amount of money, you might think—BUT consider that a regular person will actually buy soft drinks or similar products several times a week. If you bought a can every other day, you may end up buying 4 times a week, or 16 times a month. Now take that amount (P400 a month) and imagine paying that monthly to the same fund for the next 20 years. If you do, you would end up with P274,920!

That’s the power of compound interest: your money builds interest on the interest of the years that came before it. Every peso you set aside will work very hard, even while you sleep, to grow and give you a good return.

Of course, it works both ways. If you DON’T save the P400 a month and spend it on frivolous things, you actually take away its future value to you. This is called opportunity cost, and the cost of not saving your P400 a month at 10% interest is P274,920, in 20 years’ time.

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3. Set aside savings ASAP

Get your monthly income from all sources. Then tabulate all your regular monthly expenses and subtract them from your income. Then the crucial part: make savings a priority expense on your budget. That means you put away cash for savings ahead of everything else. This means that once you get your salary you immediately set aside the money as soon as you get it. Make this your rule: at least 10-20% of your income goes into savings. You can do more if you like.

If your cashflow cannot accommodate savings and you can't pare down your expenses to help it, then you will need to find ways to increase your income. Thankfully, modern times has made it easier to find means of augmenting your cashflow. One may takes sales as a sideline, or market their skills on freelance sites, or open up an SME (Small-to-medium enterprise). It depends on what your skills are.

However, just because you have more money, doesn’t mean you’ll save more. Usually the opposite is true: you’ll spend more. The mind wants what it wants when it wants it, and usually it wants immediate gratification. Again, you must train yourself to make savings a priority if you don't want your new income to go up in smoke.

4. Let savings grow as income grows

Don't keep it a steady amount but a percentage of your income—10 to 20% of what you earn. This is doable even if your income is irregular, as is the case with commissions. Whatever income stream you use, abide by this rule. Set aside the right amount according to what you earn.

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5. Keep your savings out of easy reach

The closer your money is to your wallet, the sooner you will spend it. If the bulk of your savings is in the ATM, you don't have to wonder why your account reaches zero whenever you're hungry or feeling the need for new clothes. Out of sight, out of mind; keep your emergency savings in a time deposit or a fund that isn’t easy to withdraw from. 

6. Automate your savings

One of the best ways to ensure savings is to take willpower out of the equation—by using a system where money is automatically debited from your account and placed in savings. If your company offers retirement plans, then they’re doing this for you, pre-taxed. But even if you’re not among the lucky few with this system, don’t despair. You can set up your own where money is automatically debited from your account and stashed away for you. Banks and some financial institutions offer such a service.  

Introduction To Commercial Paper

 

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The world of fixed-income securities can be divided into two main categories. The capital markets consist of securities with maturities of more than 270 days, while the money market comprises all fixed-income instruments that mature in 270 days or fewer. Commercial paper falls into the latter category and is a common fixture in many money market mutual funds. This short-term instrument can be a viable alternative for retail fixed-income investors who are looking for a better rate of return on their money.

Basic Characteristics
Commercial paper is an unsecured form of promissory note that pays a fixed rate of interest. It is typically issued by large banks or corporations to cover short-term receivables and meet short-term financial obligations, such as funding for a new project. As with any other type of bond or debt instrument, the issuing entity offers the paper assuming that it will be in a position to pay both interest and principal by maturity. It is seldom used as a funding vehicle for longer-term obligations because other alternatives are better suited for that purpose.

Commercial paper provides a convenient financing method because it allows issuers to avoid the hurdles and expense of applying for and securing continuous business loans, and the SEC does not require securities that trade in the money market to be registered. It is usually offered at a discount with maturities that can range from one to 270 days, although most issues mature in one to six months.

History of Commercial Paper
Commercial paper was first introduced over 100 years ago, when New York merchants began to sell their short-term obligations to dealers that acted as middlemen. These dealers would purchase the notes at a discount from their par value and then pass them on to banks or other investors. The borrower would then repay the investor an amount equal to the par value of the note.

Marcus Goldman of Goldman Sachs was the first dealer in the money market to purchase commercial paper, and his company became one of the biggest commercial paper dealers in America following the Civil War. The Federal Reserve also began trading commercial paper along with treasury bills from that time until World War II to raise or lower the level of monetary reserves circulating among banks.

After the war, commercial paper began to be issued by a growing number of companies, and eventually it became the premier debt instrument in the money market. Much of this growth was facilitated by the rise of the consumer credit industry, as many credit card issuers would provide cardholder facilities and services to merchants using money generated from commercial paper. The card issuers would then purchase the receivables placed on the cards by customers from these merchants (and make a substantial profit on the spread). A debate raged in the 1980s about whether banks were violating the Banking Act of 1933 by underwriting commercial paper, since it is not classified as a bond by the SEC. Today commercial paper stands as the chief source of short-term financing for investment-grade issuers along with commercial loans and is still used extensively in the credit card industry.

Commercial Paper Markets
Commercial paper has traditionally been issued and traded among institutions in denominations of $100,000, with notes exceeding this amount available in $1,000 increments. Financial conglomerates such as investment firms, banks and mutual funds have historically been the chief buyers in this market, and a limited secondary market for this paper exists within the banking industry.

Wealthy individual investors have also historically been able to access commercial paper offerings through a private placement. The market took a severe hit when Lehman Brothers declared bankruptcy in 2008, and new rules and restrictions on the type and amount of commercial paper that could be held inside money market mutual funds were instituted as a result. Nevertheless, these instruments are becoming increasingly available to retail investors through online outlets sponsored by financial subsidiaries.

Commercial paper usually pays a higher rate of interest than guaranteed instruments, and the rates tend to rise along with national economic growth. Some financial institutions even allow their customers to write checks and make transfers online with commercial paper fund accounts in the same manner as a cash or money market account. However, investors need to be aware that these notes are not FDIC-insured. They are backed solely by the financial strength of the issuer in the same manner as any other type of corporate bond or debenture. Standard &Poor’s and Moody’s both rate commercial paper on a regular basis using the same rating system as for corporate bonds, with AAA and Aaa being their highest respective ratings. As with any other type of debt investment, commercial paper offerings with lower ratings pay correspondingly higher rates of interest. But there is no junk market available, as commercial paper can only be offered by investment-grade companies.

Rates and Pricing
The Federal Reserve Board posts the current rates being paid by commercial paper on its website. The FRB also publishes the rates of AA-rated financial and non-financial commercial paper in its H.15 Statistical Release every Monday at 2:30pm. The data used for this publication are taken from the Depository Trust & Clearing Corporation (DTCC), and the rates are calculated based on the estimated relationship between the coupon rates of new issues and their maturities. Additional information on rates and trading volumes is available each day for the previous day’s activity. Figures for each outstanding commercial paper issue are also available at the close of business every Wednesday and on the last business day of every month.

The Bottom Line
Commercial paper is becoming increasingly available to retail investors from many outlets. Those who seek higher yields will likely find these instruments appealing due to their superior returns with modest risk. For more information on commercial paper, contact your financial advisor or visit the Federal Reserve Board website at www.federalreserve.gov 

Warrants And Call Options

 

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Warrants and call options are securities that are quite similar in many respects, but they also have some notable differences. A warrant is a security that gives the holder the right, but not the obligation, to buy a common share directly from the company at a fixed price for a pre-defined time period. Similar to a warrant, a call option (or “call”) also gives the holder the right, without the obligation, to buy a common share at a set price for a defined time period. So what are the differences between these two?

Difference Between Warrants and Call Options
Three major differences between warrants and call options are:

• Issuer: Warrants are issued by a specific company, while exchange-traded options are issued by an options exchange such as the Chicago Board Options Exchange in the U.S. or the Montreal Exchange in Canada. As a result, warrants have few standardized features, while exchange-traded options are more standardized in certain aspects such as expiration periods and the number of shares per option contract (typically 100).

• Maturity: Warrants usually have longer maturity periods than options. While warrants generally expire in one to two years, and can sometimes have maturities well in excess of five years, call options have maturities ranging from a few weeks or months to about a year or two, although the longer-dated options are likely to be quite illiquid.

• Dilution: Warrants cause dilution because a company is obligated to issue new stock when a warrant is exercised. Exercising a call option does not involve issuing new stock, since a call option is a derivative instrument on an existing common share of the company.

Why are Warrants and Calls Issued?
Warrants are typically included as a “sweetener” for an equity or debt issue. Investors like warrants because they enable additional participation in the company’s growth. Companies include warrants in equity or debt issues because they can bring down the cost of financing and provide assurance of additional capital if the stock does well. Investors are more inclined to opt for a slightly lower interest rate on a bond financing if a warrant is attached, as compared with a straightforward bond financing.

Option exchanges issue exchange-traded options on stocks that fulfill certain criteria, such as share price, number of shares outstanding, average daily volume and share distribution. Exchanges issue options on such “optionable” stocks to facilitate hedging and speculation by investors and traders.

Examples
The basic attributes of a warrant and call are the same, such as:

• Strike price or exercise price – the price at which the warrant or option buyer has the right to buy the underlying asset. “Exercise price” is the preferred term with reference to warrants.
• Maturity or expiration – The finite time period during which the warrant or option can be exercised.
• Option price or premium – The price at which the warrant or option trades in the market.

For example, consider a warrant with an exercise price of $5 on a stock that currently trades at $4. The warrant expires in one year and is currently priced at 50 cents. If the underlying stock trades above $5 at any time within the one-year expiration period, the warrant’s price will rise accordingly. Assume that just before the one-year expiration of the warrant, the underlying stock trades at $7. The warrant would then be worth at least $2 (i.e. the difference between the stock price and the warrant’s exercise price). If the underlying stock instead trades at or below $5 just before the warrant expires, the warrant will have very little value.

A call option trades in a very similar manner. A call option with a strike price of $12.50 on a stock that trades at $12 and expires in one month will see its price fluctuate in line with the underlying stock. If the stock trades at $13.50 just before option expiry, the call will be worth at least $1. Conversely, if the stock trades at or below $12.50 on the call’s expiry date, the option will expire worthless.

Intrinsic Value and Time Value
While the same variables affect the value of a warrant and a call option, a couple of extra quirks affect warrant pricing. But first, let’s understand the two basic components of value for a warrant and a call – intrinsic value and time value.

Intrinsic value for a warrant or call is the difference between the price of the underlying stock and the exercise or strike price. The intrinsic value can be zero, but it can never be negative. For example, if a stock trades at $10 and the strike price of a call on it is $8, the intrinsic value of the call is $2. If the stock is trading at $7, the intrinsic value of this call is zero.

Time value is the difference between the price of the call or warrant and its intrinsic value. Extending the above example of a stock trading at $10, if the price of an $8 call on it is $2.50, its intrinsic value is $2 and its time value is 50 cents. The value of an option with zero intrinsic value is made up entirely of time value. Time value represents the possibility of the stock trading above the strike price by option expiry.

Valuation
Factors that influence the value of a call or warrant are:

• Underlying stock price – The higher the stock price, the higher the price or value of the call or warrant.
• Strike price or exercise price – The lower the strike or exercise price, the higher the value of the call or warrant. Why? Because any rational investor would pay more for the right to buy an asset at a lower price than a higher price.
• Time to expiry – The longer the time to expiry, the pricier the call or warrant.
• Implied volatility – The higher the volatility, the more expensive the call or warrant. This is because a call has a greater probability of being profitable if the underlying stock is more volatile than if it exhibits very little volatility.
• Risk-free interest rate – The higher the interest rate, the more expensive the warrant or call.

The Black-Scholes model is the most commonly used one for pricing options, while a modified version of the model is used for pricing warrants. The values of the above variables are plugged into an option calculator, which then provides the option price. Since the other variables are more or less fixed, the implied volatility estimate becomes the most important variable in pricing an option.

Warrant pricing is slightly different because it has to take into account the dilution aspect mentioned earlier, as well as its “gearing". Gearing is the ratio of the stock price to the warrant price and represents the leverage that the warrant offers. The warrant's value is directly proportional to its gearing.

The dilution feature makes a warrant slightly cheaper than an identical call option, by a factor of (n / n+w), where n is the number of shares outstanding, and w represents the number of warrants. Consider a stock with 1 million shares and 100,000 warrants outstanding. If a call on this stock is trading at $1, a similar warrant (with the same expiration and strike price) on it would be priced at about 91 cents.

Applications
The biggest benefit to retail investors of using warrants and calls is that they offer unlimited profit potential while restricting the possible loss to the amount invested. The other major advantage is their leverage.

Their biggest drawbacks are that unlike the underlying stock, they have a finite life and are ineligible for dividend payments.

Consider an investor who has a high tolerance for risk and $2,000 to invest. This investor has a choice between investing in a stock trading at $4, or investing in a warrant on the same stock with a strike price of $5. The warrant expires in one year and is currently priced at 50 cents. The investor is very bullish on the stock, and for maximum leverage decides to invest solely in the warrants. She therefore buys 4,000 warrants on the stock. If the stock appreciates to $7 after about a year (i.e. just before the warrants expire), the warrants would be worth $2 each. The warrants would be altogether worth about $8,000, representing a $6,000 gain or 300% on the original investment. If the investor had chosen to invest in the stock instead, her return would only have been $1,500 or 75% on the original investment.

Of course, if the stock had closed at $4.50 just before the warrants expired, the investor would have lost 100% of her $2,000 initial investment in the warrants, as opposed to a 12.5% gain if she had invested in the stock instead.

Conclusion
Warrants are very popular in certain markets such as Canada and Hong Kong. In Canada, for instance, it is common practice for junior resource companies that are raising funds for exploration to do so through the sale of units. Each such unit generally comprises one common stock bundled together with one-half of a warrant, which means that two warrants are required to buy one additional common share. (Note that multiple warrants are often needed to acquire a stock at the exercise price.) These companies also offer “broker warrants” to their underwriters, in addition to cash commissions, as part of the compensation structure.

While warrants and calls offer significant benefits to investors, as derivative instruments they are not without their risks. Investors should therefore understand these versatile instruments thoroughly before venturing to use them in their portfolios.

 

Citing danger, PMA urges e-cigarettes ban

 

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Manila, Philippines -- The Philippine Medical Association (PMA) yesterday asked President Benigno S. Aquino III to ban the sale of electronic cigarettes in the Philippines amid the recent warning issued by the World Health Organization (WHO) that the so-called nicotine replacement therapy given by e-cigs has been proven unsafe for humans.

PMA President Dr. Leo Olarte urged the President to direct Department of the Interior and Local Government (DILG) Secretary Manuel ''Mar'' Roxas II to seriously study the Food and Drug Administration (FDA) Advisory 2013-008 and FDA Advisory 2013-015 and finally ban the sale of electronic cigarettes in the Philippines.
He cited the warning issued by WHO Non-Communicable Diseases (NCD) and Mental Health Cluster Assistant Director General Ala Alwan that electronic cigarettes are not considered as legitimate therapy to stop smoking addiction.
''We urgently appeal to President Benigno S. Aquino III and his government to immediately address this new but clear and present danger of electronic cigarettes to the health of the nation most especially our children. Our young ones can easily be enticed and duped into smoking by these novelty devices,'' Olarte said in a statement.
According to Olarte, the use of e-cigs is not an ''alternative lifestyle'' as claimed by its proponents and promoters but is actually a new and an ''alternative vice'' which should not be taught to the public in general and children in particular.
Alwan earlier stated that ''e-cigs marketers and propagandists should immediately remove from their advertisements and websites any suggestion that the WHO considers electronic cigarettes to be safe and an effective smoking cessation aid because this is untrue.''
Olarte, who is both a medical doctor and a practicing lawyer, asked the Aquino administration to act on this crucial issue and post a ban on its sale because it is contrary to the intent and provisions of the law (Republic Act 9211) which was crafted to protect everybody, most specifically the youth, from nicotine addiction and myriad of ailments like chronic respiratory and cardiovascular diseases that can kill.

 

How to manage and eliminate debt

 

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 People get into debt for many reasons: to finance a house, to pay for necessary expenses, to obtain luxuries, and so on. Whether these reasons are good or bad, no one wants to stay in debt for the rest of their lives.

Gathering advice from people who were in deep and made their way out, here are some steps to take if you want to manage your loans and wipe out your debt.

Take stock of everything you owe. Managing and removing debt requires two things: planning and massive action. Unpleasant as it may sound, you can’t get to the second without doing the first. And the first step to planning is to look at the problem.

Sit down and make a list of all your loans, including your balance and interest monthly payments. Arrange them from highest to lowest interest rate. Now that you can see the length and depth of the situation, you can form a plan to attack it.

It will also help to talk with your family members, especially if they are your co-makers. Sit down with them and explain the situation and get them to support you. Even if the support is just moral in nature, it’s easier to climb out of debt if you have people in your corner.

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Don’t add to your existing debt. It’s amazing how many people skip this part, so it bears mentioning. For the same reason you don’t fight a war in two fronts, you don’t pile more even debt on top of what you already have particularly if it’s an alarming amount.

So first, attack the problem at its source: cut up your maxed-out and extra credit cards, cancel your subscriptions, seek professional help if you must, but please don’t dig yourself any deeper into debt than you are now.

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If possible, consolidate your debt. This means paying off the highest-interest debts by using low-interest ones. If you have a loan with 10% interest, see if you can pay it off by borrowing from one that has 4% or less. Not only do you save in interest payments, you reduce the pressure on yourself by lowering the number of people or institutions you owe.

Make debt servicing part of your budget. If you haven’t done so, build a monthly budget by tracking all your income and expenses. From here you can tell what spending you can cut back on to help pay off your loan faster.

You must get creative in lowering expenses, because every little bit of money can get you out of the red sooner. If you’re unable to lower expenses, look for extra means of income or sell off some things you own.

Once you’re organized, add your loan payments as part of your expenses, prioritizing the one with the heaviest interest rate. Once you have paid that off, move on to the next, then to the next, until you are completely free and clear. Each debt you strike out gives you a sense of accomplishment and progress and will spur you on to your final goal of zero liabilities.

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Pay debt more often. In fact, pay it twice a month. This may sound strange, but it’s a powerful system you can use to end long-term debts (like mortgages) faster and save yourself a LOT of money. It’s a shame that few actually practice it. Here’s how it works: if you’re paying P10,000 a month for your debt, instead of paying it once a month, pay P5,000 every two weeks. By doing so, you are lowering your principal much quicker, because you’re making an extra month’s payment every year (that is, 26 bi-weekly payments or 13 full-month payments each year).

Here an illustration: If you borrowed P2.5M at 8% interest to buy a house and pay it over a period of 30 years, you’ll wind up with a little over P4.1M in interest payments. However, if you did the bi-weekly system, you would end with only P2.91M in interest payments instead. You save over P1.19M and get your house debt-free a few years ahead of schedule!

One final note: don’t misuse loans. Pay in cash for wants and luxuries, save up for large expenses, and think very hard before taking a loan or using credit. Debt is negative income; it slows down your capacity to earn. It’s a powerful tool if you use it to buy things that gain value over time, like real estate and education. Otherwise, you’ll just be earning for someone else.

Getting past bad money habits

 

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Last year, a Filipino named Dionie Reyes made big news when he won P14M from the PCSO jackpot draw back in April 2008—and lost it all in just three months. He apparently spent all his money on an expensive house, an SUV, vices, and lavish cash gifts to friends and family. In the end, he was in debt for P500,000.

This story is not common—many people all over the world who experience a windfall of cash wind up losing all their money. Could it just be bad luck? Or does it have something to do with their habits around money?

Lifestyle inflation

Take time to ask yourself these questions. One: when you make a lot of money, do you immediately come up with ways to spend it all? Two: are you trying to keep up with someone else’s lifestyle, or the lifestyle that media portrays “you should be living right NOW?” Three: is what you buy never enough and must you continually catch up with the latest model/fashion/trend?  Four: Are you living from one paycheck to the other, with little to no savings in between?

If you answered yes to most of these questions, it’s likely you’ve fallen under the habit of lifestyle inflation. And you’re not alone. So many people subscribe to this bad habit because it’s celebrated everywhere in media and our consumerist society.

This pervasive attitude makes us burn through our income very quickly, because no matter how much money we make, we spend exactly as much as we earn.

It’s not wrong to spend on necessary things. But the excessive spending caused by lifestyle inflation effectively kills wealth. It robs you of future income and keeps you hunting for jobs that can support your lifestyle. And when the day comes when you are either unable or unwilling to work, you’ll find there’s no more income to be had and you’ll still have the nagging urge to spend money.

Get past it: Cultivate the habit of paying yourself first: Whenever you make money, set aside a regular amount for savings. You may be tired of hearing that, but there’s a reason why people keep repeating it.

Why is saving paying yourself first? Imagine this: every time we get paid a wage, we don’t so much as make money as earmark it for other people. The government gets a cut from taxes. Then the electric, water, and cable companies get paid, followed swiftly by the telecoms, internet, transportation, supermarkets, even the tobacco and liquor companies. By the end you end up with nothing, or close to it.

So invert the equation. Pay yourself first by saving before you spend on anything else. This money you save will buy your future. Even if you are capable of setting aside only a few pesos a day, what you’re aiming for is to build the habit of saving and doing away with any unnecessary spending. Understand that when you do make a windfall of cash later on, you are NOT going to magically grow the habit of paying yourself first. Both good and bad habits are created over a period of time. So while your income is small, cultivate this practice. If you can be responsible for the small things, you can handle the big things as well.