INTERVIEW: Francisco Colayco explains how to build wealth from the ground up

 

 

Financial educator Francisco Colayco has been helping Filipinos how to manage their money and build wealth since the early 2000s, including overseas Filipino workers.

 

His approach is basically how to grow your money and achieve your financial goals through the Colayco Financial Education. 

 

“I realized people were hungry for guidance, so I thought I’d throw in my two cents,” Colayco tells iMoney in this interview.

 

iMoney spoke to Colayco specifically about how Filipinos can build wealth from the ground up. 

 

Here you can learn the steps to take in getting your finances in order and start growing your money, no matter what stage of life you’re in.

 

1. Know where you are

Colayco divides your financial life into four phases:

Start-up phase – 20 to 35 years old  - Salaries and commissions are your likely sources of income.

 

Build-up phase – 35 to 45  - You have assets and investments that generate passive income, which accounts for 20 percent of your total earnings and which funds 20 percent of your needs and expenses.

 

Asset allocation phase – 45 to  60  - Your assets and investments generate 30 percent to 60 percent of your total income, and fund at least 50 percent of your needs and expenses.

Retirement phase – 60 and above  - You no longer earn any active income. Your passive income is 100 percent of your total income, providing for all your needs and expenses.

The age brackets are estimates. They vary depending on your financial achievements. Knowing where you are in this paradigm allows you to set achievable goals for building wealth.

 

Increasing your passive income is the key to moving from one phase to the next, which you can do by saving and investing. 

 

“Never depend on a single source of income,” Colayco says. “The vast majority of us, we don’t have inheritances. We don’t have rich parents.

 

So you have two horses in your life – your active way of earning money, and your passive way. Make them run at the same time.”
 

 

 

2. Set your financial goal for each phase

 

Now that you’ve identified which phase of your financial life you're in, define your personal net worth goal to be able to rise up to the next phase. If your current income isn’t enough to support the lifestyle you want, you’ll have to find ways to add to your income – be it sidelines or investments or other means.

 

Financial goals are different for each person at each stage. To help you determine your financial goals, here are some guide questions from Colayco’s book Wealth Reached, Money Worked: Pera Mo, Pinalago Mo!

 

How much money do you need to enjoy the lifestyle you desire? If your current lifestyle costs you P20,000 a month, how much do you think is your ideal lifestyle?

 

How much risk are you willing to take when it comes to money? If you’re young, you can afford to take on more risks. If you’re older, you should be more prudent. What’s your risk tolerance?

 

How can you add to your current income? If you’ve only got one source of income, how can you develop more revenue streams?

What amount can you afford to save or invest monthly? 10 percent? 20 percent? Or more...

 

The answers to these questions can help you determine and quantify your goals. Set a specific timetable for each goal. Once you know the amount of money you need to achieve your financial goal, and the timeframe within which to achieve it, the steps to take will be clear.

For example, if you’re 21 and you want to have a million pesos invested by the time you’re 30, you can figure out that you’ll have to deposit around P6,000 a month in an investment vehicle that yields at least 9 percent annually. Check out our article, How To Make One Million Pesos By 30.
 

If this does not seem feasible, you have to make a drastic shift by changing your money habits to accommodate your goal, or go for a potentially higher average in yearly cumulative returns. For example, saving only P4,000 a month let's you accumulate P1,000,000 in 10 years if your average annual cumulative return is 14 percent – a possibility as evidenced by the performance of certain equity mutual funds over the same period.

 

 

3. Avoid these major mistakes

People who get into financial trouble on the way to building wealth often do one or all of these things:

 

Premature acquisition of assets “Some people, just because they have the money for a down payment, puwede na, even when they don’t have the money to keep up the payments,” Colayco says. 

 

Remember that when you enter a contract, you are under obligation. “You have to know where you’re going to get the money to pay your contracted amortization. Otherwise, you may lose even the hard-earned money you used as down payment. If you don’t have a sure source for loan repayments, don’t even enter into contract talks. Don’t be swayed by fancy sales agents,” Colayco notes.

 

Living a lifestyle beyond actual capabilities If you’re only earning P20,000 a month, living a lifestyle that requires P50,000 a month is the surest way to financial trouble. Give priority to saving and investing to achieve the lifestyle you want, instead of trying to live the lifestyle you want now on half the salary.

 

Falling for scams Sadly, many people have lost and are still losing money to scams. If someone offers you ridiculously high returns, like 300 percent a year, far outstripping the returns of legitimate investments or high risk vehicles like the stock market, it’s probably a scam. For more on scams, check out Are You Being Scammed?

Steer clear of these pitfalls, and remember: save and invest based on a purpose and stick to that purpose.
 

 

4. Invest wisely

 

“In my personal opinion, if you don’t have a million pesos, you should not go into investing directly in stocks,” says Colayco. But if you do want to go into investing in the stock market, he advises that you keep in mind the following:

 

Don’t put borrowed money in stocks This may put you into more debt.

 

Don’t put all your money in one or a few stocks Spread the risk by allocating your assets into different companies in different industries.

 

Don’t put everything in one stock “I don’t care if you have inside information. There are so many variables that control the prices of stocks.”

 

Diversify If you have more to invest, consider allocating your money into several asset classes like fixed- income securities, income earning real estate, and proven businesses or franchises.

 

Choosing which products to invest in depends on your goals. “Even the lowest-earning investment can make you money over time. But if you don’t have the understanding of where you are, what you want to achieve, how much you want to make and why, you won’t be able to make the choice of what to invest in,” Colayco says.

 

When you’re considering investment options, focus on risk. Every investment you make should be focused on the safety of your capital, the returns you can expect, and the liquidity of your money. Spread the risk around by putting your money in different vehicles: mutual funds, bonds, UITFs, and the like. Do some thorough researches before you put your money in something.

 

How do you know when you’ve achieved wealth?

Colayco says wealth is simply being in a place where you can live the lifestyle you want without having to work. “It’s not so much about money as it is about a disposition. When people ask me what wealth is, I quote this to them: ‘Rich is not the one who has the most, but the one who needs the least.’ You choose the lifestyle that will give you that feeling, and that’s wealth.

“There’s no magic formula. Just save and invest. And don’t put it all in one place.”

Wealth is within your reach, especially if you start now. “Time is the greatest tool to manage your finances,” Colayco notes. “This, combined with risk management, will help you succeed.”
 

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This article first appeared in slightly different form on iMoney.

 

Francisco Colayco is one of the country’s leading personal finance experts and authors. His latest book is Wealth Reached, Money Worked: Pera Mo, Pinalago Mo!. For more on Colayco’s financial literacy advocacy, visit colaycofinancialeducation.com.