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How I gained from Hospital Income Benefit

2 comments
-
Jake


 

Last week, October 24-29, I was confined in the hospital for 6 days due to dengue. The total hospital bill for 6 days (including medicines) amounted to Php 20,534.

Due to my medical insurances (i.e. Medicard, Philhealth, Hospital Income Benefit from Sun Life), I only need to pay, Php -8,893. Yup, that's right. NEGATIVE. It means that I even gained money from my 6 days confinement.


Here is the Breakdown:

Total Hospital Bill: 20,534

Covered by Medicard and Philhealth: 17,427

Hospital Income Benefit: Php 2,000 x 6 days = Php 12,000

Hospital income benefit is an income replacement benefit from my life insurance which pays me Php 2,000 for every day I am confined in the hospital. Since I was confined for 6 days, I'll be getting Php 12,000.

Hospital income benefit is not a form of hospital reimbursement. It is an income replacement on the event that you were hospitalized. This is perfect for people who are self-employed or has completely variable income.

For me to have this benefit, I am paying an extra Php 490/month. But this benefit will not go to waste if I'm healthy. On the event that I maintained myself healthy, that monthly charge will go to my MF investment in my Variable Life Insurance Policy.

Of course, I don't want to make this Hospital Income Benefit a form of "Cash Cow" for my gain. Having dengue is something I don't want to experience again. It was torture.

The Lesson: "Wag magpakagat sa lamok"
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Stocks or Mutual Fund? Which one

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Jake


Part time investors still dwell on the aspect on where to place their hard earned money that would yield higher returns.

Those who would like to invest on corporations are thinking of two methods: either to invest personally on stocks through a broker OR to invest on Mutual Fund.







Before we compare, there are two ways on investing on stocks through a broker:
  • Traders or Day Trading – Requires extensive monitoring market. Profits by buying cheaper shares and sell it at a higher price.
  • Long Term Investing – Fixed and periodic investing on corporate stocks.
For Mutual Funds, there are three common types:
  • Bond – Government Loans and Corporate Securities
  • Balance – Mixture of corporate stocks and Government Loans
  • Equities – Corporate Stocks
For the purpose of comparison, we will be comparing only:

    Day Trading VS Long Term Investing VS Mutual Fund(Equities)

Market Monitoring
  • Day Trading requires extensive monitoring on the market. Even though trading period only last 3 hours, missing this period could cause high investment loss or opportunity of gain
  • Long Term Stocks investors require moderate monitoring in the market.
  • Mutual Fund investors require low or no monitoring the market.
Company profiling
  • Day trading – Extensive. Aside from the numbers provided to you on their assets and liabilities, you even need to consider several factors that could affect the company. i.e. Changing of CEO, weather affecting commodities, government policies etc.
  • Long Term Stock Investors – Looking at their numbers (assets and liabilities) and historical performance should suffice for a successful long term investment on stocks.
  • Mutual fund Investors – They only need to profile the investment company (Managing the mutual funds), not the companies being invested by the investment company.
Overall Risk/Return
  • Day Trading – Highest risk, highest potential return. There were some stories of traders who was able to profit 50%-300% I just one trading day. Of course, there were also traders who lose their bet on stocks. One story came from recent recession; a Stock Trader killed himself when the recession came. The return if investment is highly dependent on the skill, knowledge and experience as an investor.
  • Long Term Stock Investors – Moderate to high risk. Moderate to high return. The longer your investment stays, the higher the probability your investment will provide higher return. Investors under this category usually mitigated the risk by diversifying their investment to different companies. One advantage of choosing Long Term Stock investing is the freedom to choose which company to invest to.
  • Mutual Fund – Low to moderate risk. This investment simulates an experienced Long-term Stock investing. The investment also is highly diversified which further mitigates the risk. Due to several mitigated risks, it also provides the lowest return among the three. Based on 10 year historical returns on mutual funds, it averaged around 15% p.a.
Overall verdict: That depends on your financial objective and risk profile as an investor.

If you have the luxury of time to study the company profiles, monitor the market religiously and completely understand the risk/return principle on investing, I highly recommend go for Day Trading.

If you wish to think long term and would like to have a freedom to choose which company to invest to, go for Long Term Stock Investing.

If your financial objective is long term and doesn't like to worry about the day-to-day fluctuations in the market while it is being managed by a professional fund manager, proceed for Mutual Funds.

My Personal Choice

Mutual Funds. Why? I love my job and my 9 AM to 12 PM schedule is my most productive time of the day. Also, I do not have the luxury of time to review or to worry about company profiles and market fluctuations. I love the idea that my investment is being managed by an experienced fund manager and knowing that my investment is diversified.
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The Budget App der

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Jake


It was twelve months ago that I started managing my finance by having my own budget. The first application I used was actually an excel file forwarded to me by one of my officemates. I used it regularly and tracked my expenses religiously. The only problem was it takes a lot of effort to input the values and track the expenses. Also, it doesn't have any form of feedback on how far I am on the budget that I was able to set.

On April 2011, I started to look into Apps on mobile devices that would help me manage my finance with ease and provide me real-time report and trend on my overall finance. On my experience on budgeting, my criteria are as follows:



  • Able to set budget represented by different criteria
  • Should contain data for income and expense
  • Track reoccurring expenses
  • Monthly report for income vs. expense.
  • Should be able to tell you how far are you from your budget: Budgeted vs. Actual
  • Can be exported to excel
  • Graphs like pie chart, bar and line graphs to show trends in my finance
  • User friendly
So far, with all the available apps offered in the market, one app fits the criteria I made: Budgets for iPad by iBear LLC


http://ibearsoft.com/budgets/

What makes this app so cool is the interface (and the graphics). Because of the real-time update and report on my finance, I was able to make sound decisions over my expenses.

BTW, did I tell you it was free? Yes, its free. And the advertisement on the app is not that annoying when you are using the application.

I have been using it for almost 6 months, and because of this app, I have better control over my expenses.

TRY IT!!!

Unfortanately it doesn't have a counterpart for android. However, they were able to release a better application that has more features than Budgets. It is called "Money", also developed by iBear LLC, and available for android OS.

http://ibearsoft.com/money/

I haven't tried this app but I am very curious to explore it. Two cool things about it is the Bills and Calendar features.
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Types of Mutual Funds

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Jake


There are several types of mutual funds offered in the Philippines. But for this article, I will only tackle on funds that are commonly available in the Philippine market.





Common Types:

  
Investment Portfolio
Investment Objective
Risk
Potential Return
Equities
Corporate stocks and loansLong-term capital appreciation
Moderate to high
High
Balance
Combination of corporate stocks and bondsFixed income and capital growth
Moderate
Moderate
Bond
Government and corporate loansProvide interest income and principal preservation
Low to moderate
Low

Historical returns:

The historical returns showed below are based on historical performance of Sun Life Prosperity Funds.
Prosperity Philippines Equity FundProsperity Balanced FundProsperity Bond
2001
-10.05%
-1.44%
10.54%
2002
-17.68%
-12.76%
8.40%
2003
39.84%
31.51%
8.42%
2004
20.18%
19.09%
7.89%
2005
11.35%
9.98%
11.05%
2006
44.00%
34.29%
11.96%
2007
20.58%
17.21%
2.42%
2008
-37.60%
-23.73%
1.65%
2009
43.50%
21.70%
5.67%
2010
41.24%
30.67%
7.85%


You might be scared of investing on Equity or Balance due to the negative values. The negative values do not really mean that your investment will zeroed out. The negative values mean that the unit values you bought on the previous year, devaluated. It is just considered as "paper loss". The number of units that you bought is still intact.

In fact, if the unit values went down, for just an example "due to recession", you must take advantage of that one by buying MORE mutual fund units, because the unit values are lower.

I highly recommend investing on Equity fund for your long term investment such as Children's educational fund or retirement fund. I will show on the next table why equity fund is superior to any other fund if you are thinking long term.

i.e. Initial investment =10,000

Period = 10 years


Alas! At the end of the tenth year, Equity Fund showed it's superiority over other funds.

Which fund is best for me?

That really depends on your risk appetite, your current financial situation and your financial objective. Always remember the simplest investment principle: "The higher the risk, the higher the potential return"

What do you recommend?

If you don't have any intention to use any of your investment on the next ten years, I highly recommend for you to maximize return of investment through Equity Fund. If you are about to use your investment, for just an example 5 years before your child goes to college or 5 years before your retirement, switch or transfer your funds to a more conservative type of investment like Bond Fund. This will protect your investment from any market fluctuations while you are doing periodic withdrawals on your investment.

What are the other MF available in the market?
  • GS Fund – Pure Government securities or loans. Lower returns than bond fund.
  • Money Market Fund – Short-term loans or commercial papers issued by corporations. Investment returns is almost as low as the bank.
  • Foreign Currency – Consists of either corporate stocks or foreign government loans. For me, I don't recommend investing on dollars. It's growth is just being nullified by it's devaluation.
If you have more questions about MF, feel free to email me or set an appointment to enlighten you in detail about this investment.
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The ideal way to save money

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Jake





There are three types of people on their methods of saving money.


  1. Income - Expense = Savings
    This type of saver tends to spend his or her income first for expenses, and whatever it is left, will be considered savings. Most people failed to save in this process due to their perception that they are spending money below their income. This clearly shows that the person does not keep track on his/her expenses and only relies on what is left on their ATM savings account. We usually termed this as a "Luck" Saver.

    i.e. At the beginning of the month, the person receives an income of 20,000. Since the person relies on perception when spending, he never realized that he/she has spent 19,950 pesos at the end of the month. Before the 2nd months income, he/she was able to save only 50 pesos.
  2. Expense - Income = Savings
    These are the people who haven't received their income, but already have their expenses lined-up. These are the people who were able to accumulate bad debts from loans or credit-cards. They subjected themselves to spending spree and totally OUT-OF-CONTROL.

    i.e. At the beginning of the month, the person has accumulated already 10,000 peso worth of credit-card expense. When his/her 20,000 pesos income came, the person is already limited to budget his/her remaining 10,000 pesos to a whole month. If this habit will continue, he/she will remain on bad-debt.
  3. Income - Savings = Expenses
    This is the most ideal way to save money and accumulate wealth. The moment your income is provided, set aside a portion of that money for you savings basket. The remaining money will be used for your expenses. In this way, you will be disciplined to limit your expenses and not to extend your savings. With this method you will be able to set your expenses and savings fixed.

    i.e. When the person received his/her 20,000 peso income, 10% has already been set-aside for his/her savings. The person is now free to spend the remaining 90% on anything he wants. He/she will be able to accumulate 24,000 pesos at the end of the year if he/she continue to do this type of discipline for 12 months.
So what kind of a "Saver" are you?
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Crazy over Mutual Funds

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Jake


You already heard a lot of people investing on condominiums, stocks, government bonds, businesses, loans and time deposits. Let me share to you, my personal favorite investment instrument: Mutual Funds.

I could not describe better than what is place on Wikipedia: http://en.wikipedia.org/wiki/Mutual_fund

So instead, I would convince you on why Mutual Fund is considered a sound investment.


See Figure below:





YOU as an investor trust you hard earned money in the bank. In return, the bank gives you a small percentage growth on your savings ranging from 0.5% to 2.75% p.a., guaranteed. This is one way for the bank to attract more investors. Sounds generous? Wait until you look at the 2nd figure.




The money that you deposited in the bank is used by the bank institution to invest on a higher earning investment instrument. i.e. Bonds, Loans, Stocks etc. This investment instruments gives an average interest yield ranging from 6% to 17% p.a., potentially even higher. If you ever wonder why the banks are confident to give you interest yield on your savings deposit of 0.5% to 2.75%, it is because the banks are confident they will be able to get higher interest yield out from stocks, loans, bonds, etc.

The purpose of Mutual Funds is that it gives investors an opportunity to have direct access on these investment instruments that gives an investment growth higher that what is returned by the bank.








So how does it work? It is best explained with this picture:



You buy Mutual fund units called NAVPS (Net Asset Value Per Share). The unit prices changes every business day, which depends highly on the market or economy. You earn on mutual funds by using the same principle as Buy & Sell, "Buy Low, Sell High".

Advantages of Mutual Funds:
  • Managed by a full-time professional fund manager whose main objective is to analyze investment products available in the market and select those who yield best.
  • Requires low capital to start your investment. Usually, it requires only Php 5,000 for your initial investment and Php 1,000 for you subsequent investment.
  • You have multiple funds to choose from depending on your risk appetite or financial objectives.
  • Fund managers ensure that the money you invested is diversified to mitigate the risk of losing all of your investments. Remember the saying "Do not put all your eggs in one basket". For equity Mutual Funds, investment is diversified not just on different companies, but different industries as well. This reduces the risk of losing all your investment to a mere NULL.
  • Liquid Investment. You could pull out your investment or sell your MF units, ANYTIME, either partial or full.
  • Highly regulated by the Securities and Exchange Commission
  • Potentially higher returns
  • You could easily purchase Mutual Funds directly through SEC-Licensed Certified Investment Solicitors.
  • Transparent. Your updated on your investment regularly either through mail or online
  • Flexible. You may switch you funds anytime and you are not obliged to invest regularly.
Risks of Mutual funds:
Before I enumerate the risks, let me emphasize that NO investment bears NO risk. But even though there are risks on investing on Mutual Funds, these are properly mitigated by the advantages stated above. You have several funds to choose from, depending on your risk appetite. Remember that he higher the risk, the higher the potential return.
  • Returns are not guaranteed. Fund value depends on the current unit prices of the fund you chose.
    • This is true; however, history shows that Mutual Funds, on a 5-year average, performed higher than time deposit, even higher than inflation rate.
  • Fluctuates with market or economy.
    • Especially if you chose equity fund.
    • However, on a 10-year average, equity fund shows that its investment return is superior to any other fund.
Summary:The objective of mutual funds is not to replace your savings in the bank. Your bank should only serve as an emergency fund and other short term financial expenses such as food or clothes. But for your long term investment, I really recommend go for Mutual Funds due to it’s higher potential return. It’s liquid, flexible, managed by professional fund manager, and most of all, it is diversified. Because of it’s advantages, it is considered as safe and secure investment.
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How much Educational Fund do you need to prepare?

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Jake




There are several factors that contribute on the Education Fund you need to prepare for your children's High School or college Education.

  • Tuition Fee
  • Miscellaneous Expense – i.e. allowance, books, uniform
  • Inflation Rate – Natural increase of miscellaneous expenses. Average inflation rate is around 5.8% (1995-2009)
  • Tuition Fee Increase – According to CHED, tuition fee increases 12.25% annually.
  • No. Of Children
  • Post-education interest rate – The interest rate of your investment instrument where your retirement fund will be used during your children's schooling.
  • School Years
  • No of years before your child start High School or College
Let us use the following example for our step-by-step calculation of educational fund:

  • Annual Tuition Fee(Current) – Php 114,174.00 (Ateneo de Manila University)
  • Annual Miscellaneous Expenses (Current) – Php 30,000.00
  • Annual Tuition Fee Increase – 12.25%
  • Inflation Rate – 5.8%
  • No. of Children – 1
  • Post-education interest rate – 2.5%
  • School Years – 4
  • No. of years before child start College – 15 yrs.
Step 1: Calculate future educational expenses. This includes tuition fee and miscellaneous expenses.

We will be using the Compounding Interest Formula for us to get the future value for tuition fee and miscellaneous expense.


Step 2: Calculate Real Interest Rate. This is the adjusted tuition fee increase and inflation rate

To make simple we will just deduct the Tuition Fee Increase and Inflation rate with Post-education interest rate

Adjusted Tuition Fee Increase = 12.25%-2.5% = 9.75%

Adjusted Inflation Rate = 5.8%-2.5% = 3.3%

Step 3: Calculate Total Educational Fund needed based on the result of Step 3

We need to use simple interest amortized loan formula. Yup, it's a bit complicated, instead, we will use the MS Excel Function "PV" to get the initial fund needed.

Fund for Tuition Fee = PV(AdjustedTuitionFeeIncrease,SchoolYears,-TutionFeeFuture,0)

=PV(0.0975,4,-646193.32,0)= PhP2,059,480.35

Fund for Miscellaneous Expense = PV(Adjusted Inflation Rate,SchoolYears,-MiscFeeFuture,0)

=PV(0.033,4,-69888.59,0)= PhP257,929.82

Add both fund and you will have the total Educational Fund needed:

PhP2,059,480.35 + PhP222,741.67 = PhP2,317,410.16

In summary, for you to be able to school your child at Ateneo, you need to accumulate 2.28M pesos worth of educational fund on the next 15 years.

Of course, this is not accurate as we could not predict the inflation rate and tuition fee increase on the next following years. The figures shown above should give you an idea of how much you most likely be needing in the future.
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