Pinoys are known to be big spenders even if they don’t have much to spend. (We all know the story of how a family will subsist on “tuyo” the whole year so they can have a lavish feast come fiesta time.) Often, long before they receive some money (their salary or bonus for example) they already have a good idea on how & where to spend it and saving is farthest from their minds.

The typical Filipino’s idea about savings can be shown in this simple formula:

It says that once he receives his monthly pay, his first priority is to spend, spend, spend. If, and this is a big if, there’s anything left, this will go to his savings. This is wrong! If you follow this formula, chances are you will not be able to save systematically and attaining financial stability could be very difficult.

Due to the Filipinos’ penchant for spending they have the tendency to use up all the money that gets into their hands. There will always be new things to buy and as long as they have money in their pockets they will find a way to spend it. With still many days to go before the next payday, many would have run out of money or could barely survive.

As a result, many Pinoys often end-up with zero or even “negative” savings. Negative savings means you are in debt. It means you are spending more than what you earn in a month; this is possible with your “trusty” credit card! Since you have to pay this debt, your expenses increase in the succeeding months, making it even more difficult to save. This cycle of getting paid, spending and ending with zero savings or debt, repeats after month after month after month.

Although the formula above does not represent the right idea about savings it does tell us something very important. If you spend all your earnings, your savings will be zero and if you spend more than you earn you will be in debt. Having the ability to save is not an issue of how much you’re earning but rather a matter of how much you are spending. A person can either be a saver or a spender. The spender sticks to the formula above and so regardless of how big his income is, he can still be broke. If you really want to save, follow this simple rule: “live within your means!” or “spend less than you earn!”

A bank manager once narrated how amazed she was at the “fat” bank account of her staff, which was much bigger than her savings (which practically negligible) although she’s earning a lot more. The reason, which the manager herself suggested, was that she and her fellow officers already made plans and were excited about how to spend their money months before they actually got their bonuses. The staff, on the other hand, was also very excited… excited to see her savings grow bigger with her expected bonus. Unfortunately, the staff’s attitude towards money is the exception rather than the rule. It’s no wonder then that more than 90% of Pinoys have low levels of savings.

There will always be savers and spenders in every income group and while anybody can be broke at any income level, almost everyone has the ability to achieve financial security if the right savings formula below is followed.

This formula suggests that you “pay yourself first.” This means that once you get paid the first thing you should do is set aside a portion of your earnings for your savings and use whatever is left to cover for your expenses. Sticking to this idea will force you to control your spending because you need to budget properly what’s left of your funds.

This method of saving will be difficult at first because most people have been conditioned to spend first before setting anything aside for savings. It is a good idea then to start small. Open a special bank account for your savings fund, preferably one that doesn’t come with an ATM card so you’re not easily tempted to withdraw from it. The moment you get hold of your monthly pay, deposit 5% to 20% of your earnings to your savings account before you pay for anything.

If 5% is still too big for you to start, try a smaller amount. The important thing here is that you get started. Once you get used to this new strategy, you can gradually increase the amount you set aside for savings. Ideally 20-25% of your monthly income should be allocated for savings & investments. If shopping can be addictive so can saving, especially when you start to see your funds grow slowly but surely. Don’t be surprised if you will soon be “paying yourself” 30% or more of your monthly income.

(To every rule there is an exception. Paying yourself first will not be a good idea if you are still paying off some debt. To learn more about this read the article on the importance of an emergency fund and the practical steps to get out of debt.)

Last update: February 14, 2008
Copyright © 2008 www.PinoySmartSavers.com All Rights Reserved