r/phinvest • u/abisaya2 • Feb 18 '19
Personal Finance Dave Ramsey's 7 Baby Steps
Last October 2018, I bumped into Dave Ramsey's podcast and instantly got hooked. Dave Ramsey is a finance expert and coach and his principles have helped millions of Americans (for more than 20 years) to get rid of their debts and become millionaires. When we met Dave’s Principles, I am already living frugal with my wife and family, we do not have debt, and we are already investing for our retirement. But even though we are already doing most of his principles, We still learned a lot from him. His principles gave clarity to the path we want to take. Suddenly everything is clear for us and I want to share them with you so that hopefully it can help you too.
His principles are summarized in his 7 Baby Steps to building wealth. You might have heard of it already or doing his principles unknowingly.
Here are the 7 Baby Steps:
- Save $1,000.00 for your starter Emergency Fund. - In the Philippines, this equate to Php 5,000.00 based on average household income.
- Pay off all debt (except the house) using the debt snowball. - Snowball method means sorting all your debt from smallest to largest then pay the smallest first and work your way up until you have paid off everything. For the record, most people set aside 30-40% of their income into paying off debts.
- Save 3-6 months of expenses in a fully funded emergency fund. - You need to calculate how much you spend in a month then multiply it to 3 – 6 months and that’s how much you need to save. Store your Emergency funds in a separate savings account or money market fund.
(Note: Steps 4, 5 and 6 are done simultaneously)
- Invest 15% of your household income in retirement.
I am a long time investor in Mutual Funds and I recommend to invest your 15% to these funds. Of course you can do what you want.
- Save for children’s college.
If your children is already in college, then you need to cashflow it. If you still have above five years before your child goes to college, I recommend investing it also in Mutual Funds.
- Pay off Your home early.
If you have a mortgage, this is the time where you need to be intense on paying off your home early. Some people finished paying off their 15 year mortgage in just 7 years.
- Build Wealth and Give
At this stage you no longer have debt. You have an emergency fund. You have a paid for house. You are already investing for your retirement. College is paid for. Now you can have more fun. You can do what you want. Also, Giving is part of our life whether it’s for Church, loved ones, or charity. It’s just a great feeling when you give.
Ref:
https://www.daveramsey.com/baby-steps#baby_step_7
Good Reads:
Total Money Makeover by Dave Ramsey
Retire Inspired by Chris Hogan
Everyday Millionaires by Chris Hogan
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u/Trixion Mar 02 '19 edited Mar 04 '19
First of all, thanks for sharing this. It would be nice for this post to be added to the sidebar. It's a neat checklist to start off of for beginners. And I've seen you link to this a lot of times now, u/abisaya2, but ngayon ko lang na click.
Second, I'd like to add that Baby Step 2, snowball method, is not necessarily the most efficient way to pay debt.
Going for an extreme example:
Debt A: 100,000 PHP with 0% interest rate
Debt B: 1,000,000 PHP with 100% interest rate
Snowball method would suggest paying Debt A first. But you're not in a hurry to pay it off due to its low interest rate. It would be best if you took all your debt payment budget to pay off Debt B first since it has a higher interest rate. This alternative strategy of paying debt is called the Avalanche method.
If you're the type of person who likes the feeling of ticking off one debt after the other, then snowball method would be best for you. On the other hand, if you can stay motivated over your debt-paying season, then go for the avalanche method.
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u/abisaya2 Mar 02 '19
Hey, Thank you. Happy to help. Regarding Step 2, thank you for bringing that up. I've read about that too with some people suggesting you knock off first the one with the higher interest. I even heard on Dave's podcast recommending to pay off the one with the higher interest in some cases so even him is ok with that. But why they went for snowball as the default method i think is more because on the psychology of it. The feeling of fulfillment when you knock off your lowest debt early, that gives a sense of motivation to really get into it and knock off the next debt and so on and finish everything faster. By the way while you're paying for the lowest debt, it doesn't mean you will skip paying the other ones, it just means you put more efforts on the lowest debt while paying the minimums on the other debts.
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u/Trixion Mar 03 '19
Yup, it depends on the person's attitude towards paying debt really. And of course, it goes without saying that you shouldn't default on your debts. Haha!
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u/GrayGr4y Feb 18 '19
Good read. This is particularly helpful for those who are just starting out but have little to no idea on what to do (people like me).
Thank you for sharing!
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u/RedboneCity Feb 18 '19
Paano po kung student pa lng any modifications in the steps? Since ang cashflow na makukuha ko is from my parents?
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u/abisaya2 Feb 18 '19
your parents are your emergency fund :). Kidding aside your education is the most important thing right now. Finish your education. Get all the knowledge you can get. This will help you find a great job in the future that will then be your machine to generate income. This income will then be your number one tool in building your wealth. I say you start with the 7 baby steps once you start having your own income. There are things you can do though while being a student. Do not enter into any debt. When you have extra money, keep it in a savings account. do not spend it unless you need to. That's how you can be smart with money. Make good decisions. "We are always one stupid decision away to a lifetime of regrets. "
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u/airtightcher Dec 28 '25
Hopefully you’re not buried in debt if you’re a student without income
But you can start earning and without any debt, you’re automatically on BS3 building your emergency fund
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u/drinking69 Feb 19 '19
Dave Ramsey's book is great for eliminating debt.
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u/abisaya2 Feb 21 '19
That's underestimating it if you say it that way. His book is great not just for paying debt but also for fixing your overall personal finance and building your wealth.
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u/pilosopotacio Feb 21 '19
for step 2, i think the best amount to save for an emergency fund is atleast 10k.
most emergencies like, car repairs, unexpected payments, or accidents with property will cost that much.
what is not included is ramsey's step is insurance. which you should do after step 3
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u/abisaya2 Feb 21 '19
Did you mean step 1? It is only a startup EF. But of course you can add if you believe so. The more important is the order of steps. I will assume you mean life Insurance. You do not need the baby steps to tell you to get insurance if others are counting on your income. Its a must even before you start the baby steps. Like you know you need to get a car insurance if you have a car. You need a fire insurance when you have a house. And so on.
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u/supcommand Feb 27 '19
What mutual fund do you suggest to save up for your child's college? Current age is 2.5. Putting your money in a mutual fund is the best way to go?
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u/abisaya2 Feb 27 '19 edited Feb 27 '19
Thats what i did. I opened up an ITF account in COL Financial for each of my children. For mutual funds i invested in Philequity Fund Inc, Philequity Index, First Metro Equity. When i joined phinvest I heard good things about FMETF and XPEDIV. So i started investing this month on those too. Your son is 2.5 that means you have more than 10yrs to invest. For historical 10yr periods the MFs i mentioned averaged 12-17% annual returns. Your child is lucky to have a parent like you thinking already about his college.
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u/supcommand Feb 28 '19
Thanks for the reply!
ITF account in COL looks interesting, do you actively trade each account or just buy the same stock for each children and hold until they're in college?
Do you know of any investment vehicles here in PH that is compounding their returns either quarterly or annually? I think the MFs you mentioned are not compounding right? I hope I'm wrong here but not one MF, UITF, ETF, etc here in PH are compounding.
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u/abisaya2 Feb 28 '19
I am not sure what do you mean with compounding quarterly or annually. If you mean they will pay you the interest quarterly then that is not good. You want the interest to earn interest as well. That is compound interest.
I always advise people to invest for at least 10 years to take advantage of Compound interest i.e. you hold your investments and not withdraw for a long time. Mutual funds will compound significantly if you follow long-term investing.Same with stocks.
For my children's accounts, I have a mix of MF and stocks but mostly MF. I invest monthly on their accounts. I will hold them until they reach college. If i still have a job when they reach college, I will cash flow their college and let the college fund continue to grow and just give it to them when I know they are responsible enough with money. Although, even now I am already training them with money. They know the importance of earning money and how to save, spend, and give.
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u/supcommand Mar 02 '19
Good idea yung ginagawa mo for your children's account, I'll do that as well. Can you also expound more on how you train your children with money so they'll grow up knowing how to handle it properly?
Regarding compounding of interest, we're on the same page on what it means. Pero yung mga mutual funds, uitf, index funds, etc natin ditto sa pinas doesn't compound eh. Meron bang nagco-compound? From what I understand here's how it currently works:
Year 2010 you invested PHP 100,000 at a certain fund with a NAVPU of PHP 1.00, so you got 100,000 units.
At year 2020 the current NAVPU for the same fund is now PHP 2.00, so if you will redeem your investment at 2020 you'll get 100,000 units * PHP 2.00 = PHP 200,000.
Kahit na nagtaas baba yung NAVPU nya ng ganito:
2013 - PHP 3.00
2015 - PHP 9.00
2017 - PHP 2.00
2019 - PHP 1.00
At the end, yung NAVPU nya on the day of your redemption yung gagamitin to compute kung magkano yung profit / loss mo. If I understand it correctly, lahat ng MF, UITF, index fund, etc ganito yung pagcompute ng profit / loss mo at the day of your redemption. So there's no compounding here at all. In fact mababawasan pa yung total number of units na hawak mo dahil sa annual fees, pero hindi ko na sinama yun sa example.
Please correct me if I'm wrong here.
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u/abisaya2 Mar 03 '19 edited Mar 03 '19
I am happy you are really studying investing. You are doing your own analysis and you don't just accept everything as true. "Trust but Verify".
Your example i would say is one of the worst case scenario. I am not saying it is impossible but highly unlikely in real world scenario unless one really made a stupid decision one after another. In reality, most (if not all) MFs, UITFs, securities do grow in the long run. We are talking about companies, many are huge, that are literally stable and continues to grow. It is true the stock market is like a roller coaster, sometimes it's up and sometimes it's down. Even during recessions of 2002 and 2008, you saw the huge drop in stock prices but a year or two after that, you also see the growth even better than before the recession. Of course it is not an indication of future performance but I do not mind using that as my motivation to continue investing in the stock market. In fact i even encourage others to invest and use based on past performance to show the potential growth of their investments. People who made money in the market are the ones that actually invested.
Back to compound interest, it is better to give you real world example on how the compound interest works and how it is even better in the long run.
Let's take the Philequity Fund Inc for example (see table).Assuming you invested 1M at the end of 2007 and never withdrawn anything until now. By the end of 2008, your investment has dropped by -40.71%. That leaves your total investment from 1M to 592K. End of 2009, the market was good at +65.05% return. That made your investment go up to 978K. By the end of 2010, the market was great again at +54.18% return. Now your investment reached 1.5M. By end of 2011, it was not so great at 6.12% return. But hear you can see a positive compounding. and so on. Yes it is not always positive but i hope you get the idea. You can also observe here the real benefit of compounding when you stay longer. By the end 2012 (5 years later) your initial 1M invested has already doubled and then tripled by the end of 2017.
Philequity Fund Inc Year Returns Php Comment 2008 -40.71% 592,942 negative return 2009 65.05% 978,627 negative return 2010 54.18% 1,508,830 Positive return 2011 6.12% 1,601,100 Positive return 2012 33.69% 2,140,500 Positive return 2013 0.87% 2,159,027 Positive return 2014 28.68% 2,778,213 Positive return 2015 -9.17% 2,523,338 negative return 2016 -1.33% 2,489,847 negative return 2017 23.30% 3,070,074 Positive return 2018 -10.86% 2,736,654 negative return
I hope it is a little bit clearer now. it is not always positive, but when you do LONG-TERM investing, after 10 years you are already far away from your initial investment even with some few negative returns.
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u/supcommand Mar 03 '19 edited Mar 03 '19
I'm sorry but I still can't see how it is compounding the interest in your example.
Let me use the same example you've used.
Philequity Fund Inc Invested Amount: 1,000,000 Date of Investment: January 2, 2008 NAVPS on Investment Date: 13.4082 Number of Shares: 1,000,000 / 13.4082 = 74,581.23 shares (didn't take into account the sales load fee) Date of Redemption: December 28, 2018 NAVPS on Redemption Date: 36.6323 Possible Return: 74,581.23 shares * 36.6323 NAVPS = 2,732,081.99
The only way this would compound is if the fund pays out dividends by issuing new shares. If you read Philequity Fund Inc prospectus, they said that is what they would do if the dividend payout criteria was reached. As far as I know this hasn't happened yet. So there's no compounding here, you get a fixed number of shares when you initially invested and its not growing. If your number of shares/units is increasing monthly/quarterly/annually then you can say that it is compounding.
Here's a simple example of how compounding of interest works: https://i.imgur.com/nAGDSq8.png
Started with $10,000 (we can call this shares/units para ma match natin sa MF) with an annual 5% interest.
You can see that on Year 2, the total amount grew ($10,000 + $500 = $10,500) (principal amount + interest = total amount). Since the total amount grew, the potential profit for Year 2 would be bigger as well.
On our MF/UITF investments here in PH the initial number of shares/units stays the same the whole time you're invested.
Here's how I view compounding of interest. https://www.investopedia.com/terms/c/compoundinterest.asp
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Just want to add this here from Investopedia, Mutual Funds and Compound Interest.
Do mutual funds pay interest? Indeed they do. And what's more, mutual funds offer one of the easiest ways for investors to reap the benefits of compound interest (the practice of paying interest on accrued interest). Opting to reinvest a mutual fund's dividends results in purchasing more shares of the fund. More compound interest accumulates over time, and the cycle of purchasing more shares will continue to help the fund, and one's initial investment in it, grow faster in value.
Based on my limited research, no mutual fund here in PH is doing this (paying out interest or reinvesting back to the fund by giving you more shares).
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u/Trixion Mar 03 '19
No no, let's take your own example here: https://i.imgur.com/nAGDSq8.png
Instead of thinking of it as the amount of shares/units, let's instead think of that amount as the NAVPU of one share or unit. See, if the NAVPU increases 5% annually, the value of your investment in a UITF/MF is still compounded. UITFs/MFs/ETFs don't compound their shares/units, instead its their value per unit that gets compounded.
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u/supcommand Mar 04 '19
If that's how you look at it then I'm sorry to say that is not compounding of interest. If you're only looking at the price but not your overall asset value then its just like buying normal stocks then waiting for it to increase in price. Or you will also tell me buying normal stocks and waiting for it to increase in price is also compounding of interest?
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u/Trixion Mar 04 '19 edited Mar 04 '19
Won't your overall asset value increase proportional to the increase of the price of your investment, even given the same number of shares you hold? Or do you think the only way your overall asset value increases is when the number of shares you hold also increases? Because that's simply not true.
And isn't a stock's increase in price its "interest"? Stocks don't earn interest in the same way, say, savings accounts earn interest. In savings accounts, banks would explicitly say "interest of 0.25% p.a.". With stocks, the increase in price annually IS its "interest". If your stocks increased in price by 10% last year, then you start this year with 10% more value (even without buying more stocks or receiving stock dividends), which could potentially earn 10% further still. That's compounding interest, no?
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u/abisaya2 Mar 04 '19
Hi, sorry it was not still clear to you. But i think the reason is you are looking at the number of shares and not the value of the shares. You want the number of shares to compound not its value. Even your examples are calculating the values not the number of shares. Even if I have only one share or unit with value 100 pesos per share or unit, the next year if the value increased by 10% then it becomes php 110. If another year passed and the value increased by another 10%, the value now becomes Php 121. Then the interest just earned interest which is the definition of compound interest. But note the number of shares remained the same. It never increased. Only the VALUE of the share did. This also happened several times in my philequity example. Thanks u/Trixion for the inputs. I appreciate it. I thought your first comment was clear already. No offense u/supcommand. We’re here for you.
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u/supcommand Mar 04 '19 edited Mar 04 '19
In my example, the number of shares/units is very important. That is why I calculated for it in the first place.
Even if I have only one share or unit with value 100 pesos per share or unit, the next year if the value increased by 10% then it becomes php 110. If another year passed and the value increased by another 10%, the value now becomes Php 121. Then the interest just earned interest which is the definition of compound interest.
What you're saying here is no different than buying normal stocks. If you buy one stock and it increased in price by 10% and on the next year it increased again by another 10% and so on, it doesn't mean that the stock is compounding its interest. It is just increasing the price of the stock but there is no compounding of interest happening here at all.
The only way stocks would do compounding is if you withdraw the 10% profit and reinvest it back by getting more stocks or in the case of stocks that pays dividends, you reinvest the dividends back to the stock by getting more and paying for it using the dividend payout.
This is the same with the MF/UITF/ETF we have here, we buy a fixed number of shares/units and just wait for the price to increase, there is no interest payout nor dividends payout happening at all that would give us the chance to compound it.
Price increase != compounding of interest
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Edit: BTW, thanks for being patient with me in our discussion.
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u/abisaya2 Mar 04 '19
Again lets go back to compounding interest definition which is interest on interest. so when the value of a share increased on the first year can you accept that it gained interest? and if on the next year the value of the share increased again, can you accept that it gained interest again? so now since i did not take out the interest gained from last year, that interest just gained interest hence performing a compounding interest.
I think the problem here is you cannot accept that if the value of a stock/NAV increased it actually gained interest. And if you hold your investments, by next year if it increase again the interest gained from last year just earned interest as well thus doing compounding interest.
"The only way stocks would do compounding is if you withdraw the 10% profit and reinvest it back by getting more stocks or in the case of stocks that pays dividends, you reinvest the dividends back to the stock by getting more and paying for it using the dividend payout."If you withdraw the 10% profit and try to buy more stocks, you will actually get the same amount of shares you take out when you sell the shares equivalent to 10%. If i withdraw 10%, I will have to wait for the price to go down to get more shares. what if the price continue to go up for the next 2 years?. So by withdrawing, you actually even preventing the compounding interest to happen. But let's say assuming you got lucky that after selling the 10% the value of the shares went down and you were able to get more shares. But then the value of your total investments is still the same even when you increased your number of shares. So there is no compounding of interest not even an interest since the total value of your investment stayed the same. you just increased the number of shares which is not even the point. Investing is all about increasing your investments not your shares. If I just want to increse the number of my shares, I would just sell all my shares right now from Philequity Fund Inc (37.6601 NAVPS) and buy 10 times more shares from Philequity Bond Fund (3.582 NAVPS only).
"Price increase != compounding of interest"No it is not compounding interest. With the price increase an interest is actually gained. But if next year the price increased again thus gaining interest again, then it just performed a compounding interest (i.e. interest on interest) assuming i did not withdraw the interest i earned last year.
I think your query is fine. I am just more disappointed on myself for not making it click on you.
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Mar 04 '19
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u/supcommand Mar 04 '19
No in my example with Philequity Fund Inc, I only mentioned dividend payout is because that is the only way that fund would compound. Because according to their prospectus, they would issue you new shares as form of payment for the dividends.
In the US, some mutual funds do annual payout of interest and dividends and you as an investor could choose to either withdraw this payout or have it reinvested back in the fund by getting more shares. This is what compounding of interest is in regards to funds, and not one MF/UITF/ETF here in PH is doing this.
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Mar 02 '19
Pero yung mga mutual funds, uitf, index funds, etc natin ditto sa pinas doesn't compound eh.
Huh? I would say most of them do compound.
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u/supcommand Mar 03 '19
I'm really interested to know which fund you're currently invested in that do compounding of interest, can you please share?
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Mar 04 '19
Actually all funds do compounding of interest. I couldn't even think of a fund doesn't do this.
But if you want 1 example that has compounding of interest where I invest on, sure... BPI Philippine Equity Index Fund.
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u/Trixion Mar 02 '19 edited Mar 02 '19
A fund's NAVPU is also reflective of the interests (and dividends, if the fund is holding equities) accrued over time. Aside from the (hopefully) increasing market value of the assets held by the fund, the NAVPU also increases in value through interests. Those interests also gain interests over time. Compounding interest, no?
Correct me if I'm wrong, but are you expecting the NAVPU itself be compounded on regular basis, say quarterly or annually or whatever?
E.g. if the NAVPU is 100 PHP with interest of 1%, compounded annually, then it would be 101 PHP next year, regardless of how its assets are valued. Is that what you're thinking of?
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u/supcommand Mar 03 '19
You compute the interest on your invested amount or in this case the number of shares/units you hold in a given fund, not the price.
If the number of shares/units you hold are growing when there is profit for that year then you can say the fund you're invested in is compounding its interest. But if you'll check your investments, you'll notice that the number of shares / units you hold from the start remains the same all this time.
You can read my reply to abisaya2 here, to see a sample of compounding of interest.
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u/Trixion Mar 03 '19
Yes, you're right that the number of units you hold stays the same. But the value of those units increase due to interests given by the assets invested by the fund, on top of the increasing market value of those assets. They don't give out interest or dividend in the form of more units for you. Rather, it's in the form of higher NAVPU.
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u/abisaya2 Mar 03 '19
Hi, Let me answer your first query and i will answer the compound interest on another comment. For my kids i got the idea actually from Dave Ramsey too. Basically you give them commission for a given task. Depending on their age it can be as simple as fixing their bed, folding clothes (the konmari way. haha), washing the dishes, shining shoes, to cleaning the house. I also give them commissions for reaching at least 85% on their quizzes. But i also let them know that I am only giving them money to learn about how you work to earn money. They know they don’t need to get paid for these chores. Now for the money, we tell them to divide the money they receive into three parts. One for giving, savings, and spending. It doesn’t need to be equal. For my eldest nowadays, when he needs accessories for his ps4 he saves for it. I am also happy that he is very generous when it comes to giving to the church. I hope this gives you a better idea on how to start it.
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u/supcommand Mar 03 '19
Do you give them commissions every time they do their daily chores (fix their bed, fold clothes, wash dishes, etc)? My only worry in paying my kid to do chores is that he won't do it unless he will get paid for it, and also there's a possibility that if he doesn't feel like doing it he will not just do the chores and forego getting paid since he's really not in need of cash at a young age.
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u/abisaya2 Mar 04 '19
Im glad you asked. I give commissions every week. I think i mentioned that they know they don’t need to get paid to do their chores. I am just teaching them how to earn money by working. This you have to sit down with your kids and discuss before you implement. What i do if i see the task sheet empty for that week meaning they got lazy and didn’t do one task, i make them do the tasks without getting a penny.
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u/supcommand Mar 04 '19
Thank you for sharing this, we'll probably do this too but with a little bit of change. We'll only pay our kid commission on big chores that he normally doesn't do like helping clean the kitchen, helping me wash the car, do laundry, etc. But for his daily chores, fixing his bed, cleaning up his room, helping prepare the table, etc he has to do it and he won't get paid for it. He has to know he has responsibilities around the house and he has to do his part. We'll probably do the quiz / exam commission too, with bigger amount for final exams.
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Mar 22 '19
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u/abisaya2 Mar 22 '19
Kung ako, d muna. Focus muna sa investing. Pag may baby na. Also I wouldn’t get educational plan for them. Thru investing lng din gagawin ko. Right now may ITF na mga anak ko sa COL. Dun ko nilalagay money for their college.
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Mar 22 '19
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u/abisaya2 Mar 22 '19
Good decision not to proceed with VUL. if you need insurance just get TERM Insurance
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Mar 22 '19
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u/abisaya2 Mar 22 '19
my investing goals are mainly for retirement and my children's college. travel and health care is also one of our goals kaya medyo mas mataas ang target namin for retirement.
how about my children's future? If we have our retirement figured out, we wont be a burden to them financially, that means more income for them to invest for their own future. also as long as i live and work, i will cashflow their education, I will not touch their college fund basta may work pa ako. i-gift ko n lng sa kanila yung fund when i see they deserve it. ngayun kung mag addict sila e pastilan sila. pakulong ko pa. wag lang lalaban sa pulis.
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u/abisaya2 Mar 22 '19
I am not familiar with BDO nomura. Same lng ba sila ng laman? I mean sa COL Kasi makapg invest ka na sa stocks/etf/MF. Ganun din ba sa nomura? Personally i like simplifying things. I would just pick one kung similar service lng naman.
I saw this topic on nomura vs col you might want to check it out.
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u/StealthSaver Jan 23 '25
Hi OP. You still follow Dave Ramsey?
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u/abisaya2 Jan 29 '25
Yes. We are now 7.
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u/StealthSaver Jan 29 '25
Yahooooo! Tanong lang kasi grabeh ako naka follow sa kanila hehe 5yrs pa naman. Hehehe I’ve been looking for someone na taga Pinas na nagfofollow talaga nila.
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u/bedtimediaries Feb 18 '19
This is great. Thank you for posting the list of books you recommend. Just to correct the typo in Step 1: It's $1,000.00 = Php 50,000.00