Christmas Giving (late post)

It’s Christmas season once more! For a lot of people, Christmas brings forth feelings of trepidation, laughter and cheer. It is a time of joy as we get to see relatives we haven’t seen for a long time during family reunions. It is a time when both employees and students alike can relax and take a break from the stress of office or school work.

Yet, for most people, especially those living in urbanized cities, instead of being a time for relaxation, Christmas becomes a time of stress due to the hustle and bustle of several company parties, organizational parties, church parties, family reunions, not to mention the dreaded Christmas shopping for gifts! Although employees are supposedly richer during this time because of the release of their 13th month pay, expenses for these aforementioned party contributions and gifts eat up the otherwise extra inflow of cash. In fact, not only is the extra income brought about by the various bonuses eaten up, they even usually end up broke and buried deeper in debt as a result of excessive shopping for both themselves and their loved ones.

However, giving gifts and throwing parties this Christmas need not be too burdensome and stressful. Besides, just like giving birth, these things are not actually emergency situations but normal and regular events that we can prepare for by planning ahead. Creating a budget is not only for business operations, buying a home, a vehicle or preparing for your children’s college fund or one’s retirement. A budget may also be used in preparing for any event that entails expenses. As with any financial plan, preparing a Christmas budget begins with setting the goals relative to the target recipients and intended price limit per gift or contribution. The next step is to find out the place where the best deals can be found considering the most appropriate gifts that you intend to give the concerned persons. After determining the target amounts, recipients, and specific gifts, it is now time to start setting aside the money therefor. Take note that these things should be done at the start of the year or at the latest, six months before the next Christmas.

Ensuring the success of any endeavor depends on proper planning and execution. Sufficient planning helps enable us to avoid unwanted surprises and excessive expenses. Without a plan, we may be tempted to give gifts to everyone in our Facebook friends list. This is especially true once we are already inside the mall for our Christmas shopping spree. A budget limits our expenses to only those which we intended. It prevents impulsive spending. Keep in mind that we do not need to spend more than what we want to impress people we don’t even like.

Giving gifts this Christmas should not feel like such a heavy financial burden. The essence of giving gifts is its voluntariness. We should not give gifts just because we feel obliged to give but because God loves a cheerful giver. Just like the real reason for the season wherein for God so loved the world, that He gave His one and only Son, that whoever believes in Him shall not perish but have everlasting life (John 3:16). This is the Gospel of Salvation in Christ that we celebrate each year. God the Father did not sacrifice his only begotten Son, the ultimate gift that anyone could ever receive, because he felt obliged to but because of His great love for us. As sinners, we deserve only the punishment that a just God has in store for those who violate His commands and precepts. Nevertheless, because of God’s overflowing love for us, He did not want us to suffer eternal hell-fire reserved for Satan and his minions. In order to satisfy both his justice and love, the only solution was for the Father to let His Son Jesus, God the Son, receive the penalty for our sins. Let this be the same motivation why we likewise give gifts every Christmas season.

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Affordable Quality Medical Services: Is It Possible?

In the media, we would see medical professionals such as physicians getting lambasted for the exorbitant fees that they allegedly charge their patients. Even the Bureau of Internal Revenue (BIR) capitalizes on this public perception by placing television advertisements that depict physicians as irresponsible and greedy tax evaders. Of course, as with all other taxpayers, such an accusation is not without basis. However, we really cannot blame physicians, hospitals and other medical service providers for charging relatively high fees because of the amount of expenses they have incurred in acquiring their medical degrees, equipment, facilities, and other related tools of the trade. The thing is, whether you agree with their professional rates or not, the fact remains that availing adequate medical services either from hospitals, clinics, or through house calls entails that you shell out a substantial amount of money, which may ruin your budget and cripple your cash flow. The bad news is that we are all mortal humans and are therefore susceptible to various sicknesses and diseases. Heck, even Superman gets sick when exposed to Kryptonite!

However, the good news is that there are certain financial products that can help ordinary persons such as rank-and-file employees and contractual workers avail of otherwise costly medical services for a fraction of a price. These financial products come in the form of health maintenance organizations (HMO) and health insurance. For a small amount referred to as premiums, HMO members and critical illness insurance policy owners do not need to carry the burden of their own medical expenses nor that of their dependents if so covered by their plan.

Nonetheless, many people still get confused between health or medical insurance and HMOs. Some of them even think that HMOs are a sort of a pre-need plan much like education plans and memorial plans. Such confusion is exacerbated by the issuance of Executive Order 192 on November 12, 2015, which transfers the regulation and supervision over HMOs from the Department of Health (DOH) to the Insurance Commission (IC). Although a good move by PNoy, it really does not help when the IC division in charge thereof is the Pre-need Division, albeit temporarily.

Moreover, such confusion in the minds of our countrymen may cause some unnecessary damage to both industries in that health/medical insurance operates differently from that of HMOs. People desiring one or the other may be made to invest in a product that they did not intend to get in the first place then put the blame on the entire industry when they fail to receive the services or reimbursements they require.

According to Investopedia, “health maintenance organization is an organization that provides health coverage with providers under contract. A Health Maintenance Organization differs from traditional health insurance by the contracts it has with its providers. These contracts allow for premiums to be lower, because the health providers have the advantage of having patients directed to them; but these contracts also add additional restrictions to the HMO’s members.

HMO’s are believed to have been started in the early 1900s when companies began to offer employees plans of prepaid medical service, and have done very well since. The HMO Act of 1973 helped to cement the HMO into the U.S. health system by providing grants to start or expand HMOs, removing many restrictions imposed by the individual states, and required employers with more than 25 employees to offer a federally-certified HMO to employees.”

So which is better, HMO or health insurance? Neither, actually. HMOs and health insurance should not be perceived as exclusive from each other moreso as competitors. Inasmuch as health insurance policies provide higher benefit coverage than HMOs, the latter serve as a primary defense against medical costs because HMO members do not need to shell out their own money unlike in a health insurance policy which reimburses the insured only after they have paid for the hospitalization or medical services themselves. Therefore, as a financial planner, I would recommend that people both sign up with a reputable HMO and purchase a life insurance policy with a critical illness rider in order to cover for the medical expenses that may exceed the maximum benefit limit of the former.

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Terence Camua is a lawyer and a registered financial planner of the RFP Institute Philippines. He is likewise the senior vice president for operations of IMS Wellth Care, Inc. For questions on law or personal finance, e-mail him at teng@personalfinance.ph or terence.camua@lawyer.com.

The G.O.O.D. Plan

“The rich rules over the poor, and the borrower is the slave of the lender” (Proverbs 22:7, ESV).

“Owe nothing to anyone—except for your obligation to love one another. If you love your neighbor, you will fulfil the requirements of God’s law”
(Romans 13:8, NLT)

In my previous article, we talked about the first phase in the personal financial planning process: cashflow management. Now, we will be discussing the second phase, the “D” in the CD-RW process, which is debt management or what we call the “GOOD” plan, which stands for “Getting-Out-Of-Debt.” Nevertheless, remember what I have said before, it is not always necessary to totally eliminate all debts because there are certain debts that are truly indispensable or even good such as debts incurred for business capitalization purposes. What is more important is that debts are reduced to manageable levels.

Unfortunately however, most people, even lawyers, get into the bad kinds of debts, particularly, consumer debts. Consumer debt comes in many forms, the most popular one being credit card debt. Believe me, I’ve been guilty of that as well! For those who are employed, your firm may also offer cooperative loans if you are a member of one. Moreover, as you get older and more successful in your law practice, you will also probably get a car loan or a housing loan, especially when you get married. And yes, having a nice car can definitely help you get more and better clients as it gives them the perception that you are successful and worth your salt.

According to the Bangko Sentral ng Pilipinas (BSP), there are over six million credit cards issued in the Philippines. The BSP reported that the Philippine banking system had P130 billion in credit card receivables as of September 2009, 13% of which were non-performing. Take note, that was 6 years ago. What more today? The problem arises when credit cards and other kinds of consumer loan facilities are abused. Ideally, credit cards should only be used for emergency purposes but if it really can’t be helped, you must at least make sure to pay the whole amount when the bill arrives and not just the minimum required amount. Paying only the minimum just buries you deeper and deeper into debt.

To make things worse, banks make it easier and easier for just about anyone to get a credit card these days. One day, you will just be surprised to find a pre-approved credit card under your name right at your doorstep (or mailbox), if you haven’t already! Verily, unexpectedly receiving those precious little plastic cards will make you feel like you have just won the lottery. But beware, what appears to be a blessing might actually turn out to be a curse!

New York Times best-selling author, wealth coach, and radio host, Dave Ramsey, said, “Personal finance is 80% is behavior and 20% head knowledge.” Daniel Kahneman, in his best-selling psychology book, Thinking, Fast and Slow, proved through experimental exercises that the emotional mind is more powerful than the rational mind. In other words, skill, although indispensable, is only the tip of the iceberg. No matter how skillful a person is, if his behavior or habits are terrible, then all those technical knowledge and skills go out the window. As celebrity wealth coach Chinkee Tan puts it, “It’s all in the attitude, dude!” Although, such a thing is also true for all other endeavors, it is more so for personal finance.

Getting in debt is a lot easier than getting out of it. It is easier to borrow money than pay it back. Debt is like a quicksand that is constantly trying to pull you down. The more you struggle, the harder it is to get out. Likewise, if we refuse to give up some of the comforts in life and change our spending habits, we will sink deeper and deeper into debt. For things to change, we have to change. In his book, Debtermined, personal development and success coach, Jayson Lo, discussed a three-pronged solution brothers Chip and Dan Hearth came up with.

  • Direct the Rider
  • Motivate the Elephant
  • Shape the Path

The Rider represents the rational mind, the elephant, the emotional mind, and the Path is the direction a person wants or needs to go. The Rider holds the reins and seems to be the one in control, but the Rider’s control is unstable because he is so much smaller than the Elephant. The Rider and the Elephant need to come together and shape the Path by creating a detailed image of what the destination would look like once changes are made. Their book, Switch: How to Change Things When Change is Hard, calls it a “destination postcard.”

The tension arises, says Lo, when the Rider and the Elephant pull in different directions. Riders without Elephants produce understanding without motivation. Elephants without Riders produce passion without direction. Riders and Elephants without a clear path produce movement without progress.

According to my friend and internationally-renowned registered financial planner Randell Tiongson, author of No Nonsense Personal Finance, before we buy anything on credit, there are some things we must consider: First is purpose. What is the compelling reason why we need to borrow money? Don’t you have any other source of funds than credit? Is what you are planning to buy with the borrowed money a need or a want? If it is merely a want, wouldn’t it be better to just postpone the purchase until you have saved sufficient money for it? Avoid impulsive buying. There were a lot of times that I really felt that the thing that I wanted to buy was a need but after a good night’s sleep, I realized the following day that I can actually do fine without it.

Second is cost. Despite the disallowance of the Department of Trade and Industry (DTI) on charging additional fees for credit card purchases, merchants have since come up with cunning ways to circumvent the law. And yes, this includes “zero interest” purchases on installment. Instead of calling it “interest,” merchants would instead say that they will give you a discount if you purchase it using cash. That’s why it may still be wisest to purchase things on cash basis. If you want to learn more how this works and more, attend our Financial Planners’ Training leading to the globally-recognized Associate Financial Planner (AFP) professional certification.

Third is interest. We all know about legal fruits. No, not just the mangoes, bananas, strawberries and the like—although those are included. I am pertaining to civil fruits, industrial fruits, and yes, natural fruits. One of the most ubiquitous civil fruits aside from rent is interest. Interest is what debtors pay their creditors as compensation for the use of their money. The thing is, consumer loans, as opposed to business or corporate loans, often carry with it higher interest because of the risk factor. Most banks charge 3% to 3.5% per month as interests on credit card purchases. That would result in annual nominal interest rates of around 36% to 42%! Take note, we are only talking about banks. Non-institutional lenders such as loan sharks, 5-6, or other private lending companies can charge up to 20% per month! What’s worse is that interest on debts is usually compounded. Compounding interest is simply interest upon the interest upon interest. Many people do not realize the power of compounding interest in relation to time. Compounding interest can work for you or against you depending on which side of the balance sheet you are. The value of your money today, whether you borrowed it or invested it, will not be its value five, ten, or twenty years from now. This is what financial planners refer to as the time value of money.

But what if you are already waist or neck-deep in credit card debt? The first and foremost thing that you should do is to resolve within yourself. Resolve to get out of debt and stay out of debt. Insanity, as defined by Albert Einstein is “Doing the same things over and over again but expecting different results.” So, after resolving to get out of debt, it is time to act on that resolve. Start by making a list or inventory of all your outstanding debts including the balance, start date, and status. Then, using what financial planners call the snowball method, start paying off your debt with the lowest amount. Doing so is more achievable and realistic. After you have paid that off, you can now proceed to the next bigger debt and so on and so forth until you have paid off all your debts. When you see you debts getting paid off one by one, it encourages you to take on the next bigger debt unlike if you start with the largest debt, which might just end up in frustration due to its seeming impossibility.

There may be times of plenty when you will suddenly get to earn big bucks because of a lump sum payment such as an acceptance fee, packaged deal, success fee, or a new regular retainer fee. Other possible sources could be from bonuses, inheritance, awards, or even raffle prizes. Heck, you can even organize a garage sale for those stuff that you don’t actually use anymore and are just gathering dust in your attic or storage room! Be wise, pick your brain. Better yet, if you’re married, pick your spouse’s brain! Such unexpected income can be used to escalate your debt payments thereby accelerating your debt-extinguishment objective.

Be faithful in paying your debt; but more importantly, be faithful to God. Do not forget what we discussed previously. Tithe! God is the source of everything. If you worship him through your finances and acknowledge that the solution to your problem is him and not just money, then God will give you the ability to produce wealth (Deuteronomy 8:18). This isn’t easy, especially when you are in debt. Nevertheless, Jesus said that if we “seek first his kingdom and his righteousness…all these things will be given to you as well” (Matthew 6:33, NIV).

Last but definitely not the least—in fact, this should be the first thing you do—is pray. We cannot do it on our own strength. We need God’s wisdom and grace to help us in this situation. Remember to “Trust in the LORD with all your heart, and do not lean on your own understanding. In all your ways, acknowledge him, and he will make straight your paths” (Proverbs 3:5-6, ESV). For God promises that “If any of you lacks wisdom, let him ask God. Who gives generously to all without finding fault, and it will be given to you” (James 1:5, NIV).

May the LORD bless you and keep you;
May the LORD make his face shine upon you and be gracious to you;
May the LORD turn his face towards you and grant you peace. Amen.

Personal Finance for Lawyers

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A lot of people think that lawyers make a lot of money. People automatically think highly of you: “Oh, you’re a lawyer, you must be rich or at least you’re getting there.” However, there is nothing farther from the truth. Of course, there are those blessed few who have made it to the big leagues and are now founding or senior partners of large and prestigious law firms. Surely, without possessing other sets of skills, in-depth knowledge of the law alone will not and cannot guarantee financial freedom and prosperity.

Lawyers usually earn in one of three ways: a) as a purely compensation income earner, i.e. as an employee; b) as a fee-based self-employed professional; or c) a combination of the first two. The problem is, especially for self-employed lawyers, as well as other similarly situated professionals, our income is wholly dependent on how much man-hours we put into working. In other words, no work, no pay! Those who use the time-billing method know this particularly well. As such, most lawyers end up working all their lives because no matter how old we get, for as long as we’re alive, our cost of living just keeps on going up to no end! Sometimes, we even proudly use it as a battle cry, “Lawyers never retire!” Verily, the stereotypical image of the “Abogado de campanilla” comes to mind: An old thin man with unkempt gray or balding hair wearing a faded barong carrying his briefcase to court. Indeed, it is such a sad and sorry sight to behold. I know because I’ve seen them. And could you imagine what would happen to them if they become too old to work or permanently incapacitated?

Generally, lawyers, except for those who are at the same time finance professionals such as CPAs, CFAs, RFPs, RFCs, CFCs, CWMs, etc., abhor numbers. To be sure, one of the significant reasons why people take up law, among other things, is because they did poorly in math and science during their elementary and high school days. Wait, I might just be describing myself here! Nevertheless, studying law and passing the dreaded bar exams do not require one to be adept in numbers. There are no complicated formulas or computations save for the determination of an employee’s minimum wage, a stockholder’s shares of stocks, or the occasional computation of taxable income; although the last one is pretty much done by accountants. The point is, lawyers, nay; most people in fact, just tune out when numbers are involved. As behaviorist Daniel Kahneman said in his landmark book, Thinking, Fast and Slow, our brains usually take the shortcut or the easier route when we are faced with numerical problems, which he refers to as the “System One” mode of thinking.

No wonder, it is because of this numerical aversion that lawyers avoid thinking about personal finance. To make things worse, society’s high regard for lawyers along with the dignity of the profession leave lawyers with no other choice but to do their very best to project success and honorability in how they dress, walk and talk. These kinds of expectations, not to mention the challenges of life itself, put a strain on a lawyer’s finances, especially if that lawyer already has a family of his own.

Having said this, learning about personal financial planning is indispensable for a person who wants to achieve financial freedom and prosperity, regardless of occupation. But the big question in most people’s minds is, “Where do I begin?” And a very good question it is indeed because personal financial planning is a process. Being a process, you should not jump from one step to another without completing the previous step. At Personal Finance Advisers Philippines (PFA), we have what registered financial planner and seasoned investment adviser Efren Cruz, calls the CD-RW approach to personal finance. CD-RW stands for the phases of or major steps in the financial planning process, which are: Cash, Debt, Risk and Wealth. Not undertaking any one of the four areas of financial management will lead to instability in one’s personal finance. Other registered financial planners divide the steps into five or twelve as do Randell Tiongson and Alvin Tabaňag, respectively. For simplicity and ease, however, we shall summarize the process to the four steps. A person hoping to get out of debt should not be investing before he reduces his debts to manageable levels. In fact, he shouldn’t be investing at all if he hasn’t yet protected his downside risks through insurance. Let me briefly discuss each phase:

Cash” pertains to improving one’s cashflow. There are many ways to do this such as getting a promotion, getting more clients, starting a business, or selling some stuff that you do not need anymore. In fact, Robert Kiyosaki refers to this as Financial Intelligence No. 1. Short-term and current savings also fall under this phase. In fact, these two steps under this phase may and should be done simultaneously if you can. In fact, being successful in this area alone would definitely have a strong and lasting impact in your financial well-being.

Debt” pertains to getting out of debt. Albeit, it is not always necessary to totally eliminate all debts because there are certain debts that are truly indispensable or even good such as debts incurred for business capitalization purposes. What is more important is that debts are reduced to manageable levels.

Risk” pertains to protecting yourself and your family from life’s unexpected risks such as loss of job, total and permanent disability, and even death. The steps comprising this phase are setting up one’s emergency fund and insurance planning—both life and non-life. Although not usually done, I would also include here adequate asset protection planning.

Wealth” pertains to the accumulation thereof through long-term saving and investing. In other words, it is how to make your money work for you and not just you working for money. This is the phase where if successful, can spell the difference between being rich, just right, or poor. The primary reason we should be investing is because we will not always have the ability to generate income. Investing can be in the form of real estate, business, commodities, or the most popular class, paper assets such as stocks, bonds, money market instruments and pooled funds. Of course, we cannot bring our wealth with us when we pass on from this life, hence, included in this phase is estate planning or how to legally pass on your property and money to your loved ones when that time comes.

For now, we will focus on the first phase, which is the foundation of the financial planning process, and that is cashflow management. Contrary to popular belief, cashflow management is not only about being frugal when it comes to one’s expenses but about being wise. In behavioral economics, it is said that finance is only 10% skill and 90% behavior. This means that while we may possess all the necessary technical skills, all of that will be for naught if we cannot control ourselves and exercise prudence when it comes to spending our hard-earned money.

For effective cashflow management, categorize your expenses into “needs” and “wants,” the latter also being referred to as “discretionary expenses.” One of the biggest mistakes people make is rushing into financial decisions without considering what’s really important for them. As many people get caught up in the responsibilities of their daily lives, they often do not have time for reflection. The easiest way to identify wants is to actually start with needs. Needs can be further broken down into two broad categories: absolute or bare necessities and near necessities. Absolute necessities are those that are important for our basic survival, things like food, shelter and clothing. On the other hand, near necessities include things like reliable transportation, insurance coverage, utilities, telecommunications, and personal care expenses. While these last items are not necessary for survival, they are fairly important for us to function as responsible and effective members of society. Now that we know what needs are, it would be easy to define our wants. Now, everything else that do not fall into the category of needs are therefore classified as wants and could be cut out if necessary. To be more specific, wants are items that are only nice to have. They are not things that you need to survive. Although sometimes, needs turn into wants when you take your needs beyond the basics, i.e. if you buy a home that is much larger or a car that costs more than you can afford. Carefully go through your expenses and determine which are truly needs, and which are actually wants the order them. After determining your needs and wants, create a plan for living within your means. This is important to finding success in your personal finance.

To reach a certain place, the first thing you must know is where you are right now. You simply cannot plot your course without knowing your starting point. In order to know where you are financially, you have to determine your net worth. Your net worth is an important barometer of your financial health. It indicates your capacity to accomplish major financial goals to be discussed later. Just as all government officials are mandated to submit their Statement of Assets, Liabilities and Net Worth (SALN), everyone would do well to follow suit as this is an excellent tool for financial planning. To compute your net worth, you just have to follow this simple formula: Assets – Liabilities = Net Worth. Your assets consist of everything you own, both real and personal properties including cash in bank and cash on hand; while your liabilities consist of everything you owe such as debts and taxes. For financial planning purposes however, it is generally recommended that you exclude your family home when figuring out your financial assets. Include your home only if you expect to someday sell it or otherwise have it leased out to generate passive income.

Once you have determined where you are, the next preparatory step is to know where you want to go. In short, determine your goals. Your goals will vary depending on the life stage you are in; whether you are a student, single professional, married, married with children, empty nester, or retired. Accordingly, your financial goals may be one or more of the following: income continuation, starting a business, children’s education fund, health fund, buying a house or a car, getting married, a family vacation, retirement fund or estate creation and preservation. It is important to determine your goals as each of these goals will have a corresponding cost that you will need to prepare for. Not knowing where you are or where you are going will only lead you nowhere fast! It would just be like driving around aimlessly with no purpose in mind except to waste precious fuel. Failure to plan is a plan to fail.

Once you have plotted your course, it is now time to gather your resources for the journey, and this is where saving money comes into play. Most people however, if not everyone, try to save only what is left, if any, of their salary or income after paying all the bills and cost of living expenses, sometimes even including their leisure expenses. And this is exactly why they fail. Instead of using the formula Income – Expenses = Savings, we should change our mindset to Income – Savings = Expenses. Better yet, I’ll let you in on the secret formula to prosperity: Income – Tithes – Savings = Expenses. Specifically, the apportionment should be as follows: 100% (Income) – 10% (Tithes) – 20% (Savings) = 70% (Living Expenses). Now why do I include the tithe? It is because I believe that because God is the one who gives us the ability to produce wealth (Deuteronomy 8:18), then giving back the tithe is one of the best ways we can honor Him with our wealth. To be sure, God told the prophet Malachi to instruct His people to “Bring the full tithe into the storehouse, that there may be food in my house. And thereby put me to the test, says the LORD of hosts, if I will not open the flood windows of heaven for you and pour down for you a blessing until there is no more need” (3:10, ESV). In fact, this is the only exception to God’s law against putting Him to the test (Luke 4:12). This principle of saving is referred to a “Paying God and yourself first.” Nonetheless, if saving 20% is really difficult for you right now, you can start small with just 10% and increase it later on when your cashflow improves.

Saving is an essential part of the process because the funds accumulated as a result of which is where you will source the money needed for your emergency fund, paying off your loans, insurance premiums, and investments, in that particular order if not simultaneously. Without improving your cashflow and saving money, any financial planning activity shall be futile for lack of the ability to execute the same. The strategy to saving effectively is quite simple and is no secret at all: “Spend less than you earn,” or to put it in another way, “Live below your means.” It never fails. One can choose to be a saver or a big spender. The big spender follows the incorrect formula for saving. I know, it’s so much easier said than done; but with God’s grace, it is truly possible!

Some people tend to blame their financial shortcomings on not earning more income. Such people believe that if only they earned more, their financial—and personal—problems would melt away. The thing is, as Robert Kiyosaki puts it, “It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” In short, it is all about increasing our financial I.Q. Remember, you cannot grow what you do not have. Regardless of your income or how you earn your income, you can make your money stretch further if you practice good financial habits and avoid mistakes. Effective and efficient cashflow management is essential to building wealth. In fact, the lower your income, the more important it is that you make the most of your income and savings because you don’t have the luxury of falling back on your next fat paycheck to bail you out. As aptly posited by Alvin Tabaňag, “A healthy amount of savings is the foundation on which you will build your personal wealth. Without any savings it is impossible for you to achieve financial security.”

There is so much more to learn about personal financial planning that this article can cover. Unfortunately, personal finance, for all its importance and practicality, is not generally taught in our schools. Yes, we have economics in high school and college, but the theories taught therein are usually either archaic or inapplicable in real life due to its extreme technicality. So, invest in yourself first. Read books, blogs and attend seminars of reputable finance professionals such as those mentioned above. The journey of a thousand miles begins with a single step. May the grace of our Lord be with you!

Some of the Things that a Professional Financial Advisor Does

Financial Planning:
• Cares more about you and your money than anyone who doesn’t share your last name
• Asks questions in order to understand your needs and objectives
• Helps you determine where you are at present
• Guides you to think about areas of your financial life you may not have considered
• Helps organize your financial situation
• Formalizes your goals and puts them in writing for you
• Helps you prioritize your financial opportunities
• Helps you determine realistic goals
• Studies possible alternatives that could meet your goals
• Prepares a financial plan and/or an investment policy statement for you
• Makes specific recommendations to help you meet your goals
• Implements those recommendations
• Suggests creative alternatives that you may not have considered
• Reviews and recommends life insurance policies to protect you
• Assists you in setting up a company retirement plan
• Assists in preparing an estate plan for you
• Persuades you to do the things you know you ought to do, even if you don’t feel like doing them

Investments:
• Prepares an asset allocation for you so you can achieve the best rate of return for a given level of risk tolerance
• Does due diligence on money managers and mutual fund managers in order to make appropriate recommendations
• Stays up to date on changes in the investment world
• Monitors your investments
• Reviews existing annuities
• Reviews your investments in your company PERA plans
• Reviews and revises portfolios as conditions change
• Guides you through difficult periods in the stock market by sharing historical perspective
• Works with you to improve your investment performance
• Can look inside your mutual funds to compare how many of their holdings duplicate each other
• Converts your investments to lifetime income
• Helps you evaluate the differences in risk levels between various fixed-income investments such as government bonds and corporate bonds.
• Provides research on stocks from both affiliated firm and third parties
• Holds and warehouses stocks, bonds and other securities
• Records and researches your cost basis on securities
• Provides you with unbiased stock research
• Provides you with personal stock analysis
• Provides you with a written sector-based evaluation of your portfolio
• Determines the risk level of your existing portfolio
• Helps you consolidate and simplify your investments
• Can provide you with technical fundamental and quantitative stock analysis
• Gives you strategies for trading options
• Provides you with executive services involving restricted stock and employer stock options
• Provides introductions to money managers
• Show you how to access your statement and other information online
• Shops top rates from financial institutions throughout the country
• Provides access to answers from a major investment firm

Taxes
• Suggests alternatives to lower your taxes
• Review your tax returns with an eye to possible savings in the future
• Stays up to date on tax law changes
• Helps you reduce your taxes
• Repositions investments to take full advantage of tax law provisions
• Works with your tax and legal advisors to help you meet your financial goals.

Person-to Person:
• Monitors changes in your life and family situation
• Proactively keeps in touch with you
• Remains only a telephone call away to answer financial questions for you
• Serves as a human glossary of financial terms such as beta, P/E ratio, and Sharpe ratio
• Makes sure that the he/she and the firm provide excellent service at all times
• Provides referrals to other professionals, such as accountants and attorneys
• Refers you to banking establishments for loan and trust alternatives
• Provides you with a chart showing the monthly income from all of your investments
• Suggests alternatives to increase your income during retirement
• Listens and provides feedback in a way that a magazine or newsletter writer does not
• Shares the experiences of dozens or hundreds of clients who have faced circumstances similar to yours
• Helps educate your children and grandchildren about investments and financial concepts
• Holds seminars to discuss significant and /or new financial concepts
• Helps with continuity of your family’s financial plan through generations
• Facilitates the transfer of investments from individual names to trust or from an owner through to beneficiaries
• Keeps you on track
• Identifies your savings shortfalls
• Develops and monitors a strategy for debt reduction
• Educates you on retirement issues
• Educates you on estate planning issues
• Educates you on college savings and financial aid options
• Is someone you can trust and get advice from in all of your financial matters
• Is a wise sounding board for ideas you are considering
• Is honest with you
• Saves you time

Guest Blog: Defending Your Fee in an Angry Marketplace

When clients average 9% a year, it’s easy to pay a 1% fee. When they lose money, those fees become harder to stomach. Here’s a four-part action plan for reestablishing your worth and protecting clients from further damage.

It’s not easy being a financial advisor these days. For some, you’re about as popular as members of Congress or the Bush administration. Within the last few weeks, millions of investment clients received third-quarter statements. Those who dared open the envelope found portfolios hammered by the recent market free fall. Trillions of dollars have evaporated from the markets.

Will clients stick with you?

A study released this month by Prince and Associates was not encouraging—at least, not for the wealthiest sectors of the financial services industry. The survey showed that an alarming 81% of investors with at least $1 million in discretionary assets at private banks were planning to pull at least some of their money from their advisors in the wake of Black September and Blacker October. Nearly half said they planned to change advisors and warn others about that professional.

Prince attributed this loss of confidence to the uncertainty caused by the credit crisis, the banking bailout, the market collapse, and the election. The good news in that? Factors such as the personal style and service approach of an advisor and the reputation of the advisory firm can greatly help shape an investor’s attitude. And their willingness to keep paying you, Prince said.

Advisor Beth Blecker, CEO of Eastern Planning in Pearl River, New York underscores the importance of steady service in this rough market: “I am not having any trouble defending my fee with 95% of my clients, but service is the key,” she notes. “I see my best clients every quarter, and I host special volatility-education events and appreciation events. I tell clients this is the time that I really have to earn my fees by keeping them long-term-goal-oriented. We do not believe in timing the market, so it is up to me to keep them invested.”

Taking charge of your message

What can you do now to keep clients happy, defend your fees, and attract new clients? Here’s an action plan for tough economic times.

Go back to the investment policy. When you initially establish an investment policy statement, it can be used to remind clients of potential losses they agreed to accept. This is especially valuable in a down market. An investment policy statement might include a statement like this: “Client X could accept losing 15% in any single year. Over a five-year period, she could tolerably lose 3% annualized.”

When the market falters, you can point back to the risk range outlined in the investment policy statement, as well as to the benchmarks chosen to help put the client’s investment performance into perspective. “It puts in plain English what risks they were willing to take,” said one advisor about his IPS. “It also provides a measurable standard by which we can reasonably be evaluated in a down market.”

Action step: Review clients’ investment policy statements. If you don’t have an IPS process, consider developing one to formally outline your approach.

Host an education summit. Perhaps no time would be more appropriate than now to gather your clients together at your home or office for a special “volatility event” to educate them about your market outlook and how you plan to address the current crisis. An education workshop should include the following elements:

  • A small number of attendees. Unlike a mass-marketed seminar, a client education workshop involves only a select group of your best clients—15 to 30 at the most.
  • Shared interests. When inviting clients to attend your exclusive workshop, choose those who share common interests and concerns. Your knowledge of their unique needs and issues will create a more effective event.
  • Educational purpose. Your education summit should not be tied to a product push. Clients should be able to ask questions and speak their minds. “Since this crisis hit, we have hosted special volatility events with my son, who is a certified financial analyst,” explains Blecker of Eastern Planning. “Clients were very happy that they could ask him whatever they wanted related to the market downturn.” You could bring in your own expert.

Action step: Determine which of your clients to invite. Consider hosting a series over several weeks for small client groups. Saturday mornings often work well. Limit attendance to 30 at the most. Find a guest speaker, if possible, but be sure you remain in charge of the message.

Remind clients about the benefits of fees. Clients don’t pay you a fee just for market performance. And while paying a fee in a down market can be frustrating, clients need to remember all the advantages of fees. Here are a few benefits you can remind them about:

  • Risk management. In a down market, your job is still to manage client risk and optimize their long-term strategic portfolio planning. This service becomes even more important when the market goes down as client confidence is low.
  • Portfolio flexibility. In declining markets, slight modifications to a portfolio can help your clients manage risk. A fee arrangement allows you to fine-tune their holdings without worrying about costs.
  • Constant advice. Paying a fee does not assure a positive return any more than paying for a doctor’s services guarantees the treatment will be successful. Clients pay for the process and the constant attention you give them. As one advisor notes, “Markets go down. This fact cannot be confused with the failure of the consultant.”
  • Excellent service. Clients rely on your service team to answer their questions and handle their requests promptly. Remind clients about the excellent service you strive to provide, that you have the best in the business handling their day-to-day financial needs. Point out that they can reach a member of your team at any time, and emphasize the level of personal service that distinguishes your practice.
  • Tax management. You play an important role in minimizing your clients’ tax bill. Making portfolio adjustments for tax purposes is more easily done under a fee arrangement because you don’t have to worry about transaction costs. Sometimes the tax savings can pay for a year’s worth of fees. A client can also write off your advisory fee, while mutual fund expenses are not deductible.
  • Shared economic interest. Remind your clients that as a result of your fee-based relationship, you’re feeling the pain along with them. One advisor told me his client assets were down 13% last quarter, meaning he just took a 13% pay cut. Your goal is to increase your clients’ wealth, and you share in their success and have every motivation to help them reach their goals.

Action step: If you encounter concerns about your management fee, make it your priority to listen first. Once you have understood and acknowledged the client’s objection, you can respond appropriately with the above advantages of fee-based advisory relationships.

Consider new hedging strategies. Finally, however well you defend your fees, it may be time to take a new investment approach. While focusing on long-term goals and staying invested has long been a mantra for financial advisors, a growing subset of advisors are embracing alternative risk management strategies and hedging to reduce short-term portfolio volatility. They’re basically saying, Forget the long run; we gotta stop the pain now.

“In order to justify your fee, you must bring something new to the table,” argues Otto Federen, an independent registered investment advisor in Lexington, Ky. “Buy and hold equals ‘hope and hold’—and hope is not a strategy.”

Federen completely revamped his investment approach after the 2002 bear market, when he saw fundamentally sound companies and managers beaten down by the market. “We recognized that we had to have downside protection.” He has had his clients in Treasury money funds since February, and he uses some managers who use short strategies.

Thomas Norris, president of NFI Advisors, manages risk with structured accounts comprised of Treasury bonds and call options on the S&P 500 Index to participate in upward swings. His clients have not lost money during the downturn. “If you don’t lose, you don’t have to make it up. I’m not in the market. We’ve protected them on the downside.”

Norris sees his no-risk strategy as the only approach during what may be a rough time ahead. “The average investor has been told to just stay invested, that the market will recover. But look at 1973-74. The market lost 50% of its value. People and advisors were devastated. And over 10 years during the ’70s, the market died slowly.”

And some advisors, recognizing the flat market over the last decade worry about another decade with little forward progress. David Hoelke, CFP, of Focus Financial in St. Paul, Minn. explains: “It’s not the wild swings up and down that concern me. I’m more concerned about a longer-term stagnant period, where clients might only make 2-3% because of a deflationary recession. If all asset classes perform poorly, 2-3% could be strong compared to inflation. “But if I’m taking one of those points as my fee, it might not sit well. I don’t worry about my clients becoming angry, but rather that they become pragmatic and learn that CDs might a safer alternative. And while that’s shortsighted on their part, some clients are frazzled enough that they might not care.”

Action step: Investigate alternative investment approaches on Horsesmouth and elsewhere. Explore the costs and potential advantages of these absolute return strategies.

Senior Editor Nicole Coulter specializes in helping financial advisors manage their businesses more effectively. She has previously written about practice management issues for publications such as Registered Representative and Bank Investment Representative. She holds an MBA from the University of Nebraska at Omaha.

Words of Wisdom From Master Advisor Nick Murray

1. If you are still prospecting, no matter what else is wrong with your business, you will yet succeed. If you stop prospecting, in the absence of a steady flow of referrals/introductions, then no matter what else appears to be right with your business at the moment, you are ultimately going to fail.

2. “Rejection” does not hurt, other than to the extent we allow it to do so. The only way to hear “yes” is to risk hearing “no.”

3. Most people who invest most of their capital in fixed income investments as they go into retirement will run out of money well within their lifetimes, and will die destitute and dependent upon their children. Equities: life. Bonds: death-in-life.

4. Optimism is the only realism. It is the only world view that squares with the facts, and with the historical record.

5. Get a year’s living expenses in a money market fund as quickly as you can, even if you have live on coffee and rice while you’re saving toward this goal. This will allow you to turn down business that doesn’t feel 100% right to you. It will give you the strength to tell any prospect to go to the devil, and make it stick.

6. It is infinitely easier to turn a one-million dollar client into a two-million dollar client than it is to turn ten one-hundred thousand-dollar clients into two-hundred-thousand dollar clients.

7. Money is love. The wise advisor will always look for clients who wish to use their money as an expression of love.

8. Your price is only an issue to the extent that your value is in question.

9. Every year on your birthday, fire the client who has given you the most grief since your last birthday.

10. Never take part of an investment account. Win it all, or pass on it all. It’s not just the gaps, the overlaps and the lost fee efficiencies that make divided accounts a no-no: it’s that you’re getting sucked into a performance derby.

11. When we are telling prospects and clients exactly what they need to do in order to achieve their most deeply-held financial goals, it is not possible for them to counter with valid objections, because there are no valid objections.

12. The origin of all wealth is threefold: personal initiative, hard work, and thrift. Tell me the percentage of your income that you’re putting away, and I’ll tell you whether you’re going to achieve your financial goals.

13. The world does not end. It only seems to be ending. This time is never different.

14. Americans say they want safety and income. What they really want is all the income they can get, and the illusion of safety. More money has been lost in the quest for the chimerical combination of safety and high yield than in all the stock market crashes in history.

15. Stop trying to prove anything. You can’t prove the sun’s coming up tomorrow, nor that you or your client will be here to see it even if it does. A great advisor never accepts the burden of proof.

16. There is no such thing as a “standard” deviation. Reality always comes at us out of deep left field.

17. The only sane investment objective in retirement is an income that grows at a minimum of the same rates at which one’s cost of living is rising.

18. There is no statistical evidence fore the persistence of performance.

19. Disciplined diversification is a pact with heaven: I will never own enough of any one thing to make a killing in it; I will never own enough of any one thing to be able to be killed by it.

20. All investment “new eras” end in ruin, because all inventions follow the same arc, from miracle to commodity.

21. Never take your business problems home with you. That way you can never take them out on the people who love you.

22. Price and value are inversely correlated. When the price of any investment sector is rising, its value is declining; the converse is also true.

23. The most fascinating aspect of all financial crises is their essential sameness.

24. Life is too short to work with anyone you don’t like, and /or who doesn’t like you.

25. Get our of debt, and stay out of debt. This can be a very cyclical business. If you’re a genuinely high-quality advisor, you will lose accounts and AUM in a “new era” speculative orgy. Keep you nut as low as you possibly can.

26. What goes around comes around, even if it’s on a very long, elliptical orbit.

27. Inflation is always and everywhere a monetary phenomenon.

28. The iron law of the commodity cycle is: supply responds directly to price, even as demand responds inversely to it.

29. The advance is permanent. The declines are temporary. There have been twelve bear markets with a mean decline of 25% since the end of World War II. The first one started on May 29, 1946. that day, the S&P Index closed at 19.5. As I write, twelve ends-of-the-world later, it is 1400. Stocks are up seventy times over these six decades because earnings are up seventy times.

30. Almost all of life is in the Grateful Dead dong “Uncle John’s Band.” The rest is in “Box of Rain.”

31. The dominant determinant of the real long-term returns real people really get isn’t investment performance. It’s investor behavior.

32. Every Christmas, assemble your entire family and watch the A&E move The Crossing, about Washington’s attack across the Delaware on Christmas night, 1776. This, and not It’s a Wonderful Life, is the true American Christmas classic. Every April 13, assemble them all again, and watch Apollo 13.

33. Protectionism always raises consumer prices above where they would otherwise be; it also invariably destroys more jobs than it “saves.”

34. All investments are income investments. They are made for the production either of current income, or of future income, or of income for someone else. The only sane test of an investment’s long term income producing potential is its long term total return, not its current yield. By that one sane test, stocks are a far better income investment than bonds.

35. The computer in your cell phone is a million times smaller, a million times cheaper, and a thousand times more powerful than the mainframe computer used by E.F. Hutton & Company on the day I joined that firm, May 1, 1967. This is a billion fold increase in computing power per dollar. In the next quarter century, there will be another such billion fold increase, at which point technology will have essentially solved all our current problems: energy, the environment, poverty and disease. This is the exact worst moment in human history to turn pessimistic.

36. Freedom is never free.

37. No one who really understands baseball ever referred to the 1969 World Series champions as the Miracle Mets. They were anything but a miracle. Indeed, from the middle of the 1968 season on, they were well nigh inevitable.

38. There is no completely bad time to be prospecting, but the very best time to be prospecting is when the market is down 20%. Amateurs will have stopped calling their clients, and your timeless wisdom will never get a better hearing.

39. The only sure way to be trusted is to be single-mindedly, relentlessly trustworthy. The only way to be sure you’re always absolutely trustworthy is to tell the pure, unvarnished truth all the time, and let the chips fall where they may.

40. Stop asking for referrals. Ask for introductions.

41. And in the end, the love you take is equal to the love you make.

Investment 101

This time of year, many people think about freedom and what it means to them. We’d like to go one step further and ask that you consider your financial freedom. Imagine being financially free to live the life of your dreams and be in complete control of how you spend your time. Start today by asking yourself two simple questions:

Are you close to being financially free?

If not, do you have an action plan to get there?

If you didn’t answer an affirmative “YES” to either one of those questions, now is your time to take action. The reality is that you must have a plan if you want to achieve financial freedom. Without a plan you’ll likely never get to where you are going and could potentially waste a great deal of time and money in the process. The good news is as long as you make the decision to ACT TODAY you can begin taking steps towards financial freedom – and we can help!

Just gather at least 20 of your officemates, churchmates, classmates, friends, or relatives and we will come to you!

Investment 101

What is a VUL and Why is It a Good Investment?

I have read some blogs of certain financial experts advising people not to buy or invest in a VUL insurance because of the high charges that can eat up their account value (No. of units x NAVPU) and that people should instead buy a term insurance, which is significantly cheaper, and invest the difference in stocks, mutual funds, UITFs or ETFs. Other arguments against VULs is that it is only for those who are lazy to learn about investing themselves and that people who reach a ripe old age no longer have any young children or dependents to worry about when the call of death arrives.

While these seem like valid objections, however, there are some very important things about VUL insurance products that these writers have failed to consider. But before I proceed to address these issues, let me first define what a VUL is. VUL stands for Variable Unit-Linked/Variable Universal Life. According to Investopedia, a VUL is “A form of cash-value life insurance that offers both a death benefit and an investment feature. The premium amount for variable universal life insurance (VUL) is flexible and may be changed by the consumer as needed, though these changes can result in a change in the coverage amount. The investment feature usually includes sub-accounts  (pooled funds) which function very similar to mutual funds and can provide exposure to stocks and bonds. This exposure offers the possibility of an increased rate of return over a normal universal life or permanent insurance policy.” As Mr. Rienzie Biolena, RFP, puts it: “It is an investment and life insurance product in one. The difference between a VUL and other forms of life insurance is that part of the premiums is invested in pooled funds which, in time, are expected to grow in value.

Now, for my observations: First, you cannot make withdrawals from your term insurance because it does not have cash value unlike Whole Life and VULs which have cash/account value and can therefore also serve as your savings “account” in the case of the latter. Hence, the only way for an insured to enjoy his purchase is that if he or she dies during the term of the policy, which, in this case it is not really the insured who enjoys it but the beneficiaries. Second, according to Mr. Randell Tiongson, RFP:  “It is interesting to note that less than 20 percent of term insurance policies are still in force when the insured dies and, therefore, never pay a claim.” Third and most important of all, since the death benefits of a VUL, which include the amount invested in the pooled funds, is still classified as insurance, the proceeds thereof are excluded from the computation of gross income [Section 32(B)(1), National Internal Revenue Code of 1997] and gross estate [Section 85(E), Ibid] thereby exempting it in effect from taxation, provided, that the assignment of beneficiaries is irrevocable. Unfortunately, the same does not hold true for gains derived from investing in mutual funds, stocks, unit investment trust funds, or exchange traded funds, because in case of the death of the investor, such gains, if any, including the principal amount shall still form part of the gross estate and therefore subject to estate tax. And the worst part is, once the bank or financial institution finds out about the death of their depositor or investor, such funds are mandated by law to be frozen until payment of estate taxes is completed. That is why, as discussed in one of my previous blogs, life insurance, particularly VULs, is an indispensable tool in estate planning.

As a side note, there are VUL products, such as Philam Life’s Money Tree, that while providing minimal guaranteed life insurance coverage, has virtually the same rates of return as mutual fund investing. Maybe the writers criticizing VULs as a whole were not aware of the existence of VUL products such as the Money Tree or were greatly misinformed. As I conclude, remember that prior to investing, it is important to know your needs and goals before handing in your hard-earned money and diversify! As the wise teacher said: “Invest what you have in several different things. You don’t know what bad things might happen on earth.” (Ecclesiastes 11:2, ERV)

Make Your Money Work for You!

In the Philippines, most people view dabbling in the stock market as a form of gambling and as a result avoid investing therein. In fact, several years ago, I asked my dad, who is arguably the most successful Filipino executive in the international pharmaceutical industry of his time, why he hasn’t considered investing some of his retirement money in the stock market or in other similar financial instruments. He told me that the reason why he does not is that he wants to have absolute control over his money and he cannot have that with the stock market because placing your money there is just exactly like gambling where other people and circumstances dictate the condition of one’s investments. Unfortunately, I believed him.

Ironically, for a lot of Filipinos, this way of thinking about investing in the stock and money market has led them to investing in get-rich-quick scams offered by unscrupulous persons. I mean, who hasn’t heard of Multitel, Aman Futures and the like? Instead of getting themselves financially educated and patiently investing in legal and time-tested ways to grow their money, they gullibly hitch on the bandwagon of these allegedly “safe” and “high yielding” investment vehicles such as the Ponzi Scheme, also known as the “pyramiding scheme.”

Now, some people might think that I am referring to Multi-Level Marketing (MLM) businesses. I am not. Pyramiding and MLM are not necessarily synonymous. While Ponzi schemes take people’s money and use them in paying the referral commissions of those who joined earlier without trafficking any actual product whatsoever, legitimate MLM companies carry tangible products such as food supplements, skincare and cosmetics, clothing apparel, and household stuff, to name a few. To know if you are joining a legitimate MLM company, make sure that the same is a corporate entity registered with the Securities and Exchange Commission (SEC) and a member of the Direct Selling Association of the Philippines (DSAP). Moreover, be wary of MLM companies that sell cheap products at exorbitant prices. Check the prevailing market value of similar products before jumping in. In other words, don’t just rely on the testimonies of certain network marketers, even if they are your family members, but do your own research. Due diligence is the key.

As for the stock market, when you buy the shares of stocks of a certain corporation, you actually become a part owner of that business. As a part owner, you get to have a share of the business profits, called dividends. In addition, you are also entitled to voting rights, provided that your shares are common stocks. Getting into the stock market only becomes as risky as gambling if you are involved in stock trading, where stocks are bought and sold within a short period of time through the use of market trend speculation. However, this is not the case when it comes to stock investing. Although investing in stocks still carries a higher amount of risk compared to fixed income securities such as government bonds and cash deposits due to its volatility, the same can be managed through the use of the Peso Cost Averaging method. Peso Cost Averaging works by investing a fixed amount money in stocks of great Philippine corporations in regular intervals instead of just on a one-time-big-time basis. In this manner, there is no need to time the market conditions because as you buy more units the average cost per unit of investment becomes smaller. Moreover, unlike stock trading, you invest for the long term, preferably a minimum of ten years so as to realize the positive yields of your money. Investing long-term greatly lessens, if not totally eliminates, the risk of devaluating your money because instead of focusing on the present and immediate situation of the market, you look at the bigger picture where, historically speaking, stock prices of great companies always rise in the long run even after a hard fall. Nevertheless, if you are still afraid of investing in the stock market directly or do not have enough money to invest yet, then you can consider investing in pooled equity or balanced funds through Mutual Funds, Unit Investment Trust Funds, or Variable Unit-Linked Insurance. However, that will be the subject of another article!

The bottomline is, in making your money grow, financial literacy is indispensable. So before investing your hard-earned money in any of these instruments, make sure that you invest in yourself first. Read books, attend seminars, watch video lectures, consult expert professionals, or if you’re up to it, go back to school and enroll in a business, finance or law related course. In this time and age of information technology, knowledge, nay, applied knowledge, truly is power; and with great power comes great responsibility!