Updated on March 22, 2009
FINANCIAL 4-SQUARE Part 1
Are you looking for immediate payoff? Can you tolerate delayed gratification (work hard and invest time and money now with no paycheck for exponential returns later on)? Do you want to work hard in the office and then try to find some leisure time or catch some sleep on the weekends? Do you sometimes like to splurge on a good meal or a movie or nice clothes and makeup? Are you always getting up at 5:30 in the morning to shower and beat the morning rush to get to the office (because you canâ€™t be late!)?
You answer YES!
Well, Friend, I bet you’re an honest hard-working employee! No? Are you, perhaps, self-employed? (FYI, my questions in the first paragraph came from Robert Kiyosaki’s Cash Flow Quadrant.)
I wrote this about you so keep reading. My intent is to educate, please read on even if some parts taste slightly bitter.
What did you look forward to in career class in college? I was quite amused with dressing up in business attire and doing the mock interviews because I knew how to work it.
I bet you liked the role-playing and dressing up. I did too!
You learn how to write the perfect resume. 3 pages max, clean white bond paper, Times New Roman (I preferred Arial). If you were a regular student, youâ€™d have trouble filling in the pages. Unlike most, however, I was proactive since pre-school (finished top of my class!). Most of my decisions in college were geared toward creating a perfect resume so I joined clubs, organized activities, chose at which organizations I can stand out (eventually did at the national organization of accountancy students). I also knew to take good care of my grades (also to impress my scholarship foundation) and was usually on the Deanâ€™s List. I actually had trouble fitting in all the awards and events on a 3-page resume. I had a model resume.
Thatâ€™s what happens when the people we grow up with AND our educational system are geared toward churning out employees rather than business-minded individuals and investor-types. As children, weâ€™re given allowances but we can always ask for more money from our titos and titas. Thereâ€™s always a wealthy relative you can run to so we never really feel that we MUST BE SELF-SUFFICIENT.
Like you, I was â€œdestinedâ€ to be a corporate woman! In sixth grade, I did a drawing where I was in my office overlooking Central Park, crunching numbers or doing law. Top professionals in my field of study receive really good pay. Traditional thinkers (who of course think theyâ€™re right) may say â€“ what a waste! Spend a few years spending sleepless nights in an audit firm and then migrate to Cayman Islands.
In a few years, Iâ€™d be in some island… but Iâ€™D STILL BE WORKING! Not surfing or swimming or lounging in the sun. Now THAT, for me, is a waste of lots of sun and surf time! Besides, I just donâ€™t like audit â€“ Iâ€™m not going to â€œchoose to like auditâ€. Who are you kidding? Anyway, back to what I was saying about the employee life.
They didnâ€™t teach income taxes in career class. With my accounting background, I should have seen it sooner. No one bothered to teach me about how employees are the least fairly taxed of them all. Do you realize what your personal exemption means? (P20,000 for single, P25,000 for head of family, and P32,000 for married, plus P8,000 for each dependent). Itâ€™s what the tax laws says you should live on for the whole year! P20,000 for a whole year? Thatâ€™s barely 2 months rent! Much less utilities, transportation, and so forth.
So, unlike everyone else who earns other than compensation income (investors/self-employed/professionals), itâ€™s really not very profitable. Letâ€™s look at it on a cash-basis.
Person A is a single Filipino resident who has a monthly gross salary of P25,000, paid on the 15th and 30th. Compensation income: 25,000 (100%)
Creditable withholding tax [P5208.33 + 32% (25000-20833)] 6,541.77
SSS/Philhealth/HDMF [P500 + (50% x P625) + (2% x P25,000) ] 1,312.50
Total deductions 7,854.27
Take-home pay (cash inflow for the month) 17,145.73 (68%)
That should be whatâ€™s on A’s payroll slip (aggregated for the month). The tax laws allow that A live on P1,667 per month (P20,000 annual personal exemption divided by 12 months). But come on.
Letâ€™s say this is the break down of A’s take-home pay (approximate).
Meals (P150 x 25 days) 3,750
Transportation (P100 x 25 days) 2,500
Entertainment (P500 x 2/month) 1,000
Total outflow 17,150
So A’s personal income statement would show:
Income (take-home pay) 17,150
Less: Expenses (17,150-1000 savings) 16,150
Net profit (which went to your savings account) 1,000
Person A profited P1,000 after laboring 40-60 hours a week. I feel very tired for A – don’t you?
Whatâ€™s ugly is the P6,541.77 that went to withholding tax â€“ A’s hard-earned money that went to taxes because the law thinks A can live on P1,667 for the month!
But, look carefully at my computations above. There’s something definitely sinister about the scenario. Can you see? Take about 3 minutes to look at the computations and reflect on it. Tell me what’s good or bad about it by leaving a comment. I will reveal the bad (!) if no one really gets it. Clue: Ask yourself, how and when can Person A take a vacation?
Now if you had been able to claim your expenses as a self-employed professional (assuming all of the listed above were ordinary and necessary business expenses as opposed to mere personal expenses), your taxable income for the month would have been the P1,000 net profit versus your original gross income of P25,000. Well, frankly, I think few businesses just churn out a P1,000 net profit but for simplicityâ€™s sake, letâ€™s move on.
As you can see in our simplified example, the tax laws are a bit friendlier to the self-employed. Weâ€™ll postpone our discussion on self-employment, okay?
So, hey, if you really like what youâ€™re doing, you love the people you work with, and you do want to migrate someday or move up the corporate ranks and enjoy your companyâ€™s health benefits and use your skills and experience to get you more points, that could be admirable too. If you choose to stick to it, feel good about it! Don’t be a victim!
- Stick to a steady savings plan (please donâ€™t follow just the P1,000 illustration above, make it 20-30% of your gross, auto-debit it a separate hands-off account)
- Live below your means and manage your expenses.
- You have to believe that wealth is still attainable
- Set aside time to learn about investing.
- PLEASE use credit only if you know what youâ€™re doing.