Building Wealth - A Step-By-Step Guide

Francisco Colayco has been helping Filipinos manage their money and build wealth
since the early 2000s. I realized people were hungry for guidance, so I thought Id
throw in my two cents, he tells iMoney in an interview. Throughout his career, Colayco
has helped OFWs and others grow their money and achieve their financial goals
through Colayco Financial Education.
In this interview, we spoke to Colayco about how Filipinos can build wealth from the
ground up. Read on to learn the steps you need to take to get your finances in order
and start growing your money, no matter what stage of life youre in:
1. Know Where You Are.

Photo: Calsidyrose on Flickr (CC BY 2.0)

Colayco divides the financial life into four phases:
1. Start-up phase (20 35 years old). Your only source of income is your salary
and commissions.
2. Build-up phase (35 45). You have assets and investments that generate
passive income, which accounts for 20% of your total income, which funds 20%
of your needs and expenses.
3. Asset allocation phase (45 60). Your assets and investments generate 30%
to 60% of your total income, and fund at least 50% of your needs and expenses.
4. Retirement phase (60 and up). You no longer earn active income. Your passive
income is 100% of your total income, providing for all your needs and expenses.
The ages are estimates depending on your financial achievements, they could be
different for you. Knowing where you are in this paradigm will allow you to set
achievable goals for building wealth.
As you can see, the key to moving from one phase to the next is increasing your
passive income, which you can do via saving and investing. Never depend on a single
source of income, Colayco says. The vast majority of us, we dont have inheritances.
We dont have rich parents.
So you have two horses in your life your active way of earning money, and your
passive way. Make them run at the same time.
2. Set Your Financial Goal For Each Life Phase.

Illustration: tradingacademy.com
Now that youve determined your life phase, you must define your target level of
personal net worth to be able to move to the next. If your current income isnt enough to
support the lifestyle you want in the future, youll have to find ways to add to your
income, be it via sidelines or investments or other means.
Financial goals will be different for each person, and for each stage. To help you
determine your financial goals, here are some guide questions, taken from Colaycos
book:

How much money do you need to enjoy the lifestyle that you want? If your
current lifestyle costs you P20,000 a month, how much will your ideal lifestyle
cost?
How much risk are you willing to take with your money? If youre young, you
can afford to take on more risks. If youre older, you should be more
conservative. Whats your risk tolerance?

How can you add to your current income? If youve only got one source of
income, how can you develop more revenue streams?

What amount can you afford to save/invest monthly? 10%? 20%? Or more?

The answers to these guide questions can help you determine your goals in a
quantifiable manner. Set a specific timetable for each goal. Once you know the amount
of money you need for your goal, and the time you can do it in, the steps will be clearer.
For example, if youre 21 and you want to have a million pesos invested by the time
youre 30, you can figure out that youll have to deposit around P6,000 a month in an
investment vehicle that yields at least 9% annually. (For more on this, check out our
article: How To Make One Million Pesos By 30.) If you cant afford to do that, you may
have to change your goal, change your money habits to accommodate that goal, or go
for a potentially higher average annual cumulative return. For example, even if you save
only P4,000 a month, you can still accumulate a P1,000,000 in ten years if you achieve
an average annual cumulative return of 14%. This is possible as shown in the
performance of certain equity mutual funds over the same period.
3. Avoid these major mistakes.

Illustration: tradingacademy.com
People who get into financial trouble on the way to building wealth often do one or all of
these things:
1. Premature acquisition of assets. Some people, just because they have the
money for a downpayment, puwede na, even when they dont have the money to
keep up the payments, Colayco says. Remember that when you enter a
contract, you are under obligation. You have to know where youre going to get
the money to pay your contracted amortization. Otherwise, you may lose even
the hard-earned money you used as downpayment. If you dont have a sure
source for loan repayments, dont even enter into contract talks. Dont be swayed
by fancy sales agents.
2. Living a lifestyle beyond actual capabilities. If youre only earning P20,000 a
month, living a lifestyle that requires P50,000 a month is the surest way to
financial trouble. Prioritize saving and investing to achieve the lifestyle you want,
instead of trying to live the lifestyle you want on half the salary.
3. Falling for scams. Sadly, many people have lost and are still losing money to
scams. If someone is offering you ridiculously high returns, like 300% yearly, far
outstripping the returns of legitimate investments or high risk vehicles like the
stock market, its probably a scam. (For more on scams, check out Are You
Being Scammed?)
Steer clear of these pitfalls, and remember: save and invest based on a purpose, and
stick to that purpose.
4. Invest wisely.

Illustration: tradingacademy.com
In my personal opinion, if you dont have a million pesos, you should not go into
investing directly in stocks, says Colayco. But if you do want to go into investing in the
stock market, he advises that you keep the following in mind:

Dont put borrowed money in stocks. This may just put you in more debt.
Dont put all your money in one or just a few stocks. Spread the risk by
allocating your assets into different companies in different industries.

Dont put everything in one stock. I dont care if you have inside information.
There are so many variables that control the prices of stocks.

Diversify. If you have more to invest, consider allocating your money into several
asset classes, like fixed income securities, income earning real estate, proven
businesses/franchises, and others.

When it comes to which products to invest in, it depends on your goals. Even the
lowest-earning investment can make you money over time. But if you dont have the
understanding of where you are, what you want to achieve, how much you want to
make and why, you wont be able to make the choice of what to invest in, Colayco
says.
When youre considering investment options, focus on risk. Every investment you
make should be focused on the safety of your capital, the returns you can expect, and
the liquidity of your money. Spread the risk around by putting your money in different
vehicles: mutual funds, bonds, UITFs, and the like. Do your research thoroughly before
you put your money in anything.
How Do You Know When Youve Achieved Wealth?

Photo: Shutterstock
To Colayco, wealth is simply being in a place where you can live the lifestyle you want
without having to work. Its not so much about money as it is about a disposition. When
people ask me what wealth is, I quote this to them: Rich is not the one who has the
most, but the one who needs the least. You choose the lifestyle that will give you that
feeling, and thats wealth.
Theres no magic formula. Just save and invest. And dont put it all in one place.
Wealth is within your reach, especially if you start now. Time is the greatest tool to
manage your finances, Colayco says. This, combined with risk management, will help
you succeed.