Overseas Filipino Workers (OFWs) are officially remitting more than US$10 billion (US$ 17.3 billion in 2009) through formal channels, with actual flows (which include the non-bank and underground channels) believed to be double the official figure. The biggest part of these, however, are used by recipients for conspicuous consumption rather than saved and invested to make the money grow and serve as driver of economic reform. This was the finding of an ADB-funded study released way back in 2004.
The finding struck me because as a former OFW I have known and observed such a phenomenon since quite long time ago. The ADB study merely confirmed what I have closely observed in over a decade of experience as an OFW.
Given such a finding, the question is: why people in general and OFWs in particular, tend to overspend? Why do OFWs or their dependents have an uncanny tendency to splurge? Why is it that there seems to be little effort on their part to save as much as they can? Haven’t they realized that, except for the immigrants and would-be immigrants, they work abroad only on borrowed time and that sooner or later they will face the stark reality of going home without a job?
This issue has been the subject of reflection and self-study for me for years as I delved deep into the field of investment. This field has been the subject of serious and passionate pursuit for me not only because it relates to my work but more importantly, because I believe somewhere down the line I have to face the issue of economic survival after my stint abroad.
The answers became clearer only through time as I pored through one investment book after another. Modesty aside, not only did I find answers; I gained powerful insights into the field of investments so as to eventually gain the needed confidence for plunging into stock investment, mutual funds and the like.
I have realized that this tendency to overspend is not unique to OFWs. It is a weakness not only of OFWs but of almost everybody; it is a scourge of human nature. It is not uncommon for anyone to hear of friends or colleagues whining that in the past when his salary was still a pittance, he was unable to save, but now that his salary has gone up several-fold he is still unable to save. It is as if one is stuck in a financial treadmill where, whether he runs fast or slow, he always ends up in the same place.
The fact is that most spendings are driven by desires rather than needs which one often confuses with. Desires increase almost in direct proportion to ones earnings. An increase in the OFW’s take home pay engendered by a new or better employment, for instance, often results for the OFW or his dependents, a radical change in dietary habits with the shift to fastfood-style and deep-fried chicken, pork and the like as the standard daily fare on the table rather than the usual and healthier fare of fish and vegetables. The same increase in the amount remitted to his dependents would result in the transfer of children’s education from the public schools or modest private schools, to the most expensive private schools available, whatever the rationalization. The examples could be endless.
At the root of the tendency to overspend is the lack of ability to control ones desires which one often confuses as “needs”. A person’s needs include food, clothing, shelter, medical care, education, etc.- these are all definite. Needs do not increase in direct proportion to one’s income, if ever they increase at all. They are definite and concrete. But while needs are definite, desires are not. They are limitless and as new desires get fulfilled, new desires crop up as earnings rise. One always finds new ways to spend money that is available. It is one of the basic weaknesses of human nature..
This phenomenon is more pervasive than one thinks. In workplace parlance, this is known as Parkinson’s Law and states that “work expands to fill in the time alloted for its completion.” A task that can be done in one day can easily drag up to one week if one is given a week to fulfill it. The worker always tends to find ways of adding embellishments to the task at hand so as to exhaust the time period alloted for its completion. In personal finance, Parkinson’s Law translates to the tendency of one’s spending to rise to absorb any available funds.
There is an application of this phenomenon in the field of corporate finance. The well-known fund manager Peter Lynch in his bestselling book One Up On Wall Street (New York: Simon and Schuster, 1989) calls this “deworseification”. Lynch refers to the tendency of corporations having lots of cash to diversify or acquire other corporations outside of their core competence where, more often than not, the diversification proves a costly mistake.
There is still another term for this tendency in the field of finance. They facetiously and less politely, call it the “Bladder Theory”. The theory says that the more urine that accumulates in the bladder, the greater is the tendency to frequent the comfort room. The more cash that accumulates in the coffers of a corporation, the greater is the tendency to spend it in ill-advised projects or acquisitions.
What then should the weary OFW do, given this tendency? There is a surprisingly simple way. Since the advent of the Babylonians in the days of yore, there has been a standard, proven and effective way to counter this tendency and that is to save upfront, stick to the saving discipline through thick and thin, and live below one’s means.
But what does saving upfront mean? It simply means that one first determines the percentage rate that he should realistically save from his take-home pay, given the needs of his family. It may be 50%, 30% or 20% but in no case should the savings rate be less than 10%. A savings rate below 10% is considered by financial experts to be too low to sustain the saving enthusiasm of the saver. For OFWs, one can probably save as much as 50% if one really cares to devote a soul-searching inquiry into his spending habits.
Saving upfront means deducting immediately upon receiving ones monthly pay the predetermined amount of savings and putting it to one’s deposit account, whether at workplace or in the country. As the sages of ancient Babylon say, “pay yourself first”, the upfront saving being deemed a payment or entitlement of sorts to oneself. What remains after the upfront saving should answer for the OFW family’s needs back home and that of his own in the worksite.
One of the greatest lessons of the bestselling book The Millionaire Next Door: The Surprising Secrets of America’s Wealthy (Atlanta: Longstreet Press, 1996) which caught America by storm way back in mid-90s, is that to be a millionaire one should live below his means. It’s a difficult thing to do but if one can distinguish a need from a desire and is able to save upfront, then the road may not really be so difficult.
The OFW has a choice to make. He can either remain with his overspending ways or decide to lift himself up from the financial treadmill.
Nice entry here.. As an OFW myself I’m trying to save as much as I can from the monthly earnings I have. Is it advisable to put more percentage to investments than saving it? Some financial experts say that you must have at least 40% liquid assets to have a good portfolio. Because on my current status, I only have about 20% liquid assets (including COH and savings) and about 80% are out on different investments. As a financial expert yourself, do you advise this kind of portfolio?
Any advise will be greatly appreciated. TIA
I can see from your questions that you are quite advanced already, compared to most OFWs. I have no idea where your 80% on different investments are, but I can surmise that they are non-liquid assets like real estate. There are no hard and fast rules in investment. If you have your own home already (which most celebrated experts like Peter Lynch advice as sort of absolute pre-requisite for effective investment, i.e. having a roof over your head come what may), then you are well on your way.
Going back to your question, I think it would be best if you now start building up the percentage of liquid assets to the 40%-50% range. As you become more investment literate, and as your investment confidence level increases, you will need more and more liquid assets to be able to seize investment opportunities that come your way.
What is most important is that you are well-grounded on the basics like saving upfront, avoiding “impossible earnings schemes” (more of this in future postings), avoiding the herd like a plague, diligently evaluating and not rushing on an investment proposal, consulting with investment experts, and constantly improving your investment knowledge. (Article na yata itong naisulat ko.)
Stay tuned. We’re just starting.
Romie
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