 Upon death of the investor, real property

ST. JOHN COLLEGE OF BUUG FOUNDATION, INC

automatically forms part of his estate which is subject
National Highway, Poblacion Buug, Zamboanga Sibugay, to inheritance tax.
Philippines 7009  It involves big amount so that it is impractical to
Email: sjc_registrarsoffice@yahoo.com Telefax: (062) 344-8133 dispose of it in case the investor is in need of small
MODULE 5 amount of additional capital.
Real Estate  Its price is adversely affected in times of crisis. In case
of chaos or war, it cannot easily be disposed of.
Learning Objectives The foregoing disadvantages should not serve as a deterrent to
At the end of this chapter, the reader should be able to real estate investment. Rather, they should provide basis for an
do the following: investor in exercising caution in his choice of investments. He
A. Define real estate, zoning, encumbrances, earnest should avoid over-investment therein and maintain a desired
money deposit, sellers’ market, buyer’s market, proportion between the different items of investment.
occupancy rate, cap, refinancing, leveraged acquisition,
buy-down mortgage, gross rental multiplier, rate of Carrying Cost of Real Estate
return investment, payback period, time adjusted rate The costs incurred in holding on to an investment in
of return and other terms given in this chapter. real estate consist of costs incidental to ownership thereof such as
B. Enumerate the following: property taxes, cost of regular inspection of the property, cost of
1. Advantages and disadvantages of real estate normal maintenance and insurance. In decision making,
investment. opportunity cost of capital is included in the computations.
2. Factors to be considered in real estate
investment. Opportunity Cost of Capital. This refers to the earnings
3. Advantages and disadvantages of payment that could be earned in other forms of investment but which are
acceleration. foregone by the investor by choosing one form of investment.
4. Indications that a prospective tenant would not
be a good one. Example: Real estate investment of P500,000 brings in
C. Compute for the following: annual rental income of P52,000. Interest on time deposit is 7%.
1. Occupancy rate using different bases The opportunity cost and differential income are arrived at as
2. Estimated market value of real property follows:
3. Net income
4. Net cash flow Opportunity cost of capital = P500,000 x 7% = P35,000
5. Rate of return on investment Differential income = P52,000 – 35,000 =
6. Payback period P17,000
7. Time adjusted rate of return
The P500,000 capital could have earned P35,000
Real Estate Defined interest per annum on a time deposit. With an average annual
Real estate refers to land all permanent improvements earnings of P52,000, the incremental income from the investment
thereon including buildings. It may be agricultural, industrial, must be P17,000. Assuming further that other carrying costs
commercial, residential or in the form or rental units. In addition amount to P8,000 per annum, the differential income would only
to the foregoing, real estate may also be in the form of raw land. be P9,000 (or P17,000 – P8,000).
Rental units include condominiums and apartments. In investing
in real estate, the properties with the best potential for future Factors considered on real estate acquisition
appreciation is chosen, good tenants are accepted, and value is In acquiring real estate, an investor should look into
maintained through periodic maintenance. the factors that contribute to increase in market value of the
property such as the following:
Advantages and Disadvantages
 Location. This is the primary factor in real estate
As in the case of other forms of investment, real estate
investment. Is the property near a commercial area,
investment has its advantages and disadvantages. The advantages
school, or church? Is it near a cement factory, hospital,
are the following:
cemetery or a squatters’ colony or other places with
 It is hedge against inflation. The price of land of the high incidence of violence? Is it near a creek or river
Philippines, in general, increases steadily. that overflows during the rainy season? Is there a 24-
 It is one of the few finite investments. Land available hour transportation service available?
for development is limited.  Frontage and shape of the land. The writer is the
 It is one of the basic necessities of man. Real estate frontage, the higher is the market value of land. The
includes housing and shelter is one of the basic needs shape is preferably rectangular for flexibility in
of man. designing improvements thereon.
 It is a tangible asset and can be directly controlled by  Drainage and sewerage system. This prevents pipe
the owner. As such, it provides a visible evidence of the clogging and minimizes risk from flood during rainy
investor’s financial status. season.
 It can provide periodic income when leased out.  Width of streets. Streets should be wide enough for a
smooth flow of traffic. There should be provision for
The disadvantages of real estate of real estate investment are pedestrian lane.
the following:  Elevation. Adequate elevation minimizes risk from
 It requires a number of years to realize profit on the flood.
investment. Due to the long holding period, the  Possible expropriation. The prospective buyer should
investor deprives himself of opportunities in other go to the engineer’s office to determine if there is any
forms of investment. planned road widening or other developments that
 It is immovable so that it is not easily transferred form would result in the expropriation of a portion of the
one party to another. property. If this is so, would the estimated remaining
 Mortgaging real property requires certain procedures area be adequate for the purpose it is intended?
adopted by lending institutions such as credit  Clean title. Check with the register of deeds as to
investigation, property appraisal and maintenance of whether the property is covered by clean title and if it
required deposits (in case of banks). is, what kind of title is it?
 Encumbrances. These are the liens or claims by third
parties and are noted at the back of the title.

ST. JOHN COLLEGE OF BUUG FOUNDATION, INC. PERSONAL FINANCE ACADEMIC YEAR: 2020-2021
  Improvements. What are the improvements on the is finalized between them. If the offer is accepted by the buyer
property and their possible use? If the investor is not and later on the changes his mind, the deposit may be forfeited.
interest rates.
 Prospects. This refers to the expected rise in market
value due to current and future improvements in the Constructing a House or Building
specific locality. When constructing a building or house on real
property, building plans depend on the particular market it is
Real Property with Building or House intended for and the amount of funds available. To minimize
In case there are improvements included in the construction costs, the investor should exercise control in the
acquisition of real estate such as a building, house or warehouse, different stages. He should confer with the architect or engineer
the buyer should consider the possible use thereof and the before building plans are finalized. Plumbing costs can be
estimated cost of immediate repairs or even demolition. He minimized by reducing distances between bathrooms. Building
should determine the quality of materials used, ventilation, layout plans should be reviewed and revised before the foundation is
and possible room for expansion. laid and other structures erected rather than make corrections
When the properties available for investment vary in later on. The owner may adopt an architectural design that
physical condition because of varying degrees of maintenance, provides for future conversion of residential unit into rental units
the investor should consider the cost of repairs and cosmetic or for future expansion to provide abode for married children.
improvements and their expected effects on market values.
Efficient Use of Land Space. In building or house construction,
Example: Three houses are available for Sale and the land should be efficiently used to provide for parking space or
garage, land scaping, future conversion into rental units or
multifamily residence, and for future expansion. When there are
two lots, it would be wasteful to construct a house in the middle
of total area. If the owner really wants to do so, he may see to it
that should the need arise, he can easily have a wall constructed
on the boundary line at the middle.

Market Conditions for Real Property

The market conditions for real property vary
depending on the demand and supply. It may either be a buyers’
market or a sellers’ market depending on who has the
following data are given:
greater advantage.

Buyers’ Market. This exist when buyers are at an

In the foregoing illustration, gross margin per annum from advantage. Demand is low so that buyers are able to avail of
property B is expected (to be the biggest and its holding period is discounts and deferred payment plans for extended periods. This
even the shortest.) exists in times of economic crisis and in localities that are not yet
developed. When an investor is in need of cash so that he intends
A property that requires repairs whether cosmetic or to sell property, he may negotiate for a second mortgage thereon
structural, for it to gain its full potential market value is called a instead of selling it at a low price. If he has decided to sell, he may
fixer-upper. The reason for this is that once the buyer fixes it, its offer sweeteners such as discount, fixing defects in the said
market value automatically goes up. In some cases, it would property and inclusion of personal property such as furniture and
require a minimum amount of cosmetic improvements (such as fixtures
painting and ordinary repairs) to improve the house.
Sellers’ Market. This exists when sellers are at an
Earnest Money Deposit. When an investor is advantage. Demand exceeds supply so that sellers can charge high
interested in acquiring a property which has just been offered to prices often on cash bases or for shorter terms. This exist during
him, he may give the seller an earnest money deposit equal to a times of prosperity for well-developed properties and for those
certain percentage of selling price. It may be in the form of check that can be self-liquidating. When the market conditions indicate
or promissory note. The deposit is made so that the seller can that it is a sellers’ market, the investor may wait for the market
reserve the property for him until the contract is finalized conditions to change before they buy.
between them. If the offer is accepted by the buyer and later on
the changes his mind, the deposit may be forfeited. Buyer’s or Sellers’ Market? In determining market
conditions, an investor may consider the trend in construction,
Constructing a House or Building occupancy rates, loan availments for real property acquisitions
When constructing a building or house on real and interest rates. It is always advisable to invest in real property
property, building plans depend on the particular market it is in a buyers’ market and sell during times or prosperity.
intended for and the amount of funds available. To minimize Oftentimes, big companies face financial embarrassment because
construction costs, the investor should exercise control in the of erroneous timing in real estate acquisitions. They acquire more
different stages. He should confer with the architect or engineer real property in times of prosperity forgetting that prosperity is
before building plans are finalized. Plumbing costs can be not permanent state and that the economy follows a cycle of its
minimized by reducing distances between bathrooms. Building own.
plans should be reviewed and revised before the foundation is
Diversification in Real Property Investment
laid and other structures erected rather than make corrections
later on. The owner may adopt an architectural design that A wise investor spreads his investable funds for real
provides for future conversion of a residential unit into rental estate among the different classes under this category. This is
units or for future expansion to provide abode for married done to be assured that he realizes profit from the sale of some of
children. them and in the case of rental units, to be assured of a steady
source or cash inflow. Market conditions vary. In some localities,
Efficient Use of Land Space. there may be greater demand for residential units while in some,
When an investor in interested in acquiring a property which has it may be for industrial units and in others, for rental units. It does
just been offered to him, he may give the seller an earnest money not necessarily follow that when the demand for one goes up,
deposit equal to a certain percentage of selling price. It may be in those for the others go up also. This is due to the fact that they
the form of a check or promissory note. The deposit is made so cater to different kinds of market.
that the seller can reserve the property for him until the contract

ST. JOHN COLLEGE OF BUUG FOUNDATION, INC. PERSONAL FINANCE ACADEMIC YEAR: 2020-2021
Conformity Estimating Market Value Based On Replacement Cost

Conformity as applied to real estate refers to whether The appraiser may also estimate the market value of a
the property conforms to what is normal or standard in a specific subject property based on replacement cost. How much would it
locality. It includes conformity to city or municipal requirements cost to duplicate the property either through purchase or
and zoning policies. It can enhance the value of property. It construction? The amount arrived at is subsequently adjusted
contributes to the realization of the expected cash inflow or the considering the present condition of the property, its age and its
expected gross margin upon sale. Example of non-conformity are
a multi-million peso residential house in an area wherein most of
the houses are low-cost and factory building among residential
units.

Occupancy Rate

Occupancy rate refers to the portion of real estate that

brings on revenue based on the total capacity. It may expressed in
terms of number of units, months, revenue or income producing
area physical, locational and functional obsolescence. The adjusted
figure is the sound value. Sound Value is equal to replacement
cost-new minus the corresponding accumulated depreciation.
Physical obsolescence refers to obsolescence arising from physical
features due to extensive internal systems resulting in high utility
costs or recurring high maintenance costs with all these resulting
in a decline in potential rental income therefrom. Locational
Obsolescence is a form of obsolescence arising from changes in
zoning and used property, and property designs for a market that
has ceased to exist. Functional obsolescence is a form of
obsolescence arising from a changes in systems and uses of a
property to the extent that subject property becomes out of date.

Appraisal of Real Estate Financial Real Estate Acquisitions

Upon receipt of an application for a mortgage on real An advantage of real estate investment is that it can
estate, the lender subjects the property to an appraisal or an easily be financed by long-term loans from financial institutions.
estimate of its market value to determine the amount that be This is due to the fact that real estate is the most acceptable
granted as loan. This is done to be assured that said load would be collateral for bank loans due to their immovability and appreciate
truly secured in terms of the market value of the property. The in value. To qualify for bank loans, the borrower must be
estimated market value may arrived at based on a study of the acceptable to financing institutions in terms of credit standing,
market, current and potential income, and on replacement cost. track record and continuous patronage o the bank. When the real
estate to be acquitted is used as collateral for loans to be
Estimating Market Value Based on a Study of the Market obtained, it is called leverage acquisition. In some cases, the
investor obtains a bridge loan. A bridge loan is one that is
In estimating market value of property based on a
temporarily granted using another property as collateral so that
study of the market, the appraiser takes into consideration
upon consummation of the purchase of the second property, the
conformity to how the property fits with other properties in the
latter becomes the collateral and the first property is freed of the
same neighborhood, the recent selling price for similar property in
lender’s lien
locality, and the physical condition of the subject property. Thus,
is a similar unit in the neighborhood was recently sold for P Interest Charges and Periodic Amortization
2,000,000 and it fits with the type of properties in the same
neighborhood, the subject property is not as well maintained as Interest is the amount charged by a lender to a
the recently sold property, the appraiser may assign a lower price borrower for the use of his money and is quoted on an annual
depending on the effect of the defect on market value. This basis. Amortization, as applied to loans, refers to the periodic
method is generally applied to single-family housing properties. payments to be made which is applied to interest and principal.
Oftentimes, the buyer is misled by salesmen who convince him to
Estimating Market Value Based in Current and Potential Income buy “without interest, he just have to pay a certain amount
periodically”. The total interest to be paid is the difference
Based on current and potential income, market value
between the total of the payments to be made and the cash price
of property is estimated using a gross rental multiplier (GRM).
of the property. Thus, if cash price and ten annual amortizations
GRM is the quotient between process of recently sold properties
were P500, 000 and P88, 492, respectively, total interest charges
and the rental income realized therefrom. The average GRM is
must amount to P384, 920 arrived at as follows:
subsequently applied on the estimated rental income from the
subject property to arrive at its estimated market value. This value
may be revised depending on any defects of the subject property
or other factors that may affect its value such as it’s more
advantageous location and immediate repairs needed.

Using Capitalization Rate. A capitalization rate may also be used

in estimating market value of property. The rate is derived from
the net income from properties being sold in the neighborhood
and their selling prices. It is subsequently applied on the property
being appraised. The formula are as follows:

ST. JOHN COLLEGE OF BUUG FOUNDATION, INC. PERSONAL FINANCE ACADEMIC YEAR: 2020-2021
 Advantages and Disadvantages of Payment Acceleration. The
following are the advantages of payment or mortgage
acceleration:

 It reduces the total interest charges and

consequently, the real acquisition cost of
the property.
 It enables the borrower to take hold of the
title to property earlier and subsequently
make use thereof in raising additional
capital to finance other ventures.

The Disadvantages are:

 By reducing interest charges, the borrower

forfeits himself of the tax benefit therefrom
in as much as interest is deductible for
income tax purposes.
 It increases the borrower’s opportunity
cost, that is, the benefits he may derive
Investor’s Equity from the use of the amount involved in
other forms of investment.
An investor’s equity in his investments is equal to the
 Equity in the mortgaged property cannot be
difference between the market value of the latter minus any
sold nor can it be withdrawn.
creditor’s lien in the property. Referring to the schedule of
payments on page 120, it may be noted that at the end of the
market value of the property were P3, 250, 000, the investor’s
equity in the property is computer as follows:

Easing the Financing Burden

Assuming that an investor proceeds with the financing

of his acquisition, what are his options to ease the financial
burden arising from the loan? He may opt to lengthen or shorten
Making Use of Investor’s Equity. There are financing companies the payment period depending on his liquidity. The loan may be
that are willing to extend loans based on an investor’s equity in rolled over, that is renegotiating the loan based on the balance of
real estate. This gives rise to a second mortgage on the property the principal. This prolongs the payment period although the
which usually bears a much higher interest rate and with greater interest rate may be different. Once the borrower’s finances
safety margin because the mortgage has second priority only in improve, he may negotiate for a buy-down mortgage where an
the liquidation of the investor’s property in case of insolvency. acceleration of payments is made subject to lower interest rate.

Refinancing Net Income; Net Cash Flow

Refinancing refers to obtaining a new loan to cancel an Net income from real property refers to the excess of
old one. This is usually done to take advantage of a lower rate of periodic rental income over the related operating expenses and
interest on the new loan and or a longer term. If there are two or periodic interest charges. The operating expenses that are
more old loans, the weighted average interest thereon is deducted include charges even if they do now require cash outlay
compared with the new interest. such as depreciation. Net cash flow is the difference between
periodic collections and the related periodic cash outlays.

Payment Acceleration

Payment (or mortgage) acceleration refers to making

additional payments in order to reduce the balance of the
principal, increase the borrower’s equity and shorten the
payment period.

Assume that the investor accelerates payments by P100, 000 for

the first and second years and interest is 16%.

ST. JOHN COLLEGE OF BUUG FOUNDATION, INC. PERSONAL FINANCE ACADEMIC YEAR: 2020-2021
  Over-aggressive pressure exerted on the landlord to
move in much earlier than the landlord would prefer.
 An attempt to barter services for a portion of the
rental.
 No bank account.

Deposit Policies

A landlord should see to it that an applicant makes the

required deposit ranging from one to three months rental. It
should be maintained for the duration of occupancy and serve as
security in case a tenant delays in rental payments or in case he is
to be evicted for some violations of the rental agreement. It may
be refunded to the tenant upon vacating the rental unit provided
he has paid all periodic rentals, all periodic charges for light,
power, water, telephone and additional charges (such as for
damages caused on the property) as stipulated in the rental
agreement.

ACTIVITY

Exercise 1
To which of the following terms does each of the
statement given below refer?
Rate of Return on Investment Real estate Raw land
Opportunity cost of capital Fixer-upper
The rate of return in investment in real property is Earnest money deposit Buyers’ market
estimated by dividing annual net income by purchase cost. Sellers’ market Conformity
Assuming that net income of P80, 000 is realized from a property Zoning Occupancy rate
costing P1, 250, 000, rate of return on investment must be 6.4%
(or P80, 000/P1, 250, 000). a. Property requiring repairs whether cosmetic or
structural
Payback Period and Time Adjusted Rate of Return b. Income or benefit that could have been earned on
capital had it been invested in other productive
Payback period in the length of period it takes to ventures.
recover investment. Thus it is based on purchase cost and annual c. It is given to bind the seller on his offer for a given
cash inflow from the particular investment. Time adjusted rate of period.
return is the rate at which investment is earning or the rate which d. The seller is willing to give discounts and other
equates the present value of net cash returns with the sweeteners in order to increase sales.
investment. e. Land all permanent improvements thereon including
buildings.
f. Not yet zoned for any specific purpose and lacking in
basic services.
g. There are many buyers so that they tend to bid at
higher prices.
h. A residential house in a residential district and a
factory in an industrial district.
i. Designation of certain areas for specific purpose or
limitation.
j. Revenue realized based on total capacity.

A Landlord’s Problems Exercise 2.

Investing in rental units or even in residences for rent True of false
entails some problems for the landlord. These may be in the
nature of difficulty in making collections, bad debts, excessive cost a. Real estate is a long-term investment because it
of repairs and maintenance, and property damage caused by requires a number of years to realize the appreciation
tenants. To minimize these problems, the investor should exercise in its value.
care in screening prospective tenants. b. A decline in market value of real estate should be
considered merely temporary because its tendency is
Screening Prospective Tenants. To minimize problems in dealing to rise steadily.
with tenants, the landlord should exercise extreme care in c. There is zero risk in real estate investment.
screening prospective tenants. The following are some of the d. Market value of real estate tends to go down in times
indications that tenant problems may arise: of uncertainty.
e. It is impractical to sell real property in case the investor
 Unwillingness to fill out written application or
is in need of an amount equal to just a fraction of the
information sheets.
market value thereof.
 Inability to name any landlords who cannot be
f. Not all real properties can be readily sold in case the
contacted.
investor needs cash.
 Inability to pay the required deposit or undertaking to
g. Opportunity cost of capital invested in real estate
pay the same in installments.
refers to the income realized therefrom.
 No means of livelihood such as a job or self-
h. The primary factor in real estate acquisition is the
employment but with exceptionally high income.
clean title thereto of the seller.
 Too large a family for the rental unit.
i. Real estate is immovable so that it can be easily
transferred from one party to another.

ST. JOHN COLLEGE OF BUUG FOUNDATION, INC. PERSONAL FINANCE ACADEMIC YEAR: 2020-2021
 j. When buying real property, choose that one with the purposes, gold and the chemicals derived therefrom are used in
worst improvements thereon based on the assumption photography, gold plating, and in gliding glass and china.
that the purpose of the acquisition is to have new
construction. Yellow, White, and Red (or Rose) Gold
Pure gold is too soft so that other metals are added to
ST. JOHN COLLEGE OF BUUG FOUNDATION, INC. make it durable. To produce the different colors of gold, the
National Highway, Poblacion Buug, Zamboanga following are added:
Sibugay, Philippines 7009 Yellow gold – silver and copper in equal proportion
Email: sjc_registrarsoffice@yahoo.com Telefax: (062)
White gold – nickel, zinc and copper (65:25:10)
344-8133
Red or rose gold – copper and sometimes a small
MODULE 6
quantity of silver
PRECIOUS METALS AND GEMSTONES
The mixture of two or more metals is called an alloy.
Learning objectives:
At the end of this chapter, the reader should be able to Fineness or Purity of Gold
do the following: The proportion of gold in an alloy is stated in terms of
A. Define precious metals, gemstones, platinum, gold, fineness or karat. Fineness is expressed in terms of points or
silver, fineness, alloy, karat, carat, clarity, cut, pearls percentages while karat is stated based on pure gold being equal
and other terms given in the chapter. to 24 karats. Thus, a fineness of 100% is equal to 24 karats so that
B. Restate fineness of gold in terms of karats. a 12 karat gold must have 50% fineness.
C. Compute for market value of gold per gram and gold
content of an alloy Estimating value of gold
D. State the importance of precious metals and stones as Gold is quoted in the market per troy ounce. A troy
an investment and the risks involved. ounce is equal to 31.1 grams. Thus, if the market quotation were
$300 and the peso viz-a-viz the dollar were P45, market value per
Precious Metals and Gemstones Defined gram is computed as follows:
Precious metals are platinum, gold and silver. The term Market value per troy ounce in pesos = $300 x P45 =
gemstones refers to stones with value. Precious metals and P13,500
gemstones are usually acquired by investors in the form of P 13,500
jewelry. In the case of gold, it is also acquired as an investment in Market value per gram = = P434.08
the form of coins and bullions.
31.1 grams
The number of troy ounces is usually converted into
grams because the latter is often used in weighing jewelry.
Precious metals and Gemstones as an investment vehicle; Risks
Bullions are weighed in kilos.
Investments are made in precious metals and stones
because they are portable store of value with steady increase in
prices. Stones with value are called gemstones. Precious metals Estimating value of gold content of an alloy. This can be done
and stones are portable so that they can be easily transferred when the fineness and weight of the alloy is given. The estimated
from one person to another or from one place to another. Thus, quantity gold is arrived at by multiplying them and the product is
they can be pawned or sold to raise funds whenever the need then multiplied by the market value per gram.
therefore arises. They can also be easily transferred from one Example: a gram of gold has market value of P400.
generation to another. How much must be the value of 10 grams of 18 karat gold?
The computations would be as follows:
Risk involved. These are losses from theft or robbery 18
and temporary decline in prices. Loss from theft can be minimized Fineness of 18 k. gold = =.
by safekeeping items of jewelry in safety deposit boxes in banks. It 24
they are kept at home, some prefer to use vaults while others 75
prefer to keep them where they are least expected to be. If there Value of gold content = 10 grams
are declines in market prices, they are merely temporary because x .75 x P400 = P3,000
there is always a market for them. The estimated value of the gold content of a piece of
jewelry may serve as a starting point in determining the value of
Platinum the jewelry. Other factors to consider are craftsmanship and
Platinum is a grayish white metallic element that soft, stones included, if any.
dense, very ductile and malleable and with a high tensile strength.
It has been used in jewelry, dentistry, X-ray equipment, medical Gold bullions
and surgical instruments and heating units. Due to its relative Gold bullions are in bar forms and per US standard, the
inactivity, platinum, both as a free metal and alloyed with alloy consists of 90% pure gold and 10% copper. Trading in
rhodium, is an almost indispensable material for such devices as a bullions is allowed by the Bangko Sentral ng Pilipinas (BSP).
magneto contacts, spark-plug electrodes, radar parts, bomb Safekeeping of gold bullions with the BSP is allowed for a limited
sights, and computing devices. In the chemical industries, period. However, the BSP would prefer to buy the bullions rather
platinum and its alloys are also essential as catalysts and for other than accept them for safekeeping. As stated earlier, gold is part of
uses. Platinum is much more expensive than gold because of its the BSP reserved and they are in bullions kept in its vault and
rarity and extensive usage. abroad. International trade on gold is also in the form of bullions.
Inasmuch as they are kept in vaults, ownership thereof is
Gold defined evidenced by certificates.
Gold is a metallic chemical element that is soft,
malleable and ductile so that it is an excellent conductor of heat Silver
and electricity. Silver is a white metallic element, ductile and
Production of gold. Gold is extracted by mining malleable, having the highest electrical and thermal conductivity
companies and is recovered from its contaminants by washing of any substance. It is resistant to corrosive materials, has some
and filtering. If it is imbedded in a vein of another mineral, it is germicidal effect and is the most lustrous of all metals (reflecting
mechanically recovered by power shovels, drilling and blasting. about 95% of the light falling on it). These characteristics of silver
Uses of gold. For centuries, gold was widely used as account for its wide usage not only in the monetary system but
money and as a base for monetary systems. From the 1870’s to also in the making of jewelry and display items and in the
the late 1970’s, it was being used as a monetary standard. At chemical and manufacturing industries.
present, gold is part of Central Bank reserves. For industrial
Precious stones

ST. JOHN COLLEGE OF BUUG FOUNDATION, INC. PERSONAL FINANCE ACADEMIC YEAR: 2020-2021
 The stones that are with value or gemstones are irritation by coating the foreign substance with nacreous material
diamond, ruby, sapphire and emerald with the diamond as the thereby resulting in a calcerous concretion built layer upon layer.
most valuable. Saltwater pearls are considered superior to cultured pearls which
Carat. The weight of gemstones is measured in carats are produced by using freshwater mussels. The X-ray technique is
and the equivalent of a carat is: often used to distinguish them from one another.
1
One (1) carat (ct.) = 200 milligram = gram Pearls as Investment
5 Pearls are considered as an investment because of the
The carat is subdivided into points with one point increasing demand for them. This is due to the fact that one can
equal to 1/100 (or.01) of a carat. Thus stone may be described as . always wear pearls and look smart without being called a “show-
3, .2 or .75 carat and 2.0 or 3.0 carats. off”. Aside from this, their luminous finish highlights one’s
complexion and features. For picture taking, pearls are more
Diamonds visible when compared with other forms of jewelry. For the
Diamond is crystallized carbon and the hardest believers, pearls stand for rich.
substance ever known. It is used in jewelry and in industries as an
abrasive and in cutting tools. Its brilliance arises from its high Exercise 1. Terminology
refraction index, unusual clarity and transparency. Its dispersion Match the statements given below with the following terms.
power results in the refraction of light broken into the colours of Gold Karat
the spectrum.
Carat Platinum
Four C’s in Determining Value of Diamonds Silver Pearl
In determining the value of a diamond, an investor has Diamond Fineness
to consider carat, weight, clarity, color and cut. Alloy Troy ounce
Carat. Diamond weight is expressed in carats (ct.) with Cut clarity
one carat being equal to .2 gram. Carats expressed in points so
that a ¼ carat is stated as .25 ct. or 25 points and a ½ carat as .5 ct
a. Percentage of gold in an alloy.
ot 50 points.
b. Weight of gemstones.
Clarity. This refers to the extent to which a diamond’s
c. Extent to which a diamond is free of inclusions.
quality is free of inclusions. These are traces of non-crystallized
d. Proportion of gold in an alloy based on pure gold being
carbon that are like nature’s fingerprints, thus making each
equal to 24.
diamond unique. The fewer and smaller are the inclusions, the
e. Nacre encrusted matter.
less interference there is with the passage of the light through the
f. Mixture of two or more metals
diamond and the more it will sparkle. Clarity is determined by
g. Grayish white metallic element that is soft, dense, very
examination under 10 times magnification by a trained eye. The
ductile, and malleable and with a high tensile strength.
following descriptions are used in the grading scale for diamonds.
h. Metallic element that is soft and ductile so that it is an
Flawless; internally flawless
excellent conductor of heat and electricity.
Very, very small inclusions (not visible to the naked
i. Crystallized carbon and the hardest substance ever
eye)
known.
Very small inclusions (not visible to the naked eye)
j. Whit metallic element, ductile and malleable, having
Small inclusions (not visible to the naked eye)
the highest electrical and thermal conductivity of any
Inclusions (visible to the naked eye)
substance.
A diamond is considered flawless if it is without surface
characteristics or internal inclusions.
Exercise 2. Market value of gold
Color. The colors diamonds range from the totally
Gold is quoted in the market at $280 per ounce. How
colorless to light yellow and they are graded accordingly. The
much should be the market value per gram in terms of the local
reason for this is that when a diamond has less color, the more
currency assuming that the dollar is 51 times the peso?
white light can pass effortlessly through it and be dispersed on
top as dazzling rainbows of color. However, there are very rare
Exercise 3. Market value of gold in an alloy
diamonds with color such as canary yellow diamond.
Market price of gold is $265 per ounce. The peso viz-a-
Cut. This refers to the arrangement of a diamond’s
viz the dollar is P49. How much must be the value of a 14-karat
facets and is due to the skills of a master cutter. A good cut brings
gold weighing 12 grams?
out more sparkle because the diamond is better able to handle
light thereby creating more brilliance. The conventional round
brilliant consists of 58 facets.
Cut should not be confused with shapes. The popular
ST. JOHN COLLEGE OF BUUG FOUNDATION, INC.
shapes are round, oval, marquise, pear, heart, and square. The
National Highway, Poblacion Buug, Zamboanga Sibugay,
shape of a diamond is based on the stone from which it is Philippines 7009
produced. Those that are cut off are subsequently cut into Email: sjc_registrarsoffice@yahoo.com Telefax: (062) 344-8133
different shapes and sizes with the intention of minimizing scrap Module 7
and subsequently, maximizing value of output. PERSONAL FINANCE

Diamonds as investment Learning objectives:

Diamonds are worth investing in because of the steady At the end of this chapter, the reader should be able to
increase in their prices. This is due to the constant demand do the following:
therefor and the controlled production on the part of the big A. Define personal finance, equity, liquidity, frugality,
diamond mining companies. It is portable so that it can easily be safety nets, target savings goal, expenditure, expense
transferred from one part to another. This portability makes it asset, live loan check, credit card, ‘’never retire’’
easier to pawn, safekeep or sell. philosophy, wills, personal trust and other terms given
in the chapter.
Pearls B. Enumerate the following:
A pear is a nacre encrusted matter produced within the 1. Keys to success in personal finance
shell of some species of mollusks and is used as a gem. As such it 2. The different levels of wealth
is the only gem that comes from the sea and made by a living 3. Reasons for saving
process. A genuine pear is produced by putting a grain of mother 4. Characteristics and habits for success in personal
of pearl in a sea pearl oyster. The pearl oyster tries to reduce the finance

ST. JOHN COLLEGE OF BUUG FOUNDATION, INC. PERSONAL FINANCE ACADEMIC YEAR: 2020-2021
 5. Limitations in the adoption of the standard for At this level, the saver can already afford to be choosy
wealth accumulation as to the kind of livelihood he goes into. If based on his lifestyle,
C. Compute for the following based on given data: his living cost amounts to P400,000, his portfolio at this wealth
1. Target savings goal level would be able to generate earnings that approximate this
2. Standard for wealth accumulation amount.
D. Explain the following:
1. Why personal finance should not be considered Level IV.
as mere accumulation of wealth. Portfolio must have reached that level at
2. The different characteristics and habits for which the annual earnings therefrom is sufficient to cover the
success in personal finance. saver’s living cost based on his desired lifestyle and as adjusted for
3. How an individual should start with personal inflation.
finance.
4. How the different major items in a family’s At this point, the saver may upgrade his lifestyle by
budget may be controlled. traveling more often, improving his residence and even starting
on another portfolio.
Personal Finance Defined
Personal finance refers to managing the financial Level V.
resources of an individual and his family to improve their equity Portfolio value has reached that level at
and maintaining sufficient liquidity in the process. As in the which earnings therefrom can sustain more than saver’s annual
management of a business entity, it involves adoption of long- living costs based on his improved lifestyle so that he can set up
term objectives, short-term goals and strategies to attain the trust funds for the benefit of his children, buy another house, set
latter, actualization of predetermined plans, periodic review of up more scholarships and contribute bigger amounts to charity.
performance and adoption of corrective measures.
Liquidity refers to the relative amount of cash and At what level of wealth are you? If you have not
assets that are readily convertible in to cash based on the amount reached level I, how would you do it?
of disbursements to be made. This is emphasized in the definition Success in personal finance
of personal finance because one’s inability to meet obligations as The key to success in personal finance are frugality,
they mature and family emergencies as they occur would result in vision and safety nets.
insolvency regardless of how much equity he has. Frugality. This refers to living below our means so that
savings may be effected. In being frugal, we have to save, save
Different Levels of Wealth and save. It requires control over expenditures which is taken up
Wealth measurement is based on one’s equity later in this chapter. Inasmuch as one continuously spends while
considering what an individual wants to achieve. In the Philippine he lives, personal finance is a continuous process. An individual
context, we have our own values, customs and traditions. We may be successful at a certain point but suffers from lack of liquid
value family relations, take care of our old folks, and extend assets because of over-investment in non-cash assets and sudden
financial assistance to the members of the extended family (which loss of earnings.
include aunts, uncles, and cousins) and even to a neighbor in
need. We give premium to education. Considering all these, the Vision. This refers to foresight or the ability to look far
different levels of wealth may be as follows: into the future. It entails short-term and long-term planning. In
order to achieve in the long-run. From time to time mistakes are
apt to be committed. These are charged to experience from which
Levels I: we learn and which we hope to avoid in the future.
A family or an individual is able to meet its
periodic target savings goal and has adopted sufficient safety nets
to ensure sufficient cash inflow and medical care in case of Safety nets. These are buffers or protections from
accidents and to ensure the continued education of the children or losses of property and income. These may be in the form of
dependents. investment portfolios, insurance policies and retirement or
pension funds.
At this level, there must have been adequate insurance
coverage for accidents and sufficient amounts are being set aside Why save?
to ensure the continued education of children and dependents. If Savings can be never be overemphasized.
the monthly target savings goal were P10,000 or P2,000 said Unfortunately, there are so many among us who can easily be
amount is being religiously set aside in bank accounts. waylaid by aggressive advertisements for luxury goods and the
desire to “keep up with Joneses”.
Level II: We should save for the following reasons:
Portfolio must have reached that level at  Savings provide liquidity buffer.
which periodic earnings therefrom equal the periodic target  Savings improve one’s financial position
savings goal thereby bringing about an increase in portfolio value  Savings provide a person with the capacity to make
equal to double the latter. investments as the opportunity therefor arises.
 Savings provide leverage.
The saver’s portfolio may now be a combination of  Savings attract lenders
savings accounts, time deposits, premium savings accounts, trust  Savings promote self-confidence
investments, commercial papers and treasury bills. The
composition depends on the amount thereof. Assuming that a To encourage ourselves to save, we should treat
saver’s TSG were P5,000 per month, the portfolio’s monthly savings as “payment to ourselves”. Thus, we have to pay
earnings must amount to more or less P5,000 also so that the ourselves before we pay others.
periodic increase in portfolio value must be at least P10,000 per
month. Target savings goal
Target savings goal (TSG) refers to how much should a
Level III. person save monthly or annually in order to accumulate a desired
Portfolio must have reached that level at amount at a certain point in the future. If it is for a personal
which the periodic earnings therefrom approximate the saver’s retirement plan, the question would be: “How much should I save
current living cost. so that upon retirement, I can still maintain my standard of living
out of the earnings on my portfolio?” at present, retirees from the

ST. JOHN COLLEGE OF BUUG FOUNDATION, INC. PERSONAL FINANCE ACADEMIC YEAR: 2020-2021
SSS receive less than P3,000 monthly. This amount is not even Characteristics and Habits for Success in Personal Finance
sufficient for the medical expenses of a senior citizen. People who have been successful at wealth building
(PSWB) have more or less similar characteristics and habits. To
The computation for TSG considers inflation rate, emulate them, we should:
earnings rate on portfolio and the length of period of  Be enthusiastic about life, have a passion for what we
accumulation. do and see to it that our work in some ways help
others and improve this world.
Example: Pedro Orbe, a 36 year old employee can live  Have patience and stick to our long-term vision.
comfortably on P300,000 per annum. He is intending to retire at  Have time to make good educated decisions.
the age of 50 and would like to know how much should he save  Have discipline and not bother about social climbing.
annually (aside from the effect of compounded growth of the  Save every month
portfolio) so that he can maintain his standard of living even after  Avoid dent.
retiring from his job. Inflation rate is 6% and average return on  Shop before we buy.
portfolio is 10%.  Buy quality used cars instead of brand new ones.
 Take care of what we own.
The computations would be as follows:  Maintain a basic understanding of the investment
vehicles and their markets.
 Adopt corrective measures.
 Dare to discipline our children and teach them value of
money.

The foregoing are explained in the following paragraphs.

Passion for Life

In general, people successful in wealth building (PSWB)
have sincere enthusiasm about life. They are optimistic and
resilient. They do not dwell too long losses, mistakes and
frustrations.
PSWBs maintain healthy sleeping hours to be ready to
meet the challenges of a new day. They give more meaning to
their work in terms of how it improves their lives, those of other
and consequently, this world. Thus, putting in additional hours
and exerting more effort thereat are considered a pleasure rather
than a sacrifice. PSWBs are positive thinkers and they value
relationships.

Patience and Long-Term Vision

In wealth building, expect failure from time to time.
They should not divert one’s vision from his long-term goal. The
saying “opportunity knocks only once” does not apply because
opportunities will continue to present themselves if only we can
discern their existence and take advantage thereof.

Take time to make good decisions

PSWBs are very good decision makers. They update
themselves on issues and current developments, determine the
effects thereof on their financial resources and make decisions.
When confronted with a problem, they evaluate each of the
different alternatives, determine their effect on the wealth
building process and make the final choice.

Have discipline, do not bother about social climbing

PSWBs do not try to “keep up with the Joneses” and
With a target savings goal (TSG) of P123,270 to arrive are happy living within or even below their means. They do not
at the desired portfolio value at age 50 and with living expenses of envy other people because they feel contented and happy when
P300,000, it means that Pedro Orbe must earn at least the total they are able to achieve their own short-term goals which are
P423,270 to actually save the required amount. If he is earning geared towards the achievement of their long-term objectives.
more, it does not mean that he can already spend the excess in Instead of feeling envious, they are glad when their neighbors
any way he wants to because he must provide for contingencies become successful in their endeavors. PSWBs make it a part of
and the increasing cost of living. By doing so, he does not have to their habit to daily devote some time in planning for the next day.
withdraw from his portfolio in case of need. His portfolio for
retirement should be kept separate from other portfolio that he Save every month
maintains. Thus, he may have savings accounts, time deposits and Savings can be considered as one’s payments to
other accounts for his family’s needs and other purposes. In case himself. Thus, it should be the number one item in our budget no
of emergency needs and he does not have adequate funds, he matter how small the amount may be. As the saying goes, “pay
may “borrow “from his retirement fund and subsequently “pay” it yourself first before spending”. If we can’t meet our monthly
back when he has recovered financially. savings goal, at least 10% of monthly earnings would do. What is
important is that there is progress in our wealth-building
Inability to Meet TSG. In most cases, an individual has undertaking. Some people save their pay increases and Christmas
may financial responsibilities to the extent that he is unable to bonuses instead of spending more because of these additional
meet his target savings goal. He should not despair. Instead, he cash inflows. Others accumulate all their daily changes in a bottle.
may resort to saving 5% to 10% of his earnings and make them Once the bottle is full, the amount is deposited into their bank
grow. Somehow, he has a long-term vision and the determination account.
to improve his financial position.
Avoid debt

ST. JOHN COLLEGE OF BUUG FOUNDATION, INC. PERSONAL FINANCE ACADEMIC YEAR: 2020-2021
 Debt is easy to go into but it is very expensive because prepare budgets for expenditures and compare amounts actually
of the compounded interest charged thereon. Assume that you incurred with what have been budgeted. Daily expenses are listed
buy P3,000 of consumable items on credit with monthly interest down, totaled and summarized weekly, monthly, and quarterly
of 3% on any unpaid balance at the end of each month. If you and annually just like an ordinary business entity.
undertake to pay P500 a month, total interest charges would
amount to P251 as shown in the following schedule. This amount Starting on Personal Finance
could buy around twelve kilos of rice that can sustain a family of To start on personal finance, we must first know our
five or six to eight days. financial positions and the determine how to improve it. The
following need to be done:
 Prepare your personal balance sheet
 Analyze current income
 Analyze current spending habits.
 Estimate income required to cover expenses
 Make projections showing the increased amount of
future expenses as brought about by inflation.
 Estimate your target portfolio value.
 Estimate monthly and annual total savings goals (TSG).

For a student, personal finance should start with striving for

T
good grades and minimizing unnecessary expenditures to be able
here are debts that may be incurred and there are debts that
to save. Always try to improve your grades because your
should be avoided. Debts may be incurred in acquiring a home,
transcript of records will often be used by prospective employers
starting a business and to increase cash inflows. Debts that should
and benefactors as reference and will form part of your
be avoided are those incurred just to impress other people
permanent file in the personnel department.
because they are hindrances in the wealth-building process.
PSWBs avoid impulse buying on credit. Instead of borrowing
Personal Balance Sheet
money to purchase what they want to acquire, they save and buy
As stated earlier, personal finance starts with knowing
on cash basis.
our financial position. In doing so, a personal balance sheet may
Nowadays, the use of credit cards or plastic money is
be prepared. What are the items of value that we own? What
prevalent. This is taken up separately in this chapter.
amounts do we owe?
The following is an example of a personal balance
Shopping Before Buying
sheet.
Shopping before buying gives us the chance to avoid
impulse buying and to compare prices and quality of goods.
People who have been successful at wealth-building usually make
their purchases of seasonal goods during off-season and at special
sales to take advantage of lower prices. Examples are buying
umbrellas during the early months, raincoats during summer, and
Christmas gifts during the first half of the year.

Buy Quality Used Cars Instead of Brand New Ones

PSWBs in general, prefer to buy quality used cars
instead of brand new ones to reduce acquisition cost and
consequently, the corresponding commission. They are aware of
the fact that the first user is the one who shoulders the greater
depreciation which may amount to between 30% and 50% of the
cost of a brand new car. Thus, a brand new car which sells at
P800,000 can be bought at say, P300,000 to P400,000 after one or
two years depending on its condition.

Take care of what we own

Regular maintenance of what we own can reduce cash
outlays for major repairs and even replacements. Cars should be
subject to regular checkups to avoid breakdowns. Gutter and
roofs need to be cleaned before the onset of the rainy season to
avoid clogging and should be repainted before they become rusty.
Metal primer needs to be applied regularly on metallic tools,
fences and other items to prolong their lives and consequently, to
minimize replacements and the costs involved.

Maintain a basic understanding of investment vehicle and their

markets
PSWBs, being aware of the fact that investments make
their money earn more money, keep themselves aware of the
changes in the nature of investment vehicles available and the Analyzing and Improving Current Income
corresponding expected earnings and risks involved. They update What are the sources of income? For an employee,
themselves by attending seminars on investments, reading books, there would be his salaries, bonuses, and perhaps additional
literatures and newspapers thereon, posing intelligent questions income from a sideline. If the wife is also working, consider the
to their bankers, brokers, and co-investors, and by circulating earnings of both. Additional income may also include interest,
among them. dividends and income from a buying and selling venture.

Systematically Plan and Measure Results; Objects of Expenditures

Adopt Corrective Measures Expenditures are outlays of cash and noncash assets
PSWBs have the habit of making plans regarding their for goods and services. Objects of expenditures may be in the
financial resources weekly, monthly, quarterly and annually. They form of expenses and assets and some of the latter may be in the
form of investment.

ST. JOHN COLLEGE OF BUUG FOUNDATION, INC. PERSONAL FINANCE ACADEMIC YEAR: 2020-2021
 Financial goals are set considering the effects of
Expenses. These are expenditures or diminution in assets that inflation.
provide current benefits only. Examples are food, depreciation Example: downpayment of 40% is to be made on a P400,000 car
and travel expenses. two years hence. With an inflation rate of 6%, the car must cost
Assets. It is anything of future value. Examples are appliances, P450,000 two years after so that the 40% downpayment must be
cars, house, jewelry and real estate. budgeted at P180,000. Savings may then be effected so that
Investment. It is an asset that is expected to result in future including interest, they would amount to P180,000 after two
earnings. Examples are jewelry, real estate and stocks. years.
Additional examples of financial goals and the
Control of expenditures. corresponding portfolio items are as follows:
Control of expenditures refers to the keeping track of
actual expenditures, determining whether they are in accordance
with budgets and promptly adopting corrective measures. Thus, n
controlling expenditures, the following need to be borne in mind:
a. Know first what you spend for and how much.
b. Determine what expenditures are not necessary.
c. Set the limit for expenditures on a daily, weekly, bi-
monthly and monthly bases.
d. Prepare a family budget and make every member
aware of the limits set for expenditures they can make.
e. Compare budgeted with actual figures so that
corrective measures may be adopted.

A family may adopt control measures for major objects of

expenditures. Examples are the following:
 Food It is never too late
 Clothing It has been said that employees and professionals work
 Light and power for money while investors and businessmen make their money
earn more money. However, employees and professionals can
 Water
also be investors while still working at their own jobs or
 House repairs and maintenance
profession.
 Recreation
 Entertainment
Insurance
 Cars
As a safety net, an individual should have life and
 Travel
disability insurance policy. This is preferable obtained at an early
age when he cannot afford to leave his family without a bread-
Use of Money Envelopes
earner or to suffer from loss of income in case of disability. The
Adherence to budgets may be enhanced by using
policy may be terminated when the individuals has already
money envelopes for the different recurring expenditures. There
accumulated his nest egg that is sufficient to take care of himself
may be envelopes for children’s daily allowances, food,
and his family in case of loss of income.
newspapers and medical expenses. The amounts set aside for
Fire insurance policies in properties should be
other expenditures may be deposited into a current account.
maintained at all times regardless of the stage of wealth that an
individual or family is in. the reasons for this are as follows:
Current account: A control tool for disbursements
 Premium on fore insurance policy may be considered
A current bank account is one from which withdrawals
insignificant when compared to the amount of loss
are made by issuing checks. It is advisable for an individual or
from fire.
family to maintain a current account to control disbursements
 Loss from fire and the subsequent loss of income from
such as those for water, light and power, telephone and
properties affected can totally wipe out one’s
amortization on loans. Periodic earnings may be deposited to the
accumulated wealth.
current account from which periodic transfers to investment
accounts are made. The advantages of a current or checking
In view of the foregoing, insurance policies maintained by an
account are enumerated below:
individual or family should be subject to periodic review as to
 It reduces the temptation to make use of the amounts
coverage and adequacy.
deposited with the checking account for impulse
buying inasmuch as they cannot be disbursed right
away.
 If lost by collectors, a “stop payment” order may be
made for checks issued and replacements may be
made thereafter.
 Checks issued and subsequently returned can serve as
evidence of payment.
 Checkbooks can serve as records of disbursements.

Year-end balance sheet

An individual should prepare his year-end balance
sheet and compare the same with his beginning balance sheet to
determine where improvements were made or where
weaknesses lie. In case of reduction in savings, there may have
been accomplishments that are not measurable in terms of
money such as improvement in the educational status of children,
brothers or nephews and improved health of the family.

Financial Goals and Corresponding Portfolio Items

ST. JOHN COLLEGE OF BUUG FOUNDATION, INC. PERSONAL FINANCE ACADEMIC YEAR: 2020-2021