Monday, April 15, 2013

The Law of Building Wealth and Decreasing Responsibility

During a lunch break of the marriage counseling and family planning seminar that we were attending. My fiance and I got to talking about the movie we've just seen the night before. The movie was Wall Street - Money Never Sleeps, which stars Michael Douglas and Shia LaBeouf. 

Though the movie is about the stock market, I recall mentioning to my fiance a concept that I learned a few years back about savings and investment (courtesy of IMG). I remember saying "as we increase our savings, it will bring down our financial responsibility in the future." He looked at me with amazement at what I had just said, or at least I want to believe that he was amazed at how smart I am, thanks to my mentors.

Kidding aside, we kept talking while heading back to the seminar class. I thought to myself "this is good that I'm marrying a man who has hopes and plans for the future and sooner or later, these plans will need to be executed after we're married."

A year after our marriage, and a baby. My husband and I with our baby went to attend a Personal Financial Strategy Seminar in Makati. This was the seminar that I use to go to when I was single. Now that I'm married, I decided I want my husband to come with me, and see where I'm coming from with regards to finances. This way, we can build our dreams together in providing for ourselves, our family and our old age with the same understanding.

On our way home from the seminar, my husband told me that the X-curve was one of the greatest concept he has ever met. I agree! From the first time I've heard of it until this time, I still so agree! Even financial experts believe that it is the most powerful Temporal Concept in the world.

What is the X-curve anyway. Here let me share it with you:

That's it bye! Nah, kidding again! We'll that is just the representation of what an X- curve would look like when you are looking at it from a distant. Unlike any other graphs that either trends upwards or downward, this graph's shape is X. The sense of it will come as it is being laid out one by one. So, let's dissect the graph to find out how this concept came about.

In the story of our life, every human being who has ever lived on the earth, whether they like it or not have responsibilities. That is represented by the X-axis on the graph. 

As much as we can, we all try to make a living to provide for our family and our self. No matter how large or small, we earn money with the time we are given on the earth. Theoretically by the age of 21 (according to Philippine Education), a man or a woman must already have finished a degree in college and will already have been able to find a job that pays. So, lets assume he/she started earning early at 20 years old, Y-axis will represent wealth over time, Point 0, starts at 20 years old.

As we indicate what your responsibilities are on the left side of the X-axis, the question you have to ask next is how much? If you don't have a plan, you won't really care, but let's say you are a goal oriented human being; and would want to provide the best for your family, wouldn't you ever wonder, if you could ever reach your temporal goal? How will you go about starting it, when bills to pay are never ending and the cost of commodities are high?   

Let's calculate. This is how we were taught. In order to find out how much our financial responsibility is, you need to know your income figures. This is the formula:

Annual Income x 10 years = Financial Responsibility 

Let's say you are earning Php 15,000 a month. That makes it:

x    12 months
x        10 years

Php 1.8Million, That is how much your responsibility is. Whether you think that it's a lot or not at all, do not judge yet. You will find out later why it's that so. Now, let's proceed.

There goes the question! Presented there, is the first risk that your family will have to face if ever YOU as the breadwinner will pass away (knock on wood) too soon. Will you leave them with debt and more financial problems or will you leave them a fortune of Php 1.8Million plus interest? 

As we age, our primary temporal goal should be to fill that savings into our bucket of wealth in order to lessen our responsibility. How do we do that? Remember my previous blog about the rat race cycle. We need to break that habit. 
So we turn this:

Income - Tithes and Offerings - Bills - Lifestyle = Savings or none at all 

 into this:

Income - Tithes and Offerings - Savings - Bills = Lifestyle

See the difference? Now remember:

Here we go: Php 1.8M responsibility, 
If you save Php 450,000  your remaining responsibility  Php 1,350,000.              
Raise your savings up to Php 1,350,000 you will have Php 450,000 left to save.
Continue saving up until you're savings becomes Php 1,800,000. How much is your responsibility? That's right! ZERO!

Presenting, the 2nd risk in this theory. What if you Live too long? This is where another important aspect of finance comes in. Introducing the role of investment.

Let's assume you have saved up up to Php 1.8Million and you decided to invest that in a financial vehicle that will give you 10% interest per annum(per year).

x    10% int. pa 

Earlier, we calculated that you, earning Php 15,000 a month will bring you Php 180,000 a year of income. In this scenario, Php 1.8Million at 10% pa is Php 180,000.  Now, wouldn't it be nice, if you are earning Php 180,000 per year from your investment, never having to work anymore? That my friend is called Income Replacement. You should by then be Living On Interest (LOI).  

The perks of living on interest are shown in the diagram graph below.

If you follow this concept in execution you there will come a time where you wouldn't have to worry about your family and your old age! Because of your hard work, and smart move, you can definitely say that you did the best that you can for your family... and yourself. 

The question now is, where are we in the X-curve? Are we prepared for risk 1? How about risk 2? Hope you learn something!


  1. Great post, love. I was amazed when I heard about this for the first time. Please know that I am always with you and that It is also my goal to have people know more about how to manage their finances. It's the only way to happiness in the information age!!!

  2. My pleasure, and thank you rocketboy!

  3. A company, Primerica, has used this concept to grow to be the largest independent financial services company around. I know the company has been talking about this strategy sense the early 70's. But I have never heard of the "X-curve" before. Take a look at their video here:

  4. Hi Joe, yeah that looks like almost the same as the x-curve I've watched the video, sounds like they are promoting, life insurance. Anyway, I first heard about the x-curve from the International Marketing Group the US the company is called the World Financial Group. It was discussed by one of the Financial Planner of the Philippines. From then on, I'd like to live my life accordingly. I'm not yet at the finish line but I can tell, it's very effective, as my family were able to build our emergency fund already. So in line with my own advocacy I'd like to share it with everyone that their lives too may be temporally blessed.