Are Savers Losers?
While it is true that every peso you save is a peso you earn, but with the economic climate today, one simply can’t rely on his or her savings anymore. Saving money is a virtue that everyone wants to develop and it’s as universal as our need to earn money, but is it enough to secure your financial future?
It’s one thing to have money in the bank that you could take out anytime when your financial needs get tough, it’s another to build your wealth. A savings account should only be used for your day-to-day expenses and your emergency fund, other than that you might want to consider other channels to stash your money, here’s why.
Cost of living goes up
Inflation causes savers to lose their money’s initial value. Whether we like it or not, inflation is constant and inevitable. Prices of our necessities go up, but the value of our money doesn’t.
For example, the same ₱1,000 will likely not be able to buy you the same amount of things five to 10 years down the line.
Your ₱100,000 savings in the bank today may decline in value a few years from now due to inflation, just like how decades ago, ₱1,000,000 could buy you a decent house in a strategic area. Today, that amount couldn’t even buy you one in a far-flung area.
Even though it seems like banks are compensating you for your savings through their interest rate, the real-life impact of it on your finances couldn’t help you cover a fraction of the inflation annually. So, if you want your money to keep up with the changing times, surely, parking all of it in your savings account isn’t really the best practice to do it.
|Year||Inflation (CPI)||Interest rate|
|2014||4.1%||0.626% per annum|
|2015||1.4%||0.710% per annum|
|2016||1.8%||0.721% per annum|
|2017||3.7%||0.738% per annum (as of Jan)|
Low interest rates
It’s no secret that savings account offers only a measly interest rate of 0.25% to 1.25% per annum on the average. Realistically, unless you have a millions in your savings account that will remain intact for years to come, you’re not likely going to earn a big enough interest amount that will make a difference in your finances.
Take this as an example: The highest interest rate for a savings account in the Philippines is only 1.25%. Now, if you park a ₱1,000,000 savings in a savings account in your bank, you’re most likely going to get ₱12,571 (monthly compounding) only for an interest a year!
Currency rates may drop
Money derives its power and value from the government that backs it. The paper money has no actual value on its own. Therefore, should the government that has a monopoly over it collapses, its value would also go down with it. This has happened several times across the world, even the US had their own share of a weak currency, how much more third-world countries like the Philippines.
Also, the devaluation of printed money does not only happen in doomsday scenarios. Instead, it happens almost every day. Most governments (not just the Philippines) that generate money are in debt. This is an act to finance a country’s excessive spending, which devalues the currency due to the inflation that it is causing.
If you’re only spending your money locally, the rise and fall of the currency rate may not necessarily impact your finances (except for inflation). However, if you’re based overseas where the currency is stronger than your home country and your savings in your home country, you’re going to feel the brunt of it faster than you would.
Invest your money
Apparently, the idea is to grow your money. However, before you jump the gun, make sure that you already have the basics covered: an emergency fund, health insurance, a manageable debt to income ratio, and most importantly, an extra budget! If you’ve ticked all the boxes, it’s safe to say that you can now diversify your money in a way that you can grow them instead of losing their value.
The easiest way to make your money work for you is through investments. There are various channels that could yield high returns for your money, such as mutual funds, stocks, real estate, and forex.
1. Mutual funds
A mutual fund allows you to buy part of a pool of investments with other investors. A mutual fund holds a variety of investments which can make it easier for investors to diversify than through ownership of individual stocks or bonds.
Not all investments perform well at the same time. Holding a variety of investments may help offset the impact of poor performers, while taking advantage of the earning potential of the rest. This is known as diversification.
Assuming that you invested ₱ 100,000 in a BPI’s ALFM Money Market Fund a year ago, which had a Net Asset Value per Share (NAVPS) of ₱ 115.35 (Oct. 3, 2016).
₱100,000 / ₱115.35 = 866.926 shares
At the start of your investment, your 866.926 shares will be worth ₱115.35 each. At any day, the value of each of your share will change, and there are only two things that you need to know to determine your share’s running value:
- The number of your shares
- The NAVPS price for the day
As of today (Oct. 4, 2017), the NAVPS price of that mutual fund has seen an increase of ₱ 1.79 each, making it ₱117.14 per share.
866.926 shares x ₱117.14 = ₱101,551.71164
|Initial Net Asset Value per Share (NAVPS) of ALFM Market Fund (Oct 3 2016)||₱115.35|
|Number of share||866.926|
|NAVPS after 1 year (Oct 4, 2017)||₱117.14|
In real life scenarios, people enroll in mutual funds for the long-term, not just a year. The prices of mutual funds are not guaranteed, they may rise and it may fall. That’s why, it’s in the best interest of your finances to invest in not just one mutual fund or type of investment.
Stocks are sold in units or “lots” and these shares will see a rise and fall in monetary value. There are many factors that can affect stock prices, from supply and demand in the market to even management changes in the company.
Provided that you invest in the right stock at the right time, and you learn how the trade works, you can potentially reap more than your money’s worth in the long run.
Alternatively, you can seek help from financial advisors or brokers to manage your stocks
The stock market isn’t something that you should invest in on a whim as it takes a lot of patience and research to understand the risk and returns before you can confidently invest in it. However, if you are in it for the long-term and take the time to do your due diligence, you may see handsome returns.
There are two ways to make money in the stock market.
Capital appreciation (the price of the stock getting higher), is the common way of making money in stocks investing. This should be obvious given the fact that stocks continuously change its price every single day, which means more opportunities to get out of it.
But dividends is also a great machine for squeezing the most out of your money’s potential.
The concept with stock exchange is similar with mutual funds, the difference is with stocks you have full control of your investment as you can choose to invest in a specific company.
|Date||Price per unit|
If you have invested ₱ 100,000 on BPI share on December 18, 2016, here’s how much you could have received in returns:.
|Initial stock price of BPI (12/18/2016)||₱ 85.90|
|Number of shares||1,164.14|
|Share price today(10/05/2017)||₱ 101.90|
This is one of the conventional ways to invest your money. While it may take some time to gain your starting capital back and start profiting from your business, it is the more hands-on route to grow your money and you somehow have more control over it.
Starting your own business can be expensive and challenging at first. That’s why it requires extensive research and diligent planning. You must determine what will sell in your target market and how to keep up with the constantly changing consumerism and competition.
In case you don’t know where to begin, here are the 8 promising business ideas in the Philippines ’ landscape considering its economic climate and available opportunities.
4. Stablecoin staking
It’s no secret that cryptocurrency promises a higher yield compared to other investment assets. The downside to this is that it’s riskier than traditional investments unless you’re simply stashing your money in the form of stable coins such as Tether (USDT), Binance USD (BUSD), and USD Coins (USDC).
First of all, what are stable coins? They’re cryptocurrencies that are pegged to a fiat currency which is the US dollar, making their value stable, unlike regular cryptocurrencies which are volatile. Their value is 1:1 with the US dollar.
What is staking? In a nutshell, it’s the time deposit version of cryptocurrency. You put cryptocurrency on a time deposit, in return, you get more of that cryptocurrency. If you stake a USDT, you get a USDT. If you stake a bitcoin, you’ll get more bitcoin.
Unlike the traditional time deposit, staking comes with more flexible terms – you can choose to lock your funds for a month up to 3 months tops. You even have the option to keep it open, where you can access it right anytime you want, but for a lower yield (APR). After the lock period, you are free to take out your money or keep it stakes to continue earning interest from it.
If you’re feeling more adventurous, you can also stake Bitcoin or Ethereum – cryptocurrencies that have proven to be good investments. This way, you’ll profit from its increasing price while yielding more bitcoin from the APR.
Crypto exchange platforms such as Binance and Crypto.com are the most common places to buy and stake stable coins. The APR for stable coins is around 2.5% to 10% per annum (P.A) depending on the lock period you choose. Meanwhile, Bitcoin and Ethereum are 1.5% to 5.5% P.A.
5. Pag-IBIG MP2
By now you might have heard of Pag-IBIG’s MP2, the perfect alternative to a time deposit account. The MP2 is a voluntary program that provides a higher earning potential than a regular savings account, this is a separate program from the mandatory statutory deduction from your salary. Here, your savings are invested by Pag-IBIG and will earn through dividends, just like investing in mutual funds.
MP2 has been earning higher interest than regular savings accounts, and tax-free dividends at that. In 2019, the Pag-IBIG MP2 dividend rate was 7.23%, and historically, it’s been increasing year on year. Its highest rate so far was in 2017 with an 8.11% interest rate.
|YEAR||MP2 DIVIDEND RATE|
Below is an example of a rough computation of how much your MP2 savings would have grown if you made a one-time investment of ₱100,000 since 2015.
|Year||Value of savings (year-on-year)|
If you’re interested to learn more about the PAG-IBIG MP2, you can read our complete guide to PAG-IBIG’s MP2.
Everyone’s goal is to have big enough savings to sustain their needs and wants until their retirement. However, what many people don’t know is that parking their money in their savings account only can be counter-productive.
Saving money isn’t a bad thing, in fact, it’s a habit that everyone must develop, but it can’t be the only thing you are doing to manage your finances to prepare for the future. In the context of finances and saving money, you will lose the value of your money and also opportunities when you put too much money in your savings account. Inflation, in the long run, will increase the prices of everything, the value of the money you’ve saved a decade ago will decline.
When it comes to money, never put all your eggs in one basket. Diversify not just in your investment, but also in the way you keep your money. Just like how you work hard to earn money, you need to make sure your money is working as hard as you.