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 basically a virtue that everyone wants to develop, and it’s as universal as our need to earn money. However, saving money isn’t really enough to secure your financial future.
It’s a good thing to have money in bank which you could take out anytime when your financial needs get tough. But a savings account should only be used for your day-to-day expenses and also your emergency fund because it does not boost your savings to keep up with the financially changing times. 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 our the value of our money don’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 to 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 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 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 everyday. 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 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, 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 your 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 Philippine’s landscape considering its economic climate and available opportunities.
Everyone’s goals is to have a 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 on 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.