Question: Hi Rose. I read your articles in PhilStar.com and I’m interested in your topics about financial literacy. I just turned 25 and currently working in Riyadh. I’d like to make my savings grow while I’m young and single. Can you give me advice on how and where to save and invest wisely? Thanks a lot! God bless you. – Ghurl V. via email
Answer: Hi Ghurl, your early determination to save and invest bodes well for your future because time is one of the most (if the not the most) important elements of wealth accumulation.
Here’s what you can do. Check with the banks there in Riyadh what they have to offer in terms of fixed income and equity investments. Fixed income investments give you pre-determined interest rates while equity investments don’t. Investing in the former makes you a lender while investing in the latter makes you a part owner of publicly-listed companies. The former gives you assured interest income while the latter does not, but in the long run provides you with better returns in the form of dividends and price appreciation of the stock. Read up and learn more about the different investment instruments available to you.
Another essential element of wealth accumulation is the regularity of saving and investing. This is why it’s also important that from the start, you train yourself to be a habitual saver and investor. In fact, don’t just rely on your discipline, try to automate it.
Ask about automatic investment instruments similar to what we have back home such as Easy Investment Plans wherein you only sign up once and the bank will take care of transferring your preferred amount to your investment instrument of choice on a regular basis. If the bank handling your payroll is a reputable one, you may consider their investment instruments for ease of fund transfers. Or you may also want to deal with more than one bank so that you are able to “put your eggs in more than one basket.”
To give you a comparison, here are the prevailing returns if you invest in the Philippines:
Time Deposit = 1% to 1.25% p.a. gross (deduct 20% tax to get the net)
Money Market Fund = 1.3% to 1.5% p.a. net
Philippine Stock Exchange Index year to date return = 8.23%
Some Equity Funds’ year to date return = 10.26%
Inasmuch as I want all Filipinos to invest in the Philippines, please carefully compute the other costs involved in international fund transfers. In assessing investment options, always make sure you consider all costs such as bank fees, taxes, forex conversion, etc. If it is not cost efficient for you to transfer on a monthly basis, invest in Riyadh on a regular basis. Then once you’re able to accumulate a good amount, you can move some to the Philippines, to take advantage of our growth and also to give your share in helping our country prosper. But remember to consider your cash needs. Figure out how much you need in your local currency so you know how to allocate your investments accordingly.
I also want to outline some funds that you have to consider in your financial journey.
1. Emergency Fund – You should have an amount equivalent to least six months of your expenses. A lot of people think that this amount should be in their ATM account because of the word “emergency.” There’s no need to. In order to maximize return on your hard earned money, invest this in short term fixed income instruments such as time deposit and money market placements. Only use this fund in cases of emergency such as sudden loss of job, etc. Remember, a mall sale is not an emergency.
2. Working Capital – This is the amount that you keep in your ATM/petty cash. This is equivalent to one month of expenses. The term working capital is used by companies, while “monthly budget” is what’s commonly used by households. Call it whatever you want, but be conscious that this is theamount allotted for your expenses for one month. Take note that you usually use different modes of payment in your expenses – cash, current account, credit card. All these comprise your working capital.
3. Retirement Fund – The best time to start setting aside for your retirement is when you start working. In fact, you can even start earlier than that. For this fund, invest in higher return long-term investments such as equity. There’s a lot of excitement going on back home in the stock market as the Philippines is among the world’s top performers. It’s good to see this excitement; at least it heightens the awareness. However, the flipside of this is the undue overconfidence of a lot of the newbies that they end up actively trading the market. Here’s my advice, don’t. Just buy and hold. Not everyone is equipped to trade the market. It takes special skills, a lot of time and even luck to make the right call on the market on an active basis. Historical data show that one is better off just buying the market (i.e. index funds and broad-based equity funds) and holding for the long-term. As I always say, time in the market is more important than timing the market. You may also want to include fixed income instruments such as bonds in this portfolio. Check out the tax benefits of retirement funds in Riyadh similar to the 401K in the US so you maximize your returns.
4. Dream Fund – or Fun Fund. Save up for some fun dreams like travel. Take advantage of your ability to travel with ease now that you’re single. Google on how you can travel with limited budget and learn a lot from the experience. Maybe you also plan to build your own house someday, buy a nice car, take up further studies, etc. List them down and slowly build your funds towards these dreams. Set reasonable timetable. When spending for luxury and other big-ticket items, remember that delaying gratification will add more to the excitement and satisfaction when you finally make that dream a reality.
5. Protection Fund – or Insurance. Buy life insurance once you have dependents. Even if the agent tells you it’s cheaper to buy now while you’re young, the question to ask yourself is “Do I really save money by buying something that I don’t need, just because it’s cheaper now?” In terms of medical insurance, check your employment benefits, they usually include medical. If not or if you’re self-employed, get one.
6. Giving Fund – to add a deeper dimension to your financial journey, include a way how you can give back.
I’m glad that while a lot of young people your age are groping their way in their quarter life crisis, you’re thinking of how to grow your investments. It’s normal to feel a little anxious at this age when you’re faced with career choices, relationship challenges, independence issues, and other adult concerns.
If you hit any of these, just pause and reflect on your life. Maybe it’s a sign that you’re up for life assessment. Take a look at your purpose in life, your dream vision of yourself, and the things that currently preoccupy you. Usually, if your actions are not moving towards that vision and not in agreement with your values, that’s when you get into a crisis. I bring this up so that this early you already become aware of this important compass in life called purpose. Knowing your purpose and values well will give meaning to your financial journey, because if what you do with and for money does not agree with your core values, no amount of money in the world will make you happy.
With that as your guide and your early determination, I’m confident that you will have a bright future. So what else can I say but, “Go Ghurl!”