So I’ve Been Saving… Now What?
In the past two months, we’ve been talking about saving as the foundation to your financial independence. I’ve been writing about how you should build your emergency fund and separate your expense account from your savings account. Let’s say by now you have done so and you have completed your emergency fund, what’s your next step? By now you’re ready to start investing.
But before we talk about that, let’s put what we just talked about in practical terms. Let’s say that you’re earning 30,000 a month; based on everything we’ve discussed, at this point you would have created a budget for yourself and substantial savings. Of the 30,000 you earn, we’ll assume that you spend 20,000 per month and save 10,000, which translates to a savings rate of 33%. That’s fairly high since the average saving rate is 2%.
We’ve said that we first needed to save for your emergency fund and you open a savings account for this, and our emergency fund should be 3 to 6 times our monthly expenses. In our situation, this would mean at least 60,000 (20,000 x 3) or as much as 120,000 (20,000 x 6). At the rate that you’re saving, you’ll be able to build this month within 6 months to one year. Also, for your current expenses, you have decided to open a checking account. This is how your funds should look like:
Checking Account with ATM: at least 5,000 pesos to maintain, at most 20,000 pesos for your expenses. Or you can maintain 20,000 pesos so that it earns interest, and then at most have 40,000 pesos every month for your expenses.
Savings Account: 60,000 to 120,000 pesos, no withdrawals.
As we have said before the jump, you are now ready to start investing. But first, what is investing anyway? In basic terms, investing is making your money work for you. How hard exactly does your money need to work? First, your money needs to earn enough to beat inflation, leaving savings out of the investment options; with average annual inflation of 4-5%, a savings accounts with an interest rate of 1% will not help your funds keep pace with inflation. Additionally, investing is the best way to work on your medium to long-term financial needs. If you have a goal of having 1 million pesos in savings by investing 10,000 pesos every month, you will need 100 months or 8 years and 4 months to get to that goal; investing can help you get to the goal sooner and potentially earn more.
A lot of people are wary of the words “investing” and “investments”. Many of these people associate these terms with scams. And we can’t blame them as high-profile “investment” scams usually end up on the front pages of newspapers whenever they happen. Some of these people just really don’t know anything about investment that it prohibits them from going into it. This is the point of this blog, it’s to help people explore their financial options and make informed decisions.
In investing, there’s really something for everyone. There’s a load of financial products out there that are within your reach, you just have to find the right one for you. Financial professionals, advisers and consultants would usually first take your investment risk profile before offering any financial product to you. This is because investment is a step beyond your financial comfort zone (usually the bank) so that you can realize bigger gains. While risks are inherent in any investment, there are rewards that come with it. For now, though, since this might the first time that you will be investing, we will assume that you are risk averse and stick with something more or less familiar and close to home. For our first topic on investing, we will be talking about special savings and time deposits. They’re not exactly investments but they’re definitely a step beyond your regular savings and checking. More about special savings and time deposits in the next few days. Keep yourselves posted!