Moving on: Saving to Investing

Saving to InvestingLast year I started my series on saving, the definition of saving, reason for saving and some ways to help us budget and save.  I do hope you have instilled the discipline of saving, or at least have started to instill the discipline of saving.

To be honest, it is not a one-time event but more of a daily struggle and challenge to ward off unnecessary spending, giving in to our wants, making excuses that it is a need and not a want, rewarding ourselves for a job well done, doing stress shopping.

You are not alone in this journey.  I am not saying it is not right to reward ourselves but maybe reward may not need to be big ticket items.  It can even be as simple as having time for yourself to read a book or go for a walk without feeling guilty.

Moving forward: the need to invest. Saving or the discipline of saving is the foundation for creating wealth but investing is making that a reality.

Why do we need to invest? Why not just keep it in the banks via time deposit?  I remember in one of the seminars I attended that the strategy of saving in the bank that our grandfathers were using worked because it was different then with higher interest rates.  But now, with this fast changing world, we also need to change the way we handle our money and saving in banks will not work.  Let me share with you why.

The low interest rates offered by banks versus the rates of return when you invest in different mutual funds using the 3 year return:

  1. Bank – normal saving Accounts: <1% (pre-requisite: account balance needs to have the required maintaining balance)
  2. Banks – Time Deposit: 2-4% (interest rate varies depending on the amount and lock in period)
  3. Balanced Funds: 7%
  4. Bond Funds: 5%
  5. Stocks Funds: 12%

For more details on the interest rates given by banks for savings accounts and time deposits, check your bank’s website.

For more detailed information on the rate of return for mutual funds, go to http://www.pifa.com.ph/factsfignavps.asp where you can see the YTD return, 1 yr Return, 3 yr Return and 5 yr Return.

For example, if I have 100,000Php and if I compare the interest rates/rates of return if via bank or investing in mutual funds:

“Investment Vehicle” Interest Rate Interest Total Amount
Savings Account 1% 1,000 101,000
Time Deposit 3% 3,000 103,000
Balanced Funds 7% 7,000 107,000
Bond Funds 5% 5,000 105,000
Stocks Funds 12% 12,000 112,000

Note: 12% rate of return for Stocks Funds is conservative. 5 yr return shows average of 18%.  Last year, my favorite Philequity Fund, Inc. had a 25% rate of return.

Why would you settle for the interest rates via bank savings account and time deposit when you can go and invest in bonds and stocks?  In a nutshell, we need to learn how to make our money work for us.

You may wondering why there is a quotation mark on the Investment Vehicle in the table above.  Watch out for my next blog post where I will explain the reason for this and share the two silent killers which we know but really don’t understand how it impacts our money: tax and inflation.  Till my next blog post. 🙂

 

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