Make Your Money Work for You

After forming the habit of saving, the next step is to make the money you saved WORK FOR YOU and generate another source of income called PASSIVE INCOME.  How do you do this?  Through INVESTMENT.

In 2013, the Study of Lifestyle Attitudes and Relationships Philippines conducted a survey to test the financial literacy of Filipinos and found that 50% of the respondents defined financial security as having enough money in the bank.  While is it important to have readily dispensable money in the bank to live on and act as an emergency fund, anything in excess of this should be invested.  

Banks offer security for your money.  It is a better option to just keep it in the house.  When Filipinos were still leaving in nipa huts, savings were kept inside one of the bamboo foundations to be used for a rainy day.  Unfortunately, it provided no security.  If the house burned down, the money goes with it---savings gone.  Banks can provide such security and in the event of a bank run, it is insured up to Php 500,000.  The thing is, banks does not provide much in terms of interest.  Easily accessible savings account normally has an interest rate of 0.25% per annum.  So say you put in Php 120,000 in the bank and let is stay there for 10 years it will earn around Php 3,000. Good?  Well, not really.  You see, there is such a think called INFLATION that actually messes this up.

Inflation is defined as the sustained increase in the general price level of goods and services in an economy over a period of time.  Remember when the cost of pandesal was just Php 0.50?  Well, now it's Php 2.00.  That's the effect of inflation.  And it cuts across all products and services.  So, remember the money you saved for ten years and grew by Php 3,000?  Well, after 10 years and with an inflation rate of 4%, the buying power of your Php 123,000 will only amount to roughly around Php 89,000.  That's inflation.

Now what does inflation got to do with investing?  Well, it is going to be your benchmark in choosing the investment facility you want to get into.  This means that you should put your money where the potential gain will be more than the inflation rate.  The key word here is POTENTIAL.  Why?  Because most investments entails a certain level of RISKS.  The higher the gain, the higher the risk and vise versa.

There are a couple of ways that you can do this.  First, build your own business.  Capital needed:  You can start a food cart business for Php 18,000 (Source:  http://www.mcbizsep2015promo.com/).  Effort needed:  Business management required.  Worst case scenario, the owner will be the one to man the cart to save up on hiring manpower. Profitability:  Profitability dependent on product quality, location, traffic generators.  Risk(s): It is seldom that a business venture succeeds the first time.  The business acumen to build a successful business is experience.

Second, go into the stock market.  Capital needed:  The cheapest blue chip stock is Megaworld at Php 4.50/share and minimum investment capital is at Php 5,000.  Effort needed:  Continued market monitoring.  Profitability:  Depends on the stock market fluctuations and the amount of capitalization. The concept in playing the stock market is you buy low and sell high; hence, if the stock you  bought does not go up---then you're stock with no profit.  You need to have a considerable amount of stocks to play around with.  At Php 120,000 investment, you can buy 26,666 worth of Megaworld stocks.  Assuming that this particular stock grows an average fluctuating rate of 8% , your potential gain would be Php 9,500 thereabouts minus tax.  The question is the frequency of clime and decline.  Risk(s):  Not viable in a passive market.  An active market fluctuation is needed to gain profit.  Otherwise, go long term with a stock that provides for an annual stock dividend.

Third, put your money in a mutual fund.  Mutual fund is a professionally managed investment fund that pools money fromt. many investors to purchase securities.  Funds are allocated depending on a client's risk tolerance:  (1) Bond Fund for the low risk-low gain client; (2) Equity Fund for the high risk-high gain client; and (3) Balanced Fund for those in between.Capital needed:  Minimum of Php 5,000.Effort needed:  Finding the right mutual fund institution to invest in.  Profitability:  Depends on stock market performance.  Risk(s):  An incompetent fund manager handling your account.

Wealth accumulation is important to start early.  We cannot just depend on our active income to build our savings; for no matter the extra effort you give to your work, you will only be paid by the income due you.  It is therefore important to have another source of income by which we can confidently face the future and meet the different life milestones PREPARED.