FINANCIAL LITERACY IS NOT ABOUT NUMBERS.

FINANCIAL LITERACY IS NOT
ABOUT NUMBERS.

IT IS ALL ABOUT MINDSET.

“Saving for a rainy day” starts with a mindset of abundance. Some believe in the saying “Make merry today because tomorrow you die.” or “I can’t even make ends meet with the increased cost of living.” or “I can’t wait for 40 years. I might as well play the Lotto and hope to hit it big.” Perhaps then, saving is not for you and no matter what I say, you will not want to save. That is your choice.

A word of reminder, though. In a market-driven economy like ours, it is an obligation to save, invest and sustain financial well-being over your lifetime. The simple reason is that you will not be able to work and earn actively for your entire life. You need to
plan for the day you can no longer earn actively. You need to provide for your future. Thus you must learn to keep a portion of what you earn and do more with what you keep!

Life is about growing your earnings, protecting it, learning how to spend it wisely and sharing it.

For those who question how P10 per day can grow to P28million in 40 years if you invest at 20% per annum, I’d like to bring up: Time and Compounding.

Let’s put it to good use.

When I was a struggling youth, I would look at the rich and believe they had everything. True, they had the money to start with and I had to start with practically nothing.

Unfortunately being young, nobody emphasized to me in money terms that rich or poor, we all have 24 hours a day. No amount of money can buy even an extra minute to extend our day. An hour that has passed is forever lost.

So now I want to pass on to you that whatever it is you want to do, you must do it now.

Time is your greatest asset and in fact, is part of the capital you have to grow your wealth. Combined with savings and the knowledge on how to use compounding, you will be well on your way to financial independence.

“Compounding” is a phenomenal tool to grow wealth. Albert Einstein defines it as man’s greatest invention. Compounding can grow even a little amount into a huge amount if you allow it to stay invested for a long period of time.

You just “roll” your money. You allow the earnings on your investments to be added to your principal or original investment amount. The result is that your principal and its earnings will earn even more earnings each year. For example, in one year,
1000 pesos that earns 20% per year will grow to 1,200 pesos in that one year. In the second year, if you “roll” the entire amount of 1,200 pesos to compound, it will earn 240 pesos for a total of 1440 pesos (P1,200 + P240). As time passes and as you continue to roll your investment and earnings, allowing it to compound, the growth in earnings becomes even faster. For example, 300 pesos saved each month and invested to earn 20% compounded per annum will grow to 28.8 Million Pesos in 40 years. This is 200 times PhP144,000
(300 x12 x 40), which is the actual amount of cash you invested over the 40 year period.

Note though that if you SPEND the yearly earnings or gains of your investment, after 40 years, you will be left with only PhP144,000. This is the same amount of money you set aside. This is because you did not avail of the power of compounding.

I personally did not take advantage of this principle in my early working years. Like most young professionals, I was impatient and wanted to live a lifestyle I wanted right away. Looking back, I would probably have ten times more of what I have now and be much better off, had I religiously invested even small amounts and practiced these principles much earlier.

For those who doubt the very assumptions of 20% and 40 years, let me set the parameters more strictly for the sake of argument.

If you are going to absolutely technical about it, we all know that:

1) It is not possible to
invest P10 to earn any amount of interest. Even a savings account will require a minimum deposit of P500 in some banks and P1,000 in most banks.

2) Earnings of 20% per year is difficult to attain for a short-term investment.

However, it is possible to:

1) Pool your small money with an investment “club” made up of friends or save your money until it accumulates to P5,000. You can then invest this amount in equity mutual funds which can average a yield of 20% per year over a period of at least 5 years.

2) In most Mutual Funds, It is possible to add as low as P1,000 or more to your P5,000 investment as often as you want.

We can email the specific results of certain Mutual Funds to those who are interested to know the performance details of the reputable and responsible Mutual Funds.

I believe that the average 20% per year over a period of 40 years is possible. There are no guarantees of course. However, the chances of achieving these returns improve over a longer period of time.

At today’s market when all the values are very low for mutual funds and UITFs, there are even bigger chances of very high increases in the future.

As I always advise, buy regularly whether the market is up or down and the law of averages will keep your investment on the right track.

But let us just say for the sake of argument that you are not able to get 20% per annum and that you are not disciplined enough to save monthly for 40 years. If you still saved your P10 per day (something you normally throw away for unnecessary expenses) for 17
months until it your savings reaches P5,000, invested at say 15% p.a. and added P1,000 every 3 months (the time it takes you to save the amount at P10 per day) you will still end up with around P7.6 Million at the end of 20 years. You might not find this amount exciting but it certainly beats nothing. Note too that the amount you actually put aside in 40 years is only P159,100.

At an average inflation rate of 5%, your P 7.6Million at the end of 40 years is the equivalent of around P1.08M in today’s peso. You could buy a respectable studio unit in a medium level condo today with this money.

Presumably, that’s what you could also acquire at the end of 40 years assuming that prices increase based on the average inflation rate. That would also be a reasonable amount to get started on a small to medium business venture, something you could leave for your children or even your grandchildren.

Why do I set higher targets than perhaps you would believe possible?

Because, whenever it will not harm anyone, that is the way to set your targets. Believe in the impossible and it will happen.

Is betting on Lotto then believing in the impossible? It is not believing in the impossible. It is simply betting on the improbable. Betting on the Lotto is sure loss if you will only think of it in money terms. Your chances of winning is perhaps one out of 10 million. But if you want to join the ranks of people who want to “Get rich quick.”, that is your choice. I believe that in accumulating wealth, “Slow is fast.” Just save the little that you will not worry about and put it in instruments that will grow and leave it alone. You will be surprised one day that it has grown much more than you thought possible.

Does land investment meet my criterion of “Slow is fast.”? I believe that investing in land to be used for your home is good. I also believe that investing in land that you will develop to earn income for you is a good option. However, both cases are good only if you can afford all the necessary costs for improvements and
maintenance. For ordinary income earners, buying land in the hope that it will increase in value over time (i.e. land banking) is not a good option. This type of “positioning” is more of speculating than investing, I do not believe in land banking without any specific objectives and long-term resources. While there are some cases of vacant land values going significantly up, there are also a great number of cases of negative growth caused by land squatting and spurious titles on land left idle.

Again, I do not know if I answered all the questions in the comments. I appreciate the many comments but my CFE Team and I may not be able to pick out all the questions. Please write to info@colaycofoundation.com if you have specific questions that we can address…

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