If you are 23 years old, and put away just PHP100 every month for the next 42 years until you “retire” at say age 65, how much money will you have saved up assuming average compound interest rates of say 11% per annum or roughly .90% per month? The answer is roughly PHP1 million. Not bad for PHP100 a month, less than the cost of snazzy Starbucks latte. But if you wait until 33 years old until you start saving, that PHP1 million figure falls precipitously to just PHP335,000 or so.
Such is the power of compound interest and discipline in constantly putting away a little bit of your earnings every single month of your working life. This example above is the gist of a new advertising campaign of BPI in conjunction with Suze Orman, that popular financial planner and advisor that tells you whether or not you can afford to buy something based on your financial situation or health. I love the local ad, because it simplifies the concept of future value and the incredible importance of saving for one’s future… I run across so many people today who have trouble making ends meet, and simply not having enough resources for their perceived daily needs, let alone think of saving for retirement. And 99% would think I was crazy if I told them they can start by just putting PHP100 a week into a mutual fund…
But if you are young, have just joined the workforce, plan to take care of yourself and remain independent, and aren’t counting on a huge inheritance from wealthy parents or relatives, you need to seriously start thinking about saving and investing on a regular basis.
Here are the basic assumptions you need and a few more examples below, then you can go to the link at the bottom where there is an easy calculator that you can use for your own different scenarios.
“Payment” – Refers to the amount of money you are thinking or willing to put away every period (usually every month or year, but you can use weeks, days, etc.). For the calculator below, the “payment” amount is fixed or the same every period for simplicity. Changing the payment figure over the years is possible, but you need to alter formulas to adjust.
“K – Annual Interest Rate” – Is the assumed rate of interest that you will earn on average on your funds over a LONG period of time. Most financial planners use a return of 12% for mutual funds/equities per annum or 1% per month compounded. I know that figure can seem a bit high in today’s very low interest rate environment, but on the risk level of stocks, use the 12% as a starting point, and realize if you earn much less, say 8%, then the returns change DRAMATICALLY over decades of time. If my hypothetical stock portfolio was the one you picked 5 years ago, annual compound growth rate would be 24%+ and you would be wickedly happy…
“n – Number of Payments” – Usually monthly or 12 per year, or weekly at 52 payments per year. If you divide payments into monthly periods, then interest rates must also be divided into the same number of months. For example, instead of saving 12,000 per year at 12% per annum, you can enter PHP1,000 per month at 1% per month in the calculator (actually it’s a little less per period as it’s compounded).
“Future Value” – Is the lump sum you will have at the end of the period. So if you are 23, and put away money for 42 years until you hit 65, the future value will be the amount of savings you have when you turn 65.
Here are just some examples assuming 12% per annum returns or 1% per month if you do saving monthly:
Your Age : 23
Payment : PHP1000 per month
Number of Payments : 504 (42 years x 12 months)
Future Value : PHP14.97 Million
Your Age : 30
Payment : PHP2000 per month
Number of Payments : 420 (35 years x 12 months)
Future Value : PHP12.86 Million
Your Age : 45
Payment : PHP2000 per month
Number of payments : 240 (20 years x 20 months)
Future Value : PHP 1.98 million (SEE HOW MUCH LESS THIS IS?! And you doubled your savings amount compared to the 23 year old!)
Your Age : 45
Payment : PHP15,000 per month (15x the payment of the 23 year old above)
Number of payments : 240 (20 years x 20 months)
Future Value : PHP14.8 million
Another way to look at this is if Marketman wants to have PHP100 million in the bank when I turn 65, and I am now just about 50 years old. How much do I need to save every year (and not touch that savings and keep it invested) for the next 15 years to have that amount? The answer is a whopping PHP2.68Million per annum! Assuming I make it to 65, and live another 13 years after that (average life span assumed at say 78), then I would have roughly PHP11million per annum or more to spend every year until I died (this assumes the PHP100 million continues to earn some interest of say 6-7% per annum as I withdraw funds to live on).
If you haven’t thought about retirement, or if you thought it is too early to think about it, think again. Financial literacy is the key to an independent and comfortable future. And the sooner you start, the better your chances are of achieving your goals.
And please, don’t tell me you just can’t afford to save anything. If you go back up to that 23 year old example up top, PHP100 a month out of say a PHP16,000 monthly call center salary is just 0.63% of the gross pay, and less than the cost of a couple of beers or the effective amortization on a “snazzier than you need” cellphone, or a two-piece Jollibee ChickenJoy, JUST ONCE A MONTH. For me, putting away say 5-10% of your monthly salary into savings and investments should yield you a sufficient nest egg for after your retirement…
Your Age : 30
Your Monthly Salary Today : PHP35,000
Your Payment : 3,500 (and I would personally increase this over the years)
Number of Payments : 420 (35 years x 12 months)
Future Value : PHP22.5 Million (For you to use over say 20 years, with interest of say 6-7%, you could probably use PHP2.0+ million a year on average, or roughly PHP200,000 per month after the age of 65.
Future Value of Annuity Calculator, here.
49 Responses
Very Good Advice to your young readers, but it is never too late to invest for your future.
hi marketman, what companies manage mutual funds in the Philippines? Any suggetions? I want to know more I want to read about how it works
bam, your safest, most conservative option is to go with your bank, they should have at least a couple of mutual fund options. As you get more comfortable, you can explore insurance company managed mutual funds, or buy stocks directly. If you have access to family abroad, eventually, you may want to use them to help you buy international mutual funds, so you are invested in at least two currencies, say peso and dollar, or peso and euro. Pinoymoneytalk has a post on top mutual funds in the Philippines, here, and they even include up to 5-year returns, which are a surprisingly high 22+% for the Philippines, given the bull-run of the past few years, so the 12% that is typically used for equities in the long-term seems reasonable… But I have to warn you, stocks can be volatile, so you have to think 20, 30 year investment horizon, not just returns from one or two years…
I like how you explained the 100/month thing, as far as comparing it to the cost of 2 piece chicken joy. But before that, you said 1000 a month for 23 years old.. right? While it may seem absurd that some people cannot save 1k a month, it is just a reality that more than half of the working population now face. Still, kudos to this article. It highlighted the need for one to save and invest and become financial literate, if anything. :)
Jane, the PHP100 a month example from 23 years old gets you the PHP1 million at age 65. While the PHP1,000 a month gets you more than PHP14 million (quite a bit more). I agree that more than half the population cannot put that away, but even if I target the habits of the top 20% of the working population, I guarantee that not a large percentage are saving even this amount monthly. And worse, if I were cranky, I would argue that if half the working population simply curbed their insatiable desire for “load” on their cellphones, they could find the PHP100 to put away every month. Folks need to realize that despite small salaries and incomes, they DO in fact spend on things that could otherwise go into savings… amongst them, fast-food meals easily replaced by home cooked baon, cell-phone load, grocery purchases from convenience stores where prices are 10+% more than large groceries or markets, new cellphones, high-sugar and carbohydrate snack foods, etc. But I am not in a cranky mood, I just think people don’t take enough responsibility for their own financial independence, and have a more “bahala na” attitude… It’s unfortunate, because what we face in 20-30-40 years is a huge number of retiring individuals that will have little or no resources to take care of themselves.
Jane et al, if you missed this old post on income levels in the Philippines, you would notice, that as of the time of that article, perhaps the top 30% of the population belonged to families that earned PHP17,000 or more per month for a family of five. So even if only those top 30% of folks saved PHP500-1000 a month, that would be a huge improvement…
thanks for this, marketman, this has been on my mind for the past year or so. unfortunately, i signed up (with sunlife) only last year and i’m nearing 40. so now i’m wondering how to “make up for lost time.” haha!
Hi Marketman,
This is my first time posting a comment, but I have been visiting your blog since early 2008.
I currently intern at a telecom company, and have been putting aside roughly 5% of my monthly salary in my savings account. I try not to dip into it unless it’s for school expenses.
I appreciate this entry–it helps reaffirm the notion that living modestly has its rewards.
Bzbot, good on you! 5% is a great start, but now that the funds are sitting in your savings account, if you meet the minimum investment amount, its time to put it into higher earning alternatives, such as bond or equity funds if you are comfortable with that, or any other reasonably safe investments that yield you higher than savings account returns. When I first started working after MBA school, I was an “OFW” and was only liable for minimal tax (1% to Philippine govt) and lived in low tax areas like Singapore, plus worked for a company that did everything legally possible to reduce my liability. I lived in hotels constantly, traveled for work, and had much of my food paid for. So I ended up saving some 60-65% of my annual salary and bonuses for a period of 12-15 years. That’s how I was able to retire at a relatively young age… Only to find out it was a bore to be retired, so now I do things to keep myself busy…
And btw, I love your phrase “living modestly has its rewards” — that is so TRUE. Always try to live within or below your means — it amazes me how often younger folks think I am bizarrely crazy when I counsel them to do the same when asked how they should prepare for their futures…
Thanks for reminding us MM! Ive been an avid reader and posts like this really helps us a lot.
Marketman, I invested in prulife equity fund. Last time I checked, 2 months ago, it was down by almost 20%. My investment is for long term (for the kids). Now I’m thinking, should I split the money to a growth fund instead ( half equity, half fixed income) or should I just leave it in the equity fund anyway its for long term? I’m scared the market may be bearish this coming months.
This is a very timely post now that I’m back inhaling desert dust. Salamat for posting this.
CCA19, first of all, you should know I am NOT a CERTIFIED Financial advisor, and thus my opinion is a personal one, not a professional one, though I did work in the Finance field for two decades. My guess is you have invested in Filipino stocks only in the past year or so, from whence the markets tanked. If your investment is for the long term, say 15-30 years, then stocks or equity are typically the suggested avenue to take by most financial planners. And you have to keep at it, meaning, some folks would say keep buying into the fund say monthly or yearly whether it goes up or down, and over time, you should theoretically receive a reasonable return for a well-run fund.
i’m one of the many who always appreciate your financial advice posts, Mr. MM, so thank you again for this one. lots to digest here especially for someone like me without any background in finance, but maybe just a question: is it silly for me to worry about how the economy (and therefore, any domestic investments–if I understand your message correctly so far) will perform after 2016?
You are correct. I just started May of last year. I am looking at 5-10 year investment. But I dont want to keep on buying for this fund. Is that necessary (to buy when the market is down or up)? I might get too exposed in this fund. Thank you for your advice. I just wanted an opinion of an experienced banker.
Gosh, I have gotten a LOT of private emails with questions on this post. Here are a few more Marketman tips to help the novices along…
1. When you get your paycheque, set aside the money you want to save first, removing it and putting it away in your savings or investment account right at the start will help you avoid spending it.
2. Unless you have PHP1 million in the bank, avoid using a credit card. I know, it sounds like a dumb rule, but think about it. If you don’t have significant savings, then you probably can’t afford to buy most NON-ESSENTIALS and pay for it at the end of the month, or worse, on installment over the year at interest rates that approach 30-40% per annum. Try to use a debit card or cash instead. It may seem cool to you to have a credit card, but it is, in my opinion, next to money with evil intent, the root of a lot of financial evil. :)
3. The little “treats” you buy yourself during the month to make you feel good, are often your future savings slipping away like sand through your toes. Be honest with yourself and think back through the last week. Did you buy a soft drink, hot drink, snack or treat that you could have done without? Did you really NEED to spend that much on your cellphone? Did you take a cab rather than the MRT for a short hop? Did you buy yet another article of clothing when you have sufficient clothes in your closet? If you could find one or several expenditures in the past week you could have done without, then you could have saved that money relatively easily.
4. For many folks earning say PHP15,000 or less, I find they often eat in fast-food places, say 2-4 times a month. At PHP69 say for a chicken and rice, they think it’s worth the convenience and they get to sit in an air-conditioned place for a few minutes. But if you cooked that chicken wing at home, it would have cost you say PHP30 at MOST, and thus, if you bothered to prepare your lunch at home just 3x a month, you COULD, in theory, put away PHP100 a month instead.
5. If you are pawning items, just until your next paycheque, and ignoring the fact that you are paying 40-60% interest per annum, again, you need to put on the brakes in a big way, and absolutely positively remove any non-essentials from your expenditures until you can cover the basics without short term 5/6 or high-interest loans.
6. Filipinos love personal care products, and branded ones at that. If you are so inclined, think about how much you spend on branded shampoo, toothpaste, cologne, deodorant, alcohol, etc. and see how you can cut back. It’s amazing how many people think they are saving money by buying sachets, when if they bought a larger bottle, and self-rationed they might save 20-30% per month. I know, sachets seem “cheaper” — but they aren’t. And the same people who say they can’t buy in bigger amounts, often turn around and buy a pack of cigarettes for PHP100 peso or more…
7. If you watch local TV, you would be amazed at the emphasis put on long women’s hair, and straight at that, so one can only imagine how much is spent on hair products and salon care. A friend of ours owns several hair salons and he claims that a huge proportion of people who come in for PHP1,000+ treatments fall into the PHP12,000 and below in monthly salary, so it seems a disproportionate amount of income is diverted to beauty than savings… I guess it’s a matter of personal priorities.
8. Cigarettes, liquor, etc. expenditure over savings is, well, plain ___________. You fill in the blank.
9. Until you have six months of salary in savings or liquid investments, do NOT buy anything you do not ABSOLUTELY NEED. So if you are earning say PHP15,000, try to get to at least PHP90,000 in savings before you start looking at doodads.
10. Look for more ways to cut out waste, reduce expenses and save more, regardless of your income levels.
CCA19, you can buy other local funds, but with such a small local equities market, they will probably be buying similar stocks of local companies. Some financial advisors tell folks to buy on a regular basis, whether the markets are up or down. Personally, I wait for major corrections, before buying as I suggested five years ago after financial turmoil. But I think the buy on a regular schedule has its merits too. Everything I read points to a potential increase in interest rates in the years ahead, if that proves to be true, then bonds might decline in price as well, unless you buy a bond with say 7% coupon rate and it matures say 10 years from now and you hold it until then, thereby earning a fixed 7% return per year. shiko-chan, the Philippines is an emerging market, with high-volatility, so it is riskier than other markets… but over periods of say 10-20-30 years going forward, hopefully the returns will reflect that risk and provide 10-15% average annual returns on equities in the long run… Of course there is always real estate, that except for a few PRIME, PRIME properties, is probably even a riskier class of investments in this country…
Thanks for the advice, Marketman. Though I agree that the money should be invested on things that may have amplified returns, I also read that debts should be cleared before going on riskier ventures. At the moment, I am shooting to pay off my student loans from undergrad. Perhaps if I was offered a full time position at my workplace could I begin to consider investing, seeing as the company offers a tuition reimbursement program.
As a side note, as much as I enjoy reading about your food adventures, I would also like to read more about your MBA experience and how you navigated the corporate world. I am currently pursuing a dual MBA/MS Healthcare degree and believe that such information is valuable to a journeyman that just entered the workforce.
Cheers!
Bzbot, you are right, take care of the student loans first. I finished an undergraduate degree in Finance in Boston, then worked for HSBC in Corporate Banking for a couple of years. I returned to graduate school for my MBA in New York, worked in Strategy consulting first in New York, then based out of Singapore, for nearly 15 years or so… My specialty was corporate strategy, failing banks, Corporate and Middle Market banking and I did work in credit cards, insurance, investments, etc. I borrowed roughly half of my tuition/MBA expenses and repaid that amount within 3-4 years of working, and I have never ever borrowed money since.
Thanks, MarketMan. I consider it a wakeup call, since I’m turning 30 next month and haven’t really made a thought about saving for my retirement. Young people like myself tend to put it off for next time thinking it’s too early to even consider it, until we forget, and realise too late that we could have done something about it when we were younger. Thank you!
These are the sort of life lessons they should be teaching us in college!
I have a rule regarding credit cards. When I buy something I ask myself if I have the same amount in cash at home or in my ATM. If yes, that’s the only time I will buy the item.
I work with some people who seem to survive paycheck to paycheck. Getting a promotion or a raise doesn’t solve their money flow problems since they also “level up” their lifestyles correspondingly. Sadly, most of these people feel that their only option to save up is to move to another company with a higher salary (where they also get overworked) or work abroad.
Thanks for these tips MM! I’ve been thinking of where to put some of my savings and you suggested some things I could look into.
I had money in savings which was totally wiped out when I gave birth and my child had serious medical issues. Good side is my child is now fine, but starting all over again in savings which is harder because there are always ongoing medical expenses and emergencies. So true, save as long as you can!
MM: I know you are not a financial adviser or planner but your ideas make better sense than many of the so called financial planners.
I , for one, followed your opinion on renting vs owning a home. At my retirement here in ‘Pins I felt renting is more prudent than putting a large chunk of our retirement savings outright in a home in my desired location as it will tie up a good portion of our nest egg. Since amortization is not the norm here, owning property may render us illiquid in case of a catastrophic and chronic health event. if instead, I am able to invest in well diversified holdings earning 4-8% ( a very conservative estimate depending on the investments) I feel that is the better way to go in my case .
But I am curious, do you have any funds invested in the Philippine market? I see the top Philippine funds in the Pinoymoneytalk article you cited posting some very good returns (1,3,5 year returns). Not a bad idea to invest a portion of my funds here as part of my diversification for money I do not need in the next 5-10 years or so? what do you think?
ConnieC, I have to be honest and say I find the local market a bit scary, and didn’t have much invested over the last five years when everyone else seemed to be making hay while the sun shined, until the pull back for the last year. However, I would consider say 10-20% of one’s long term assets in the local market to make sense if one had peso expenses that could use the returns while in the Philippines for say half the year… We are engaged in the real estate business, which in general has been doing well for the last few years, ironic isn’t it, that I don’t like owning property, but we rent/sell it. We STILL rent our primary home. I will say, however, that we have held top quality local company bonds, that have yielded say 7-8% or so over the past decade or so, and in some cases, their prices increased as well (bond yields are down the past two years). If you have much of your retirement funds abroad, and are happy with the investment vehicles they are in, you may just want to keep things the way they are, with the exception of perhaps just a small fraction invested here. Remember, the dollar/peso rate is another consideration. Had you put your money in Filipino stocks last May, as a reader above mentions, they would be down 20+% in just 9 months, plus you would have lost another 10% in the weakening of the peso from say 40 to 45. So that would not have been a pretty picture… As always, remain conservative, particularly if you have hit retirement age of 65 or older — I am much more conservative than I appear for my age, I think… :)
And a strong warning to all — MAKE SURE YOU ONLY INVEST in LEGITIMATE financial instruments offered by legitimate corporations/institutions — there are way too many dubious folks out there.
Oh, I forgot ConnieC, make sure you have VERY GOOD MEDICAL INSURANCE to cover health expenses in the Philippines, and if necessary, back in the States. You can get pretty good health care in Manila for most illnesses, and it costs FAR FAR less than the U.S., but you need to have the health side covered to have peace of mind.
Connie, here are the full year returns for 2013, note the losses that year, but the last five years have still been quite positive.
CCA19’s info about prulife uk alarmed me. I invested in equity $ funds based on my relationship manager’s advice! It matures early next year and i am now concerned that i made the wrong decision! Arggg i should have read more before investing my savings!
My hubby and i make sure we set aside half of his salary. I told him that i do not want to grow old poor. I want us to enjoy our returement and not burden the kids with our needs and wants when we are no longer earning.
Thanks for this marketman. I will encourage the kids to read this and hopefully they will start saving!
Hi, Marketman. Fantastic post! 25 year old local female reader here. I can’t tell you how many times I’ve felt like an alien because I’m really into frugality and investments and no one else among my family and friends can relate! Everyone thinks I’m crazy and depriving myself because I’ve been living on 50% of my salary since I started working 5 years ago (and that 1st salary was only 28k!). I’m at about 65% savings rate now, thanks to raises, and no one I trust enough to share my finances with, not even my longtime boyfriend, believes it’s possible to be happy living like this. But it is!
I’m glad to see posts like this from you because we need to change the Filipino mindset that investing is only for the rich. Buying stuff does not buy happiness. But saving and investing definitely buy peace of mind!
Max, that is AMAZING. Really inspiring to hear a young locally based and employed Pinoy saving that much. AMAZING. And proof positive it can be done. Brava! The habit of saving and investing builds on itself, and at some point, when you are comfortable with your savings/investments, you need to use some of it for a nice trip or some other goody. After all, it’s there to eventually be used. :)
Thank you! It’s really gratifying to hear that. The 60% is for longterm savings and the other 5% is for fun stuff like gadgets and trips abroad. I believe one can strike a balance between discipline and enjoyment and hopefully other readers are inspired to do the same.
Once again thanks MM for your wise counsel. I did not even think about the currency devaluation as part of the equation but since the funds I am investing are here and just being idle now, I thought it better to get into the Philippine market rather than putting them in CD’s with very measly returns , as long as I can park them for at least 5 years.
Historical market trends appear to generally improve with return charts on the upward trend over a five year time period regardless of when one enters the market, but one has to stay invested with good diversification and not pull out when the market goes down. Besides, perhaps this is a goof time to invest as the Philippine market is down. Didn’t Warren Buffet say, “buy low, sell high”?
Yes, a good medical insurance is part of good retirement planning, including long term care insurance. Fortunately, we have good medical insurance that covers expenses outside the US. If I remember correctly, 65% of bankruptcies in the US is attributable to catastrophic medical conditions.
Oh Max, i so admire you. I wish i was as wise as you when i was your age. I love that you are able to save but not deprive yourself of the simple pleasures in life!
ConnieC, if you park them in some 5+ year CD’s or other investments, they might even be tax-free, if I am not mistaken. You may want your banker/broker to look into some Philippine bonds from top companies, that mature in say 5-7 years… that might get you a yield of 6-7%. If you want to go riskier, then a local mutual fund might make sense… but I have just read a couple of professional opinions that world stock markets are about to go for a rough ride for the next couple of years… so that might make one more cautious…
OK, MM. Thanks again. I think I’ll park some in individual bonds as you suggested.
I have more than 1 M dollars in my 401 K , still living below the means but still anxious
to leave the workforce . Is this normal? I am in my 60’s ,active and loving life. My hubby
saves even more than I do. Many will envy our situation but I am still apprehensive.
Your thoughts marketman ? Love all the things I learned from you.
Hi marketman..thanks for this! Im 30 but got no penny in the bank..like what eveybody says its never too late…i just started saving when I was approved of a can visa..Now, I have no excuse to save more..
Thanks again..!
ConnieC, make sure the bonds have shorter maturity dates, so you can hold on to them until they mature, and you get the coupon rate as stated… no surprises with price declines, etc. Amethyst, I would look at my situation at 65 like this… If I spent $50K per year to live the way I wanted to live (including medical insurance, household expenses, etc.), then I would double that to 100K for a buffer. And my nest egg would have to yield that much every year in interest. That way, I am pretty sure my funds will last for as long as I need them, and any extras can be bequeathed to my children or heirs. I am also assuming your home is fully paid for, and there are no loans of any kind left. If your husband is saving too, then combined you should be set for retirement… But to stay active, absolutely, I think I would die if I had nothing to do… Charmaine, start saving… :)
I really like this post. I do agree on living below your means, albeit I have a hard time practicing it! :)
I have 2 investments, one is a growth fund with insurance and the other a straight up mutual fund (invested in government bonds). I learned that, the former is expensive in a sense that I pay for it on a monthly basis (it doubles as an insurance and retirement plan), for about 5 years now. In the first year, I didn’t make money (fees went to admin), the following year 25% was invested, the next year 50%, so fort so on. It’s only now that I’m actually able to see growth in it. I think that if what you want is investment, then invest directly in government bonds first, and if you have enough safe money there already, then start building for your equity investment, which has higher return. And if you want insurance, then just get insurance with no other riders. But if you still wish to get this type of investment, then invest a huge amount of money, then forget about it (lump sum). Always, don’t put all your money in one investment, scatter them in different investments.
Great post.Like Marketman I believe you should, save, save and save. What is important is not how much money you make but rather what you do with the money.
I believe you should only buy funds when you truly know what fees are going to be charged. I would only buy passive index funds that track large markets and there is nothing wrong with buying a fund that tracks the market worldwide. You gain exposure to every market and also small to large cap companies. I understand and appreciate that it is easier for those readers of the blog who are residing here in the US to access low cost fund management but the same principles apply in the Philippines. I also believe in the notion that dollar cost averaging every week or every month is effective. If you adopt the dollar cost strategy you will avoid to a certain degree the hoops and swoons of the market. This means that you go out there and open an account with a discount broker and buy religiously every month. I also believe in the strategy of buying and holding. Gamblers like to trade frequently but true investors are in there for the long haul. It is simply not possible to time the market.
I do not believe that a 12% annual return going forward is realistic but what do I know. I would be more than content with a steady 6% to 9% return including dividends. I do believe that you will do well if you buy broad baskets of stocks and hold them for the next ten, twenty or thirty years or so. I also believe that potential investors however small should understand the potential of owning stocks that also pay out dividends every quarter. I believe these dividends should be reinvested.
I absolutely agree that everyone should live within their means and avoid buying the better car or house in order to keep up with the neighbors. I am an old man and I have seen many so called wealthy people live quiet lives of destitution and desperation in their old age, because they lived beyond their means.We all should keep in mind the ugly fact, that debt never sleeps, and is always there with you in the middle of the night, when you wake up trying to do the math for the next week or the next month.
I also strongly believe in the purely financial notion, that a house is really a liability. It is interesting that the pragmatic and very wealthy Germans have one of the lowest rates of home ownership in the EU. I believe this simple statistic comes not by accident, but rather comes from frugality, and knowing the value of a dollar, and what to do with the dollar.
Jody
Hi all,
I was holding off commenting about how I save since it is such a different/unconventional view which would be hard to explain to most who view their currency as both a “medium of exchange” and a “store of value”.
Then I came across this article today which sums it up quite nicely and, imho, is worth a read (with an open mind of course):
https://www.zerohedge.com/news/2014-02-20/things-make-you-go-hmmm-anti-gold-idiots
It quite a long read when including the sribd document embedded in the page.
But do note the part of the article about the Philippine Central Bank accumulating physical gold as part of its reserves.
To sum it up, fiat currencies, the Philippine Peso and the US Dollar included, are mediums of exchange. Gold is a store of value. I spend my currency of things I need and save in gold for long term wealth preservation.
But for my specific circumstance, I am not yet 40. So my savings in gold is for a longer time horizon. If you are near or at the retiring age, your savings plan would be a bit different from mine.
Also, you can hold gold in an IRA.
(if you have a 401K you can rollover to an IRA)
Disclaimer: I am not professionally schooled or credentialed to give investment advice so do your own due diligence.
With that said, it is supposedly a “cultural thing” for Chinese to save in gold. I have some chinoy blood in my family but I don’t think we’ve ever talked about gold in the family. And I’ve also asked a couple of my chinoy friends and the concept of saving in gold is also foreign to them.
Also, the Philippines has some customs laws regarding the import of precious metals. But if I’m not mistaken, you can still import gold coins/bullion as long as the purity of the gold is clearly marked on the coin/bullion/bar that you are importing.
Mart, yes, absolutely, different strokes for different folks, some invest in fine art, others ceramics, others gold, silver, real-estate property, etc. So I guess it’s what works for the individual.
Here are two interesting charts to consider:
First, a hundred year inflation-adjusted history of gold (and silver) prices from roughly $432 to $1216 or threefold (3x) in 100 years. But if you only use 50 years from 1953, it went from $298 to $1216 or roughly four-fold (4x) in the last 50 years. Of course that meant if you bought in 1915 and sold in the 1960’s you would have lost money in gold.
https://www.macrotrends.net/1333/gold-and-silver-prices-100-year-historical-chart
The Dow Jones Industrial Average, on the other hand, went from roughly $1800 in 1913 to roughly $16,000 or an eightfold (8x) increase in the same 100 year period. But if you use only 50 years from 1953, it went from $2,469 to $16.000 or roughly five point five-fold (5.5x) in the past 50 years, also inflation adjusted. If you bought the index in 1915 and sold in the 1960’s you would have made just a bit of money, inflation adjusted…
https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart
This is very helpful to me. Thanks,
FOR CONNIE C.
JUST A FEW SUGGESTION:
1. IF YOU WANT TO INVEST A SMALL PORTION OF YOUR PORTFOLIO IN THE PHILIPPINES ( P200T + FOR EXAMPLE ) I WOULD LOOK INTO YOUR LOCAL RURAL COOPERATIVE . OUR COOPERATIVE IN ABUCAY BATAAN PAYS A 7% RETURN ON INITIAL P200T TIME DEPOSIT FOR ONE YEAR TAX FREE.
2. REGARDING BONDS : MOST FINANCIAL PLANNERS RECOMMEND BOND LADDERING , IT MEANS BUYING BOND AT DIFFERENT MATURITY. THIS WILL DIMINISH THE RISK OF INTEREST RATE FLUCTUATION.
Hi MM,
You are my IDOL, being able to retire early is my dream.
I am 32 yrs old now and believe it or not, from the time I started working I have been living on a daily work allowance of 100 pesos (regardless of any salary increase )+ 100 pesos on transportation (no taxi). Add that to my household expense and an occasional splurge, I only spend about 40%-50% of my monthly income.
And I am proud to say that with my frugality, I have been able help build my parents a house.
Now that I have turned 32 I would like to start investing my savings (to maybe start on the early retirement dream), but I was always afraid to do so because: 1. I do not know where to begin, no knowledge whatsoever with stocks and bonds. 2. Because I am our family’s breadwinner and part of what I am saving for is our “in case of emergency” like hospitalizations and stuff like that, I am afraid of risking my savings in case things do not work out.
MM, Thank you for this very helpful post and I hope I can get enough courage to start investing.
Thanks for the charts MM! Wow, that website is like “chart porn” nirvana. :-)
Yes, of course. Timing is always important. When you sell is the time when you crystallize your gains or losses.
The article I hyper-linked to (and the embedded scribd document) actually implies a “doomsday” scenario where the fiat currency is rendered worthless. It would be hard to imagine a similar scenario playing out with the US Dollar especially with its current status as global reserve currency. Hence my initial reluctance to post such an “out-of-the-box” idea of saving in gold.
For non-“expriv” currencies (currencies that are not the global reserve currency; or put another way, currencies that do not enjoy an “exorbitant privilege” status), hyperinflation and sudden revaluations can and do happen.
But hyperinflation and currency devaluations usually are only triggered by wars (e.g. Germany’s hyperinflation around the first World War) or internal country conflicts like civil unrest (e.g. Zimbabwe).
Argentina is one example of a country whose currency has been devalued several times in one generation.
But yes, saving is very important in any case. Be it in precious metals or the paper currency or stocks available wherever you are located.
This post is really inspiring MM! I’ve put away money ever since I’ve been given any (so that’s before working). I remember my friends in grade school poking fun of me when I would only buy so much in the canteen and I would tell them I was “saving”, hehe :) That being said, sadly, I have zero knowledge of investing and, shamefully, have never done anything about it :( You’ve just inspired me to go out there and find a way! I turn 40 this year…is it too late for me??
joey, not too late at all. But yes, get cracking and get those savings into something that yields a better return!
I believe in the concept of investing but no so much on retiring. The value of your 1 million pesos could change depending on inflation. But first things first you cannot invest if you don’t know how to save. You really don’t need to retire if you love what your doing.
Very inspiring and encouraging post, MM! I am sharing this with my family and friends. Thank you, MM.
Question is where will you place your savings that can guarantee an 11% interest a year, for the next 42 years? Let me know asap. This article is dated 2014. What bank or financial institution can guarantee you an 11% interest?
Well it will be more dramatic if you put it at 22% or 33% or why not 50% interest per annum but at current interest rates, how will you advice your young readers to realistically earn good from their savings?
anu_bayan, listen SMARTASS, and obviously someone who doesn’t appreciate the concept of saving for retirement, so hopefully you are fabulously wealthy to begin with, or incredibly lucky in your working life so as to put away for a comfortable retirement.
The post is meant to illustrate the benefits of saving, investing and doing it from an early age. No where does it say the returns are guaranteed, the example is clearly illustrative but certainly not outrageous. But since you are so brilliant and need a solid knock on the head, if you did just a bit of googling, as I have no desire to waste much more time to get better data, then you would see that during the last 40-50 years, the average returns of the U.S. equity market (which you can easily get into with a local bank’s global equity fund) was some 10-12% per annum, compounded, see here. So the 11% example falls right smack within that range. Also, anyone who has attended finance classes know that historically, the equity market return used often used lies in the same range. The extremely low interest rate environment of the past ten years is one of the longest cycles, and hopefully does not last forever. Furthermore, even with the seemingly appalling returns of recent years, some folks estimate growth over the next 30 years in international equities at roughly 7-9%, and that’s only one person’s opinion. One need not limit their savings to bank deposits and equities, either. If you save religiously, but put it in things that may or often do grow in value, such as art, spectacular gems, ceramics, etc, you could earn decent returns as well. But NOTHING and I say ABSOLUTELY NOTHING is guaranteed. But trying is sure as hell better than just griping and attempting to poke holes in a system of savings and investment that has done very well by tens of millions of people around the world, as opposed to those who left their future retirement solely to chance.
And in case you want more egg in your face, why don’t you read this series of posts, with a semi-hypothetical portfolio of ten stocks picked on this blog, first acquired after the market turmoil in 2008, and which over the next six years, brought in a total return of roughly 120% (without changing any stocks at all), see final post in series, here. If you were reading this blog in 2008 and had the nerve to buy the same stocks in the list, or even just Apple, Inc. Then you would be laughing all the way to retirement. But again, that’s not guaranteed. However, several readers have written me privately to say they did buy a few of the stocks, and were thrilled with their results.
Furthermore, you can also take your savings and invest it in a business or businesses that yield you better returns than just being an employee. Those with capital are in a much better situation than those without capital to invest. A small, properly run business can and does earn upwards of 20-30% annual returns on capital, but then again, 90% of them do not.
Even if I only used 6% returns, rather than classically quoted 12%, if you saved religiously every month and got those returns, you would BE FAR BETTER OFF than someone who didn’t get into the habit of saving. You may be young, but don’t be intentionally, moronically stupid. Read what you read with a critical eye, but look at it from several angles, research and learn, and don’t think anyone else owes you an explanation for things you couldn’t be bothered to learn to figure out for yourself. Before you criticize, understand the issues, the context and the intent.
The point of the original post was to encourage young people to live well within their means, unspoken but implied is that they stop wasting money on things that are not essential, and instead save a good proportion of their income and invest it. If you only get 6% for the first few years, so be it, but build your capital anyway. Then later you will have options open to you that would not have existed otherwise. I wish you good fortune, but with the irritating tone of your comment, you need a good smack on the head with a marketmanila fishpan, before you finally figure it out.
And on a final note, I will give you the example of my wife’s work colleague from her government days. She saved a good 20-25% of her meagre government salary. She listened to good investment advice. She bought stocks of top Philippine companies. She bought bonds. She eventually used her funds to help her migrate to a first world country (after working and saving in the Philippines for 20 years) where she has worked her last 10 years just above minimum wage before retirement and where she saved up to 40% of her income. She invested some more, and now, is almost set for a very comfortable retirement, which she hopes to spend back in the Philippines. Hers was not exactly a rags to riches story. But a story of coming from Filipino minimum wage means, to being fully and utterly independent with a good 20-30+ post retirement years ahead of her with a nice nest egg put away. She did it, and so can many others, if they just persevere.
P.S. I don’t normally allow comments nor reply to people who don’t have the balls to put a real functioning email address. But I do so in this case hoping you will learn something. But trying to remain hidden behind a stupid pseudonym without providing a valid email address strips you of 99.99% of your limited credibility with respect to the topic at hand.