If I had P1M

Q: If I had P1 million, how would you suggest I save and invest it?—(posted at PFA’s “ask a friend, ask Efren” service at www.personalfinance.ph)

A: Before I give you my answer to your question, let’s analyze first some of the rules of thumb in personal finance and the radical modifications by the brave.

Rule 1: Provide the equivalent of three months of expenses in terms of emergency funds if you are employed, or six months if you are self-employed. In a world with diminishing job security and fast product obsolescence, leading to shortened business life cycles, one should be ready for income disruptions.

The brave would say there is no need to put up cash for emergency since money will only be tied up in practically non-earning assets.  The better alternative would be to set up credit lines through lending cooperatives or even credit cards.

Rule 2: Pay yourself first, which means you should work within a fixed income by saving first (come hell or high water) and then making expenses fit.

The brave would say the reduction in expenses does not lead to much improvement in finances.  Focus should be on increasing income.  That is why many would recommend going into business instead of being just an employee.

Rule 3: Do not borrow, if it can be avoided. If you do, pay your debts on time and in full.

The brave would say use other people’s money to buy earning assets that would increase your earnings on top of your employment or even business income.

Rule 4: Get life insurance as early as possible so the premiums are cheaper. This works well if you are buying life insurance where premiums remain the same throughout the life of the policy. These should be whole life and endowment policies.

The brave would say buy cheaper term insurance and invest the difference between the premium on term insurance and the more expensive policies.

Rule 5: Hire people more intelligent than you for your investments. Just buy into pooled funds where professional fund managers manage your money.

The brave would say investment returns from pooled funds are not exciting. You would probably earn higher returns by investing yourself.  Just hone your investing skills by reading books and attending investing seminars.

Do you see what is common in the strategies I enumerated?

They are all tools. There are specific tools for specific jobs. You would not use a hammer if what you needed was a screw driver. In golf, you would not use a driver if you were putting.

You have to focus first on your needs before using one of these financial planning tools.  Also, you would have to balance that need with your preference for risk. While there is appeal in the suggestions of the brave, they entail more risk.

Using credit lines for emergency funds will entail interest expenses. Expense reduction is easily controllable; earning additional income is not. Investing directly to earn returns better than those of pooled funds is a full time and heart-pounding job, something that a busy novice investor may not be capable of.

To answer your question then, I would recommend that you find out first what your goals are and then allocate your P1 million accordingly. The barest minimum is to have adequate emergency funds, manageable debts, sufficient life insurance and appropriate investments in relation to your goals and risk preference.

If you want to learn more about what to do with your investible funds, check out the other free resources at www.personalfinance.ph. You may also attend one of the 2014 EnRich™ personal finance training on March 1 in Baguio City, March 8 in Davao City, March 15 in Cebu City and March 22 in Quezon City.

(Efren Ll. Cruz is a registered financial Planner of RFP Philippines, personal finance coach, investment adviser and author. Questions about the article may be sent by SMS to 0917-5050709 or e-mailed to [email protected]. To learn more about the RFP program, attend a FREE orientation on March 12, 2014, 7 p.m. at the PSE Center.)