Dear daughter: Why you should prioritize saving and investing

To my dearest daughter Nicole,How time flies! In a year, you will graduate from university. Although I am confident that you will find a good job that pays well, that is not enough to guarantee financial freedom.

There are many Filipinos my age who earn more than I do but who can not afford to quit their jobs—otherwise, they would have to significantly downgrade their lifestyles.

Sadly, by the time they realize the need to do something to improve their financial situation, time is no longer on their side, making it more difficult for them to become financially free.

Yes, time is one of the best tools we have in reaching our financial goals. Never underestimate the power of compounding. Even a small amount of P1,000 growing at a compounded annual rate of 5 percent can become big over time. That was why when you and your sister were small, I used the money that you received during your birthdays and Christmas to invest in stocks.

Admittedly, stocks are riskier because they are more volatile. However, those who can afford to hold on to them for a long period of time generate higher returns.

Since I knew that you and your sister wouldn’t need the money any time soon, stocks were the perfect investment for you.

Soon, you will start to work and earn a steady income. Although that is good, be aware that having a steady stream of income will tempt you to buy nice, expensive things that you only dreamed of owning when you were young.

Also, when you live by yourself and start your own family, you will have more bills to pay. These will make it difficult for you to start saving and investing, which is why many Filipinos with large salaries still don’t have enough savings and investments and can’t afford to retire even when they are old.

My advice to you when you start working is to prioritize saving and investing.

The first thing you should do when you get a job is to open two bank accounts on top of your payroll account.

The first bank account is for your monthly expenses—the amount you spend on food, gasoline, mobile phone load, rent and other necessities. That way, you are sure that you can always pay your expenses on time, eliminating the need to use your credit card to borrow money.

The second account is for your savings and investment. Initially allocate 10 percent of your salary for this.

I suggest increasing the amount you set aside every time you get a pay raise. In fact, I know some people who set aside as much as 50 percent of their salaries on investments.

Only when you have funded your two bank accounts can you spend what is left in your payroll account to buy the things that you want: new clothes, shoes, or go on a trip that you have always wanted!

To stay disciplined, make sure to automate the fund transfer process. If you need to do the transfer manually, you might be tempted to delay allocating funds for your savings and investments. This will make you lose out because you are diminishing the power of compounding.

Aside from automating the fund transfer process, automate your investments. Many banks, stockbrokers and fund houses now allow you to automatically buy stocks, mutual funds, or unit investment trust funds on a regular basis. If you don’t know what investment product to buy, I suggest starting with equity index funds. After all, you are still young and can afford to ride the volatility of stocks. Moreover, equity index funds are automatically diversified since these funds own all the members of the Philippine Stock Exchange Index.

Finally, live simply. I realize that prioritizing the payment of expenses and savings and investments will leave you with little to buy the things that you want.

You might become jealous of your friends who have nicer things, eat at fancy restaurants, and go on expensive out-of-town trips. Remember that you are worth more than the things that you own and the enviable experiences that you post on social media.

Your father and I don’t own many expensive things and live very boring lives, but people respect us because of what we know, our work ethics and how we help and treat them.

Besides, your savings and investments will eventually pay off and allow you to buy and do the things that you want, and you have seen that with us. The best part is, when this happens, you can afford to choose a job that you really want to do, something that makes you happy even if it doesn’t pay the highest salary.

By then, not a lot of people who seemed to have the perfect life when they were young will be able to do the same. For me, being able to choose the life that you want to live is one of the greatest benefits of being financially free. And that is my wish for you, which is why I also want you to be financially free.

Love, Mommy INQ