Question: I notice people have difficulty saving up for big purchases; what is the best way to do it?—Carlo Ople, TV5 via e-mail
Answer: That’s a very good question Carlo. I often ask that question myself, too. Many Filipinos find difficulties in this aspect, which is why many get in debt.
I believe all of us have something that we want, something that our hearts desire. Unfortunately, some of those aspirations carry a price tag and in most cases, a hefty price tag.
The nature of those that we yearn for differ from person to person. A yuppie may be looking at the latest LED TV with a hi-tech game console, or saving up enough to ask the love of his life for marriage; a young couple may be saving for the down payment for their dream home or setting up a college education fund for their children; a middle-aged executive is looking at a business venture he can get into when he retires. The aspirations and costs vary but the principle remains the same, we all need to save enough for that big one.
The first and, probably, the most important ingredient we need is discipline. Personal finance is largely a behavior issue as against a skill issue. Dave Ramsey, personal-finance guru says finance is 80 percent behavior and only 20 percent skill. We must first have the willingness to make sacrifices so we can achieve something great in the future. Most people fail to save because they are unwilling to make the necessary changes.
Financial success is a slow process and we build it day by day, peso by peso. Be mindful of what you spend on, track expenses by writing down and compare it with your income. Knowing how much you need to spend on a month will allow you to set a savings target. Take note that expenses are either a need or a want and if you wish to look at bringing your expenditures down to save more, review your want expenses and cut from there.
The next thing one needs to consider is the timeline. When is the targeted time you expect to accomplish or fulfill the task? We can break down timelines according to tenure: Short-term (within a year), mid-term (up to 5 years) or long-term (beyond 5 years). Having a timeline will help us quantify our goals and prepare a road map to achieve them. Further, tenure will also help us identify financial instruments we can use to aid us in the achievement of our goals. There are financial instruments that are better suited for our goals and they can aid us in a more efficient manner.
For short-term needs, you can consider time deposits, special deposit accounts (SDA) or treasury bills—they give better rates than your savings account and they are liquid enough to cover short-term needs. They are also considered low-risk instruments. However, don’t expect good returns as yields are always a function of the risk one takes.
For medium-term needs, you may consider treasury notes or corporate bonds as they can give you better returns than short-term instruments albeit with a longer term. A bond fund (mutual funds or unit investment trust funds) can also be a good alternative. Take note, however that pooled funds carry some investment management cost and carry no guarantees. For the longer-term goals, one can consider putting some money in the stock market or some pooled funds that have some equities like balanced funds or equity funds. While they are riskier instruments, they will be your best bet to accelerate growth and a good hedge against the erosion of your money via inflation.
In investing, always remember the cardinal rule: High returns = high risks and low risks = low returns.
The last step is for you to carefully map out a plan and execute. If you have determined the amount needed vis-à-vis the timeline needed, ascertain the amount that needs to be set aside regularly plus any anticipated interests you will get. You must be committed to the regular amount and as much as possible, stick to the course without detour. Every detour you make, like spending more than you should, will bring you a step farther away to your goal, the big one. Start looking at available instruments you can consider, talk to your bank or broker and take a look at what they are offering. Further, if you can have your bank debit a specified amount from your account, it can help you save more since it is a form of forced savings. Many people fail to execute a well-crafted plan because of inertia so be watchful that you don’t delay putting your plans into action.
Remember, be willing to make the right sacrifices if you really want to realize your aspirations. The principle of delayed gratification is your best ally as you yearn to go for that dream of yours. The bible encourages us to be like the ant, wisdom that can bring us closer to the big one. “Go to the ant, you sluggard; consider its ways and be wise!”—Proverbs 6:6, NIV
(Randell Tiongson is an advocate of life and personal finance. He is a director of the Registered Financial Planner Institute (Phils.) and has over 20 years’ experience in the financial services industry. He may be contacted through randell@randelltiongson.com. To know more about personal financial planning, please visit www.rfp.ph or e-mail at info@rfp.ph.)