Investing Your Hard-earned Money

Investing Your Hard-earned Money

How to Make a Financial Plan

You're working hard with a specific goal in mind: provide well for your family’s needs today and in the future. That’s why you’re keen on saving, a key strategy in securing your financial future.

But where should you put your money? Are savings accounts enough? Savings accounts are good in that your money is easily accessible anytime, but the interest they earn can be so small that you’d be missing out on higher potential returns other investment instruments may offer. You may want to consider keeping some money in a savings account and invest the bulk elsewhere.

Here are a few suggestions on where you can invest your hard-earned money:

Time deposits. Your money will be kept by the bank for a fixed period (30 days, 60 days, 90 days or more) in exchange for an interest rate higher than that offered by a savings account. A time deposit is easily accessible, but early withdrawal may cost you a fee.

Some banks, however, have introduced time deposit products that allow partial withdrawals without touching the interest rate. For those who want to save and invest smartly, be more diligent in choosing banks.

Foreign currency. You may choose to invest in US dollar, euro or other foreign currency savings or time deposits. Be on guard though, since a foreign currency may weaken against the peso anytime. In that case, you may choose to ride out the exchange rate fluctuation or switch to another currency.

Stocks. When you invest in the stocks of a company, in effect, you get to own a portion of the company. According to The Citibank Guide to Building Personal Wealth, “Seen from a global perspective, equities have historically been the best-performing asset class over the long term.” The stock market is very volatile — prices of stocks fluctuate in response to the times. Stock investments should thus be held over the long term to ride out these fluctuations.

"Avoid investing solely in one form of investment. Allocate your assets to spread out your risk."
"Avoid investing solely in one form of investment. Allocate your assets to spread out your risk."

Bonds. A bond is a loan that you, the investor, makes — you lend your money to a government, municipal authority, or company in exchange for a fixed amount of interest paid to you regularly. You don’t get to own a part of the lending entity. At maturity date, your investment is paid back to you at par value — the amount written on the bond certificate.

Bonds have long been established in Europe and the US, where this type of investment has done better than cash investments in terms of returns. Bonds suit conservative investors since they can get a regular stream of income over a number of years. The risk lies in payment defaults, so choose bonds carefully.

Mutual funds. If directly investing in money market, stocks and bonds seems tedious, time-consuming, and baffling, consider getting into mutual funds. A mutual fund gathers together investment placements from many investors which the fund manager then invests in money market, stocks, and bonds based on their market study. It has become popular, with more investors in the US shifting from cash deposits to mutual funds in recent years. This is because mutual funds allow investors to diversify rather than just focus on one investment vehicle. Mutual funds also “have the potential for good long-term growth,” points out The Citibank Guide to Building Personal Wealth. Choose a mutual fund according to your preference — money market fund, equities fund, bonds fund, or balanced (mixed) fund.

Derivatives. These are financial instruments based on the prices of equities, bonds and commodities. It requires more capital and investment know-how, since you deal in effect with the future prices of these assets. Trading is done in futures exchanges or privately through contracts. Financial institutions can do this for you.

Real estate. This is familiar to many Filipino investors, since a house and lot is often one of the first things we save up for. It is a sound investment, much better than renting a place where the family can stay. But there are some things investors have to consider:

  • It may not earn income if the family lives in it.
  • Maintenance costs will go higher as years go by.
  • It does not sell as quickly as other investments.
  • Its price fluctuates depending on the condition of the real estate market.
An investor is thus advised not to plunk all his hard-earned money on real estate.

Diversity is the name of the game

The adage “Don’t put your eggs in one basket” is a rule investors need to follow. Avoid investing solely in one form of investment. Allocate your assets to spread out your risk. How you should allocate your assets is answered by how conservative or aggressive you are in risk taking, and in how long you can hold the investment.

If you are still young and fairly willing to take on risks, consider investing more in stocks or in an equities mutual fund. You can ride out market corrections and earn a potential higher yield.

If you are conservative, or approaching retirement, experts advise you shift more to bonds or a bond mutual fund.

Time deposits or money market placements are investments for the short term, which you need to have to meet any financial need arising out of emergencies.

Having a good mix of investments will help you prepare for your future well.

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