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Tuesday, July 8, 2014

A Financial (Mis)Understanding

One of the perks of my job as a financial advisor is never facing the same set of faces everyday. While some people may find that daunting, I relish it because it means no two workdays will ever be the same. It keeps me on my toes, and makes "an interesting day" part of the job description.

I have been feeling distressed as of late, though. And it stems mainly from the observation that some would-be clients do not comprehend financial terms as they were meant to be conveyed. (Hint: compound interest has nothing to do with parking lots) I realize a lot of jargon in the financial world seems to be made to be deliberately obfuscated, as if they were code words of a secret fraternity that no outsider should ever know.

But I'm not talking about derivatives or corporate mergers. I'm referring to terms that I expect high school graduates to have no problem comprehending, but are somehow (intentionally?) "misunderstood". I've compiled a list of terms that seem to generally confound people when I try to explain how to utilize them.

1. Emergency Fund

On my drive yesterday, I heard Randell Tiongson, one of the country's famous financial advisors, over the radio talk about emergency funds and how much one should set aside for this (three to six months worth of salary).

Reading the terms, this means a fund purposely set aside for unexpected expenses (or not factored in as a daily/expected expense). This list would include a sudden onset of major illness, which requires hospitalization; the smashing of your car in a four-car collision, rendering you at the mercy of public transport until your car insurance company deems the accident to be, well, accidental; or the loss of your job (goodbye, useless superior!) which will most likely ensure you will be knocked off your feet financially, even if only for a couple of months.

(From mecob.co.tz)

In short, these are occurrences that are unwanted but you have to prepare for, because they impact your financial state.

Therefore, a trip to an Asian country, just because there was a piso sale with your favorite airline, does not constitute an emergency.

Neither does your need to complete #100daysofhappiness by eating at another fancy restaurant.

And if you just bought a new smartphone, when the phone company announces a new model coming out, trying to scour for funds just to have the "latest" incarnation is not a correct use of the term "emergency".

Don't wait until you have a real emergency to find out how to properly utilize it.

2. Insurance

By definition, any insurance product is designed for protection and uncertainty. Whether it's life, car, fire or mortgage insurance, the aim of insurance is to make sure that someone benefits from the insurance proceeds: with life insurance, it's so your beneficiaries - oftentimes your family/loved ones - can hopefully retain their standard of living should you pass away unexpectedly, seeing as they all depend on your income for survival. When a coconut falls on your car, breaking your windshield, you can't very well haul the tree to court to collect damages, it is the car insurance company that covers the cost of repair.

Again, these are instances no one wants, but everyone has to prepare for because paying full cost for a windshield or asking a spouse who just stayed at home to suddenly find a job while grieving for your loss can be devastating.

So it surprises me no end when people say, "walang pakinabang/gastos lang ang insurance" - thank your lucky stars if none of these events happen to you, but you and I know better. We have people in their thirties dropping dead from a heart attack, or an innocent bystander waiting for the bus (at the proper bus stop!) getting rammed down. These are not fictional stories, they are in our current headlines.

Getting insurance is a way to cushion life's unpleasant eventualities/occurrences from being a sinkhole to your finances. (Seriously, I cannot comprehend breadwinners who think of insurance as a waste - I daresay it is foolhardy to have a family, especially raising children, without protecting yourself: do you have any idea how much tuition fees are these days?)

And today, life insurance policies have evolved to have an investment component in them (a way to address the notion that insurance is a waste), but that is for another post. Suffice to say that I have clients who are happy that they are actually "earning" with their insurance policies, just to lay the "" notion to rest.

3. Investment

Arguably the most contentious term here, spurred on by the fact that Filipinos are generally averse to anything related to risk. (And it also surprises me when they are averse to the previous term - insurance - which is designed as a risk management tool. Ayaw sa risk, ayaw sa risk management - truly, financial advisors in this country have our work cut out for us.)

Ask the average citizen here what financial product they know, and overwhelmingly, they'll say "bangko." Those who fancy themselves as financially savvy will say "ay, nagta-time deposit ako!" These are products that have minimal to virtually no risk, which explains why your money in the bank isn't growing. (The current bank deposit has an interest rate of less than 1% annually, and given our inflation rate,you're actually losing money by letting them sleep there. Again, this deserves another post.)

The general rule with investments is: (blank) risk = (blank) rewards. So if you invest in a fund that has more risk, you will probably earn a lot more than if you placed your funds in a relatively risk-free vehicle (my bank deposit example illustrates this clearly). More equals more, less equals less.

Nowadays, there are more investment options to choose from, from the POV of an ordinary citizen. You do not need millions of pesos in order to take part of stock market gains - you can gain access to those levels of profits by investing in a mutual fund. (Pooled funds from numerous investors which can be chosen based on risk appetite and desired returns.) Banks have offered their counterparts called UITFs (unit investment trust funds), and companies like Citisec Online also offer their services for those who wish to get their feet wet in the stock market, but by investing in a number and variety of listed companies.

So when someone approaches you and tells you "invest ka sakin, kikita ka ng 30% in two weeks!", realize that you are taking a huge risk, seeing as the stock market (on average) hasn't even breached this number, on an annual basis. Legitimate investment  companies will have returns that approximate or slightly surpass the stock market indices, since they invest in the same place.

Study the companies that want you to invest in, because as with all investments, you have to bear the brunt of the risks yourself - but you also reap the rewards fully.

4. Retirement Fund

Another two-word term that seems to be confusing, I find it easier to state one acronym to instantly illuminate the client in front of me: "SSS".

The Social Security System was designed to "force" workers to save a part of their earnings for when they retire, and to have them use this once the mandatory "retirement age" kicks in. Ideally,this is a fund that is - all together now - for retirement, so it would be logical that one doesn't withdraw or use this fund prematurely, e.g. while you are still working, in your thirties, etc.

And because of the length of time before it is needed, the way to build this fund into a sizable amount is to start early and save consistently.

You often hear seniors who are now collecting their SSS pensions complain: "Eto na yun?" Some have even been interviewed on TV because either the agency miscalculated the benefits due, or the companies they worked for did not properly remit the correct payments.

Against this backdrop, I often encourage my clients to set up their own (voluntary and personal) retirement fund. That way, they can monitor it closely, increase/decrease contributions as the circumstances warrant, and without going through bureaucratic processes. Private companies that offer this often make it easier for clients to do so by installing auto debit arrangements.

But guess what? Even in these auto-debit setups, some people fail to have money in their accounts to be actually debited from. They completely forget what they signed up and agreed to do - set aside a certain amount of their salary to be saved for retirement - and then wonder - surprisingly - why their fund isn't growing!

I've also encountered people who say "tsaka ko na pagipunan yan, matagal pa naman" but fast forward to almost a decade, and when I see them again, they sheepishly mutter, "di ko pa nga naumpisahan yung pang retirement ko, hehe", punctuated by an awkward laugh.

Do people expect a retirement fund to just magically appear? Are they expecting dole outs from relatives or the government? How can they even proclaim - loudly - "ang hirap ng buhay!" but are not doing anything constructive to prepare for a certain question we all face once age 60 hits - who/what will fund my retirement, so romantically called The Golden Years?

Anyone who has heard of the fable of the Tortoise and the Hare should heed its' lesson: slow but sure wins the race. Nowhere is this more evident than when preparing for your retirement fund.

Most of us will never be multimillionaires, let alone billionaires, in this lifetime. But one statement from a foreign speaker at an event I recently attended still rings in my ears: it's not your fault if you were born poor, but it's definitely your fault if you die poor.

In a country that relishes and champions the underdog, it may sound harsh, where "maawa ka" is a common expression. But until we face the reality that we are solely responsible for our financial state and future, this culture of dependency or fatalism where money is concerned will not die out anytime soon.

Your finances are your responsibility. Start now.

3 comments:

  1. Nice post! I agree with every word you said regarding emergency fund....it frustrates me to see people na ginagawan ng paraan yung mga luho nila like that piso sale you mentioned (by borrowing money or maxing out their credit card limits), but when it comes to real priorities like fixing their home (tag-ulan pa naman ngayon), saving for the rainy days, getting an investment insurance for their child's college education and yes, getting themselves insured (I am a big advocate of 'being insured'), they always procrastinate.

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  2. I only discovered your blog today and what a gem it is! nice post and i whole-heartedly agree... i work for a financial services company and though i am not in sales, i feel it is my responsibility to offer either life insurance protection or investment instruments to my immediate relatives....yes , it may be "expensive" but i tell them i would not personally benefit from the premiums that they pay...it is for the family they would leave behind in case anything happens to them ..i also tell them we are not taking their money from them but are putting it where it could work better for them instead of leaving their money in banks... unfortunately and as you wrote, matitigas ang ulo....pero pag may bagong labas na gadgets o kaya seat sale ayun nakakahanap ng pera... pag may emergency sabay manghihiram samin

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  3. Emergency fund is indeed important. I remember when my first husband died because of car accident. We have no big funds then; just ample savings for our daily expenses. It was a big lesson for us (especially to me) to apply for an accident insurance for emergency situations.

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