Sankofa

Just a few words before I start: I am not here to offer you insurances, investment “opportunities” or some form of “networking” – No, I am not an evil sales agent and I don’t have much time on my hands to play around with “networking”.  I am also no financial expert (so take all the information here with a grain of salt). I almost flunked my high school Accounting course and I still don’t have an idea how to make a Balance Sheet that will be deemed acceptable by any sane CPA.

Caution aside, I am here to share with you some basic financial concepts that I have recently learned. It is also my goal to make you realize that your personal finance is YOUR OWN BUSINESS. As much as we hate to accept it, we must acknowledge that we are slaves of the global financial system. In this capitalistic world, your very survival on this money-driven economy may lie in your understanding of this few, basic financial concepts.

It all started with saving…

I can’t say that I’m an avid “saver”. Most people say that I’m stingy; I disagree. It’s just that there’s so much “pre-shopping tasks” involved before I pull the “trigger”. Being a geek, I refuse to accept the idea that one can just walk around the mall, decide right there and then what items they think they need and buy it without prior knowledge of the product and the company that made that product. So you might wonder what these “pre-shopping tasks” are… So, for your amusement, I present my “pre-shopping tasks”:

1. Convincing Phase – I first need to convince myself that I really need to buy that item or to procure that service. (Output: “I need a moisturizer”)
2. Scientific Inquiry Phase – Once I’m convinced that I need the item, I need to really understand how this item will benefit me. I mean really UNDERSTAND. (Output: “I need a moisturizer that is not oil-based because water-based moisturizers get absorbed better by the skin”)
3. Research Phase – When I’m convinced that I really need a certain item (or a service), I will scour the internet to research about the “product” (product reviews, customer testimonials) and compare all my choices. (Output: “I need a Dove moisturizer”)
4. Financial Scheduling – But before I buy, I need to “schedule” when to actually deposit the money into my account.

I’m not stingy and I am most definitely not cheap. When I realize I need something, I will happily spend the required amount to get it (My haircut always cost me no less than 3,000 PHP). I’m not stingy and I’m not cheap, I am just lazy. So I always defaulted to saving my money because it doesn’t need me to do anything.

Having saved a substantial amount, I was made aware (after a quick visit to a bank) that the banks only insure a certain amount per depositor. My mom also reminded me to not put all my savings in a single account/bank because that’s like putting all your eggs in a single basket. For a brief moment, I thought about spending the “spill-over” on something but laziness struck me again So I just opted to open a new savings account under a different bank.

During this point, my actions were only limited to: 1.) Saving and 2.) Spending. “If you have money, you either spend it or save it”, right?

Apparently, there is a third option…

Growing up, I have always heard my aunts and cousins give this advice to each other during family reunions and events: “Invest”.  Being Chinese, I guess that the only things to talk about during gatherings are money and how to make more of it. But somehow, back then, I did not manage to care enough to focus on the part of the conversation where they discuss the how of investing (when that Sweet & Sour Pork is in front of you, you just have to drop everything you’re doing and eat).

Thanks to the “old” people at the office in whom financial wisdom have been bestowed by experience, I was inspired to research more about the different kinds of investment opportunities. Having talked with said people, they shared with me their experiences with mutual funds, bonds, time deposits and the stock market. I was surprised to discover that the first three are passive investments – you don’t actually need to do anything substantial to earn. The latter is an active investment wherein you need to actively “manage” your investment like a business.

Not so long ago, I associated the word “invest” to “business”. I thought that for one to invest, one needs to start his/her own business. For people who have jobs, starting and managing a business is most often not a viable choice. Lucky for us, there are passive investment opportunities.

But even having heard of these investment opportunities, I wasn’t “inspired” enough to actually “care” about investing. I didn’t want to decide on how much risk I am willing to take. I didn’t also understand why I should invest… My money is safe in the bank and I thought that it’s greedy of me to “risk” my money for a “little” more in return. Besides, my mom is skeptical about these investments which for her sounded like a scam. So I said to myself “someday I’m gonna try these investment opportunities” and left it at that.

That someday came sooner than expected.

The invisible hand of a thief…

“Aside from the fact that I still can’t fathom that there are people out there who are willing to pay programmers to do stuff that they will otherwise do for free, I also find it astonishing that companies are mandated by the government to increase the salary of their employees every year.” – Me, just a year ago.

During my trainee days, I found it fun to “cubicle crash” certain people just to chat about anything related to their job. One of the people that I frequented was our software architect (and my mentor back then). We were talking about the retention problems of local I.T. companies (plus the fact that some of our colleagues are going abroad to work) and the reason why it is happening. I mentioned to him that I don’t understand why people are leaving despite above-average salaries here and he said to me: “Inflation pa lang, lugi ka na. Yung yearly increase mo, kulang pa para matalo ang inflation”. I never really understood then what he meant by “inflation”. That software architect is now in Singapore.

What is inflation and what role does it play in our lives?

To put it simply, inflation is the rate in which you get poorer. If you had 10 pesos in the year 2000, that 10 pesos will only be worth 5 pesos today (calculated at 7% average inflation rate). You won’t see deductions from your savings account. Inflation rate negatively affects the “purchasing power” of your money (which, in effect, makes you poorer). Depending on the economic performance of our country, the “purchasing power” of your money will either increase or decrease. According to the data available here, the average inflation rate in the Philippines from 2000 to 2010 is 7%. I hate to be repetitive but I just need you to understand the point: YOU ARE GETTING POORER BY 7% EVERY YEAR. If you have 100,000 pesos today, that exact 100,000 pesos will only be worth 93,000 pesos next year. 7,000 pesos gone without you spending it.

Inflation rate is being computed using Consumer Price Index. Using a market basket (which you can think of as a real basket  that you use for grocery shopping), economist will take the prices of basic commodities (think of the basic stuff you buy from the grocery store) every month. The rate of change in the price of these commodities is the “inflation rate”.

To deal with the inflation rate, the government mandates local companies to increase the salary of their employees across the board.

Here’s the sad thing about the inflation rate. Say you got a salary increase of 15% because of your stellar performance, taking into account our high inflation rate, your actual increase is only 8%. If you receive an annual salary increase of less than 7%; your salary is, in effect, lower than the previous year. Isn’t it ironic that they call it a salary increase?

If that wasn’t bad enough, here’s another sad reality that we have to face. When you put your money into a savings account, it accumulates interest (yes, you get richer without doing anything). The rate depends on the bank but locally, it’s between 0.5% to 2.0% annually (According to a friend, there is a small bank that offers 16% annual interest, but I don’t recommend it). Taking into account the average inflation rate (7%), via simple arithmetic, your actual annual interest is –5%. (You are getting poorer by 5% every year!)

Inflation rate is the invisible hand that steals from us; slowly making us poorer. Here’s the good news, we can fight it! In the real world, we fit our houses with electric fences to guard against thieves. In the financial world, investment is the electric fence that guard against the negative effects of inflation.

In my next blog post, I will discuss the different investment opportunities that is available locally. I will also discuss the different risks involved in these investments. As always, I will try to make it as simple as possible. Please stay tuned!