The silent thief
Fast forward three decades, and I caught myself saying almost exactly the same things to my kids – "When I was in college, my lunch cost only 5 pesos a day. Out of that I could buy a large burger, or a full meal with meat and vegetables and even a small dessert" or "The ikot jeep then was only 20 centavos, regular jeeps were 25 centavos." Ikot fare in UP had gone up more than 20 times in just a little over 20 years. Even more shocking was that my parents used to pay P900 (US$21) for my one year's tuition in high school. By the time it was my daughter's turn, tuition had gone up to almost P70,000 ($1,600) a year!
Inflation is the silent thief that creeps up on all of us, stealing the value of our money. When the expenses come, we suddenly realize that what we have is not enough. It is no wonder then, that the Sun Life–SWS survey conducted earlier this year showed that 9 out of 10 Filipinos, including those in the upper demographic classes, experienced financial shortage in the past year. These were funds needed for housing, education and health and medical needs, and while some of them were unexpected, quite a number acknowledged that they were not able to plan properly.
This forced Pinoys to either cut back on spending, look for additional sources of income, borrow money, or even sell property.
And when while 7 out of 10 tried to save money, 30% of those surveyed did not bother to save at all, with 10% saying they don't earn enough to save anyway. By the time people retire, only 2% are financially independent (from an earlier Sun Life survey), with the rest forced to continue working, borrow from relatives and friends, or rely on charity.
Unfortunately, this creates a cycle of dependency where the next generation is forced to support the older one, and thus is often unable to prepare for their own future.
Can we beat inflation and break that cycle? Yes, but only if we plan and prepare properly. This means putting our money where it earns more than the inflation rate, so that it doesn't lose value over time.
To illustrate, the inflation rate this year is about 4%. If the inflation rate stays that way for the next ten years, a one hundred peso meal today would cost P148 ($3.38) ten years hence.
But most Pinoys still think the best and safest place to keep their money is in savings accounts, where they typically earn 1% a year. After 10 years, the P100 ($2.29) you set aside today would only be worth about P110 ($2.51), not even enough to buy the meal you can buy today. In other words, your money has actually lost value in what you thought was the safest place for it. Inflation has stolen its value.
In order to plan properly for your future, you need to match your needs with where you put your money. Set aside money in savings accounts or time deposits, where you can easily take them out, for short term, day to day and emergency needs. Typically this would be equal to 3 to 6 months of your income.
For longer term needs, however, such as for your kids college education or your retirement, look for higher yielding instruments such as stocks, bonds, and pooled funds such as mutual funds, UITFs and unit-linked insurance products. These financial instruments have historically outperformed traditional savings products over the long term. Bear in mind that these instruments are not guaranteed and values fluctuate. The higher the potential return, such as with stocks, the more volatile they are likely to be. If you will need your money within a year, it could be quite risky to put your money in stocks.
Fortunately there are various types of assets that underlie the pooled funds being offered in the market today so you may choose the one that best suits your risk profile and time horizon. In addition, some of these pooled funds are very affordable. They allow you to start with as little as five thousand pesos and add amounts as low as a thousand each time, and are managed by professional fund managers who take care of selecting the assets in which to put your money.
But make sure you study where you put your money, as not all funds are the same. Not everyone has the same "risk profile."
For example, a person close to retirement would not be investing his money in the same instruments as a young professional with no financial obligations, just as a person with a lot of disposable income can take much more risk than someone who does not have as much. A financial advisor can help assess your profile and help you develop a financial plan: determine what your needs are, how much you need to set aside to cover those needs, and how to allocate your money to various financial instruments.
With proper planning and the discipline to follow your plan, you CAN beat inflation. My dad made sure to invest a certain portion of their money and never touch it, so that he and my mom had enough set aside to sustain them through their retirement years. Even with expensive medical bills, he never had to ask us for help. They were financially free! – Rappler.com