Don’t Put Your Retirement Fund in the Bank
A peso goes a long way now.
You can carry it around for days without finding a thing it will buy.
Author: Bo Sanchez
When I was a kid, a bus ride cost 25 centavos.
Today, the same bus ride costs seven pesos.
What happened? In one word, inflation.
Overtime, your money loses its purchasing power.
How much? It loses around seven percent a year.
Do you now see how futile it is to put your savings in the bank? As of this writing, a savings account in a major bank promises you one percent interest, while a time deposit promises five percent interest.
These aren’t enough to fight inflation. At the end of the year, your money would still have decreased in purchasing power.
What should you do?
Here’s the key: Differentiate your emergency fund from your retirement fund. Put your emergency fund—around three to six months of your salary—in the bank. That’s for quick withdrawals.
But not your retirement fund.
When it comes to money, there are really only three kinds of people in this world: (1) Spender, (2) Saver, and (3) Investor. And sadly, only one of these three will win in the money game. Which one are you?
Let me introduce them to you by way of a story.
James, Jim and John were salesmen. The three of them landed a huge deal. And their company gave each of them a P100,000 commission check. They were totally blown away by their luck, but they used their money in very different ways. Because James was a Spender, Jim was a Saver, and John was an Investor.
James was the Spender.
Upon receiving his check, James encashed it, and went straight to a fancy restaurant and invited all his friends to celebrate his good fortune. Later that day, he bought himself a new hi-tech cell phone, nifty clothes and a brand new pair of designer shoes. The next day, he took a holiday trip to Boracay.
In three days, James had nothing left from the P100,000 commission.
This is the story of his life. After many years of working, he has no savings to show, but he has many credit card debts.
We see Spenders everywhere, and I hope you’re not one of them.
Jim was the Saver.
Jim walked straight to the bank with his P100,000 check. He approached the friendly bank teller with a smile and said, “Miss, I don’t plan to touch my money for a long time. It’s P100,000. How much interest will you give me?” She nodded and said, “Let’s put it at a time deposit account. We’ll give you five percent interest a year. That’s the highest we can give you, sir.” “Okay!” he agreed, signed the deposit slip, and walked out happy. Thirty-six years later, he was 65 years old. He retired at age 60, got his retirement package, spent it in five years, and was now totally broke. That was when he remembered his time deposit.
He visited his bank.
He saw the same friendly teller “Hi, I deposited P100,000 some 36 years ago,” he said, “and I’m finally withdrawing it. How much is it now?”
“Just a minute, sir,” she looked at her computer, and after a few minutes looked up and said, “Sir, you now have P400,000.” The retired salesman blinked hard. “After 36 years, it’s only grown to P400,000? Perhaps you’ve made a mistake, miss.” “I’m no longer a miss, sir. Lola na ako.1 And no, there’s no mistake…” I pity Savers. Savers are good, disciplined, honest people. But Savers still don’t win in the money game.
John was the Investor.
He doesn’t go straight to the bank. He goes to where the bank puts their money. In other words, he bypasses the bank. Out of the three salesmen, only John has raised his financial I.Q. He learned that the bank puts a part of their money in investment vehicles like mutual funds, bond funds, equity funds and stocks. So he thought, if it’s good for them, why not for me? So John takes a few days researching for the best mutual fund investments in the country and visits one of them. He approaches the lady behind the desk and says, “I’ve never done this before but I want to invest in mutual funds. How much interest will you give me?” The lady shook her head. “Unlike banks, we don’t guarantee our interest rates. They depend on the ups and downs of the market.” “Isn’t that scary?” John raised his eyebrow. “It is—if you plan to invest for only a short period of time. But if you plan to invest long term and ‘forget’ about it, it won’t be scary. Like for the past years, we’ve given our investors an average of nine percent to 12 percent growth.”
“Yes, I do plan to invest for the long term,” he says, “but do I have to invest millions to join your mutual fund? I don’t have millions.”
She laughed. “Sir, the minimum is P5,000 per investment.” His eyes bulged. “What? That small? Then anyone can invest!” “Mutual funds are the great equalizer. Some call it the secret of the rich which is now available to the poor. Banks don’t treat people equally, but we do. Someone who puts P5 million in the bank gets a higher interest than someone who puts P5,000. But in mutual funds, it doesn’t matter how much you put in. Five million or P5,000, you earn the same interest.” “This is incredible,” he says. “Why don’t people know about this?” She said, “In the Philippines, less than one percent of Filipinos invest in mutual funds, while 99 percent invest in banks. But in America today, 70 percent already invest in mutual funds, while 30 percent invest in banks only. The Philippines is 30 years behind America, but we’re getting there…” So John invested his P100,000 and left happy.
Thirty-six years later, at the age of 65, John wanted his investment back. So he walked into the same mutual fund company and saw the same lady behind her desk. He asked her, “How did my investment fare the past 36 years?” The lady said, “To be honest, there were bad years and good years. There were years your money earned only seven percent but there were great years when your money earned 20 percent and more.
In the past 36 years, you averaged 12 percent a year.” “Is that good?” he asked. “According to my records,” she smiled, “your original P100,000 has now grown to P6.4 million. Now you tell me if that is good,” she winked. “That’s very good!” John grinned from ear to ear. Friends, now you know why banks have nice, tall, expensive buildings. They get your P100,000 and invest it in an investment vehicle where they earn P6.4 million, and then return to you the P400,000. How much did they earn? Six million. So next time your bank offers you a cup of coffee for depositing P100,000, realize that that cup cost you P6 million. Here’s my big question: At least for your retirement fund, why not bypass the banks? Why don’t you invest your money where banks invest their money? You can. Anyone can.
Here’s the table of earnings vis-à-vis interest rates.
For specific details of investment vehicles like bond funds, mutual funds, equity funds and stocks, I want you to do your own research. Check out www.icap.com.ph for a listing of mutual funds in the Philippines. If you get stumped and don’t know where to go, you can email me at firstname.lastname@example.org for more specific information and guidance.
Don’t put your retirement fund in the bank.
To your success,
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