Here on the Edukasyon blog, we’ve been writing a lot about raising your financial intelligence quotient (FQ). I’ve even written a few tips that have seriously changed my life—a budgeting hack that works for my mathematically inept self? Yes, please! But my best learning so far?
Always pay yourself first.
Essentially, savings became my way of treating my future self to better, higher rewards. So pro-tip: when you get your allowance or paycheck, set aside something and put it in a savings account. I started to see that pool of money grow over time, too.
Now this one’s for everyone who wishes to take their FQ journey a little further.
Don’t stop at savings. Make your money grow!
Think: High-interest savings accounts, stocks, bonds, mutual funds, trust funds. People call these passive income instruments.
Everyone wants to make money in their sleep (myself included).
So I did it—I started my own unit investment trust fund (UITF) with the savings I’ve accumulated over the past year. UITF is similar to mutual funds. They are both pooled funds that allow us to invest even with just small amounts because our investments are put together. And if a former financially awkward millennial like me can do it, then so can you!
Investing isn’t so scary (after all)!
On a cost-level, it doesn’t take much if you’ve been saving. Entry-level direct stock or equity accounts at COL Financial as well as mutual fund deposits start at PHP 5,000.
On an info-overload level, it’s not as intimidating as you think! If you’re scared, there are free seminars for stock market beginners.
If you want to stick to your trusted bank or the one that handles your payroll account, just ask about the UITFs like what I invested in.
One day, I chatted up one of the bank associates to help me make the most of my savings account. Seriously: Befriend your local bank assistants! They’re more than happy to assist you, they’ll give you a range of options to choose from based on your budget and your goals.
Most importantly: Go in there knowing yourself well and knowing your priorities better.
Financial Quotient Pro-Tip: Know your personal goals.
If you’re terrified of technical terms, start with your values. Start with your goals. Start with your why and the how will follow.
In order to make sense of your saving and investing, know your life goals. Do you want to travel, buy a car, build a house, have a happy retirement? These goals put life and meaning to your saving and investing.
Thinking about it rationally, the sooner I invest, the more my funds can grow. That’s the magic of compounding, for you. Time is your biggest ally in investing. All I needed to do was take the plunge and invest.
But go a little deeper. Why is there a need to invest? Why not just keep everything in a savings account? Because being content with low-interest rates given by savings accounts will surely allow inflation to erode the purchasing power of your hard-earned savings!
In other words, there’s such a thing as over-saving. Or rather: under-utilizing your savings.
So if you’re saving on the regular, spending wisely, and budgeting like a (semi)pro, then it’s high-time you gun for higher-yielding investments.
But wait, what kinds of investment accounts are there?
Depending on your lifestyle and your personal financial goals, there are different investments you can go for. It was intimidating for me, too, so let’s break it down in order of risk. You can also read up on our quick guide to investing here!
Bonds are essentially secure loans. When you buy bonds, you’re the lender. If you buy government bonds, you lend to the government. If you buy corporate bonds, you lend to corporations. With bonds, you earn interest and get back the principal (or the money you lent) at the end of the bond’s term. This is classified as a fixed income investment.
Stocks are units of ownership in a publicly-listed company. When you buy shares of stock, you become part-owner of the company. You can earn through dividends and price appreciation of these shares. However, you’re not assured of earnings here because it’s not a fixed income investment like bonds. It is considered high risk, but this asset class gives the highest returns in the long-run. Investments in stocks or equity are for your long-term goals.
Pro-Tip? Invest in blue-chip companies. These are well-established, recognized, and financially sound companies with a good track record of growth.
How do you invest in bonds or stocks?
There are essentially two ways to invest in the above financial instruments. You may directly buy them or you may buy pooled funds. So instead of doing your own stock-picking, you may just buy pooled funds and let the fund manager or the index do the stock picking for you.
Further, there are two kinds of funds: the mutual fund and the UITF. Don’t get confused with the terms. They are essentially the same.
I got the UITF because it’s simpler for me.
Is it time to update your financial habits?
Now that I’ve got an investment fund, my life plan and financial habits have changed, too. Since it’s an added cash outflow, technically, I’ll need to account for it in my long-term budget. But it’s an outflow that’s designed to increase my inflow so it’s all good.
I’m keeping up the good work with my budget plan. Breaking up with my irrational brain and setting aside 20% of my salary for savings has made a huge difference. Every so often, I’ll be checking in on my investment account, and when I can afford it, I’ll pitch in additional placements.
My next goal? To open up a stock exchange account. I know it’s higher risk, but in the spirit of breaking through the knowledge-behavior gap, I want to learn how to trade.
What are your financial goals and where are you on your FQ journey? Wherever you are, it’s always great to check out your progress by scoring on the Financial Intelligence Quotient (FQ) test! Keep raising that FQ by checking out more of our tips and guides.