This topic is a life-changing aspect of financial preparation. The way we see our financial action plans determines where our future would look like.
Not too long ago, I counseled a young couple. They approached me and they said that maybe I could help them plan for the future as I have been working in a financial institution for several years now. And I said, tell me about your situation. They were both school teachers. They were both 30 years old. They have been married for about 5 years. They own a condominium. They had a mortgage on that, they don't have any car debt. They have been saving their wife's salary since they have been married. They have about 10% of their salary set aside for future needs. And I ask them what they were doing for the future. They said that they were about to put P 5,000.00 into their retirement plans.
They were telling me that they will never afford to retire because of living on a teacher's salary. At one point it's going to be 1 teacher's salary. I said to them would it surprise them to know. That you will end up in the top 1 or 2 percent of Filipinos when it comes to Financial breaking through.
What we want to talk about this time, how does that happens? Can we prove that point? I want to begin in defining what an investment is.
INVESTMENTS
Now let's talk about this wonderful terminology. A lot of people are beleaguered when it comes to investments because they are claiming that they don't have any or they don't have a plan to get one for some odd reasons. It is something that you buy intentionally and it has two purposes. One that you are to get growth in value or a yield or intense rate. Second, that it will be sold when it doesn't meet its needs, it no longer serves your purpose, or when it goes down its value.
Well, a lot of people buy things that they think it is an investment and they are not really investments. For example, a Car. I've heard a lot of people say, "you know, I just made a good investment. I bought this car". Maybe they are just keeping up with the Santos'es so as we would say.
In reality is, I don't know any car other than an antique car that has ever gone up its value and it doesn't pay me interest to own a car. So, why would I make an investment that I know is going to go down in value and is not going to yield me anything? You know I had this dilemma a few years ago since I made my statement that I won't get any car forever since it's not a good investment. Certainly, it is not, but when I had my firstborn came out, I had a hard time picking up taxis during rainy days and running before the other passengers going out from the malls during rush hour. So by God's provision a few months back, we acquired our first car. And when the pandemic came it was so timely that I don't need to rush through public transportation and get infected with the virus.
Certainly, I may have made a better purchase than somebody else, but a car is not an investment. Typically, jewelry or diamond rings or things may not be an investment, and the reason being is that I'm buying that home in order to provide for my family or to provide recreation or value.
The same way with a home. A home might be a really good purchase at a certain time period. It can be a really good purchase. But I'm buying a home to live in, I'm not buying a home for its investment value. I need a home. It may turn out to be really good. But a home's not really an investment either. I remember when I was picking up my own condo investment plan near our place in Mandaluyong where the proximity to our office is really at stake, I was supposed to get a condominium unit nearby but when the pandemic came this picture turned 180 degress. It made me think twice and I did not pursue in getting the condo.
What is the perfect Investment?
If those things are not an investment, what's the perfect investment? Well, something that has no risk of loss. It'll never ever go down. It has an instant convertible to cash, so anytime I want to liquidate it, I can liquidate it. It's always got the maximum yield, so I'm never ever worrying about the yield on it. It always grows in value, and not only that, it may accomplish something that is morally responsible. Well, we know that, in fact, there is no such thing as a perfect investment. I think the world has some messed-up thinking when it comes to investing.
One is that they want to get rich quick. They have a short time horizon. Their priority is to spend and consume first. Time is always an enemy. I don't have time to be patient, and I've heard this so many times in my business career in the stock market, bet it the real estate market, be it the gold market or whatever it may be: "This time it's different. It will be-it won't go down this time."
Well, we don't have to think back to far to see that the reality of that and we think of the dot-coms, when we think of home values, in many cases. "This time it's different," and "can always buy low and sell high". God's word has a lot to say about investing.
Proverbs 28:20-22
'A man with an evil eye hastens after wealth And does not know that want will come upon him. A faithful man will abound with blessings, But he who makes haste to be rich will not go unpunished. To show partiality is not good, Because for a piece of bread a man will transgress. '
I believe that the world says, "Get rich quick," but we're going to see later that I believe that the bible also teaches, "Get rich slow" Trustworthiness and consistency.
Luke 14:28
'For which one of you, when he wants to build a tower, does not first sit down and calculate the cost to see if he has enough to complete it? '
If you want to build a tower. Will he not first sit down and estimate the cost to see if he has enough money to complete it? I believe the principle is this: take a long-term on all of your decision-making, especially your investment decision making, as opposed to having a short time horizon.
Ecclesiastes 5:13-14
'There is a grievous evil which I have seen under the sun: riches being hoarded by their owner to his hurt. When those riches were lost through a bad investment and he had fathered a son, then there was nothing to support him. '
In other words, if I spend and consume first, which is a worldly principle or priority as opposed to saving and investing as a first priority, I may end up with nothing. Another biblical principle is found in
Proverbs 6:6-8.
"Go the ant, you sluggard; consider its ways and be wise! It has no commander, no overseer or ruler, yet it stores its provisions in summer and gathers its food its harvests. "
Time is a tool.
I start now in the future. The world tends to say, " Time is an enemy. I cant wait for the Fall to begin accumulating. I need it right now. " Ecclesiastes 11:2 says, "Divide your portion into seven, or even to eight, for you don't know what misfortune may occur on earth."
But I believe that God's word says, "Diversify, diversify, diversify, in order to avoid loss." I'd like for you to put a principle in your mind, and its this: that wealth is typically created by a career or vocation over some long timeframe. For example, that couple that I was talking about, the teachers. They've left of 30-35 years and if they spend less than they earn, save as a first, priority, then they've got 30-35 years to accumulate wealth.
So, if I create wealth by my career or my vocation,
I then preserve it by a diversified investment strategy, and I do that because it's impossible to see or predict the future, no matter what investment that I am in. I think there are two critical concepts we want to take a look at. First, is the magic of compounding and second is a prioritized investment strategy. In other words, step one, step two, step three, step four.
Let's take a look at both of them. In order to do that first of all, looking at the magic compounding, I need to introduce you to a concept called "the rule of 72." The rules of 72 say this: if I can earn of have appreciation or growth in value of a certain percent over time, how long will it take my money to double? For example, if I have a savings 3%, and I put P1,000 in there, how long will it take that savings account to double? Well, divide the 3% into 72 and its equals 24 years.
So I invest P1,000/ year and in 24 years I have P24,000. Now, if I double my interest rate from 3% to 6%, that means that the money will double, 6% divide into 72, in 12 years. So, in 24 years, it doubles twice, and that seems to make sense. If I invest P1,000 in 12 years, I have P2,000.00 and in 24 years, I have P4,000 at 6% compared to P2,000 at 3%.
Now here's where the magic compounding comes in. Let's assume that I double that interest again to 12%. So if I divide 12% into 72 that means that my money is going to double or my investment is going to double 12 into 72 every 6 years. So when I look at the same 24 years time frame, my money doubles in 6 years. It doubles again in 12 years again in 24 years. so what I have now is P1000 at 12% and through 4 times doubling, it equals to P16,000. In other words, I doubled and I got a four times increase. That is the magic of compounding.
There are some observations. As the earning rate is doubled, there is a geometric increase in the amount accumulated. Now don't get lost with all this math. I am trying to make a point that I think you'll see when we get to the compounding charts. Because here' hat happens on the compounding. Interest earns which earns interest or growth in value- it has grown and value or growth and value. So I have a compounding impact on the money that I invest. This is called the magic of compounding," and there are really four variables that you need to think about.
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Jack speaks at conferences across the Philippines on topics such as family finances, and personal and professional growth.
You can contact Jack Marbida through his social media accounts or email him at papajackph@gmail.com.
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