Most people think they know what money is, but the truth is they don’t. To most people, money is the paper that is in their wallet or the number in their bank account. While we call that money, it is actually not the truth about what real money is. Real money is invisible and cannot be seen. What we call money is a representative of money.

Money is value, and value is invisible. You can experience it, but you cannot touch or see it. The paper, or coin, or the number in the bank is a store of value. What we call money is an agreed upon system of storage of value. When you add value to society, by producing goods or offering services, money was invented to store that value, so that the next time you need to exchange your value for someone else’s value, then you can use money-stored value in form of paper, coin, or number to do so.

The problem with our money today is that sometimes it is not a true representative of value. Because the money system has been corrupted, there are people that know how to manipulate the system to print or manipulate the numbers to create “fake” money. Most of our money today does not represent actual value.

Therefore, in a world where the real money is used, anyone who wants to have money can do so. All they need to do is to produce some value that the society they live in needs, and money will come to them as people who have been producing value will exchange theirs for it. People miss this simple truth because they get blinded by the physical money instead of looking at the actual money, value. If you focus on actual money, it becomes easy to make money because all you need to do is scan through the society you live in and see the need and provide a service or product to fill that need.

However, we need to understand that it is not our money that determines our true worth and as they say, money is only a tool and not the end goal.

For where your treasure is, there your heart will be also. – Matthew 6:21, ESV

For the love of money is a root of all kinds of evil. Some people, eager for money, have wandered from the faith and pierced themselves with many griefs. – 1 Timothy 6:10, NIV

And he said to them, “Take care, and be on your guard against all covetousness, for one’s life does not consist in the abundance of his possessions.” – Luke 12:15, ESV

What strategies should you use to invest your money?

Individual preferences create issues and choices in the way investments are managed. Two of them-active versus passive investing and use of individual securities versus mutual funds or UITFs?

An Active versus Passive Approach

Risk-return and efficient market theory says that attempting to outperform the market will not be fruitful. If you manage to do so, you are just lucky, not skilled. This thinking leads to a passive approach to investing. With a passive approach, no attempt is made to receive greater-than-market returns. Its proponents believe efforts can better be used to diversify in order to reduce risk and keep costs low. Passive investors tend to purchase index mutual funds of all types. An index fund attempts to duplicate market performance and keep costs low by using computerized programs to purchase holdings and not employing high-priced investment managers and analysts.

With the alternative, the active approach to investing, changes are made in holdings over time to take advantage of new opportunities. There are many different ways of performing active investing. However, they all have as their basis the belief that it is possible to outperform the market. Otherwise, it would be silly to make the effort.

One prominent active approach is fundamental investing. Under fundamental investing, analysis is made of overall market, industry, and company data to identify opportunities. Often the basis of this approach is the belief in mean reversion in investments with purchases made at below “true value” levels and sales made when they return to or attain correct valuations.

Individual Securities versus Mutual Funds / UITF

In establishing an investment portfolio, a decision should be made about whether to use individual securities or mutual funds. Individual securities purchased by the household involve no fund-overhead expenses and offer a greater ability to buy and sell for tax planning purposes instead of typical annual taxable capital gains for mutual funds. With individual securities, there also can be the emotional “high” of watching a stock in your portfolio do well.

Mutual funds and/or UITFs offer professional advice at reasonable cost, the ability to delegate the investment management and record-keeping function, and simple diversification with low investment minimums by specialists in a wide variety of types of securities, geographic areas, and styles of investing. One of the risks in these investments is that it can underperform the market at certain times.

Given the lack of expertise in many households, the lack of desire to monitor their investments, a sometimes-emotional response to buy and sell decisions, and a desire for lower volatility, the majority of financial planners recommend implementing through pooled funds such as mutual funds our UITFs.

There are no perfect investment strategy just are there are no best investments. Do not forget to diversify and always be prudent with your investments.

Question: How should we do personal financial planning based on our culture? Unlike the west, we heavily support family members. Mike via Facebook

Answer: I have been a student and a teacher of financial planning for many years, and it is true that we do things very differently here in the Philippines.

It is a common observation that financial literacy is not very high in our beloved nation, which makes it very difficult to do financial planning. To make things worse, the citizens of this nation, and the nation itself have very low savings rates.
Filipinos are not much of an investor, which is why our investment market, although performing extremely well, is not as big as it should be. The rate of Filipinos with insurance is likewise low at less than 20 percent of the household heads.

Here’s another disturbing statistic, it is believed that less than 10 percent of Filipinos actually prepare for retirement. Because of all these, a big majority of the population ends up financially dependent on their children during their old age. Many studies show that majority of our elderly are dependent on family members.

There are many issues abound with context to your question. We can’t argue the fact that income opportunities in this nation are really a big problem, but I believe that our financial woes go beyond just income. I have personally been a witness to many individuals who had relatively good income and yet failed miserably with regard to being financially secure. For instance, the increase in the average of income employed by the BPOs and our OFWs was not a guarantee to see many of them with a financially secure future.

While the results or the symptoms may seem economic in nature, I believe that our problems are largely behavioral and cultural. Dave Ramsey said that personal finance is 80 percent behavior and only 20 percent skill, a notion that I agree with. In our case, we have big issues with both the 80 percent as well as the 20 percent.

A big behavior issue is that we spend much more than we should and we save far less than what we are supposed to. Don’t you even wonder why our nation now has the record number of malls and it seems that many malls are being built monthly, maybe even weekly? The stark increase in the number of shopping malls through the last 10 years only shows that the income of Filipinos is improving; and yet the increase in savings among us is grossly disproportional.

To make things worse, a big cultural issue that you pointed out is that Filipino parents expect their children to support them financially. While supporting parents financially is very noble, the impact of such actions to many Filipinos results in not being able to save enough for their old years and making themselves dependent on their children in the future; a vicious cycle indeed. A skill issue among many of us is we do not really know how to properly invest and we borrow too much.

Here are my tips for you:

Increase your cash flow. You can do this by earning more money and spending less money. Your biggest asset is yourself. If you constantly invest in your competence and abilities, your income will surely grow. Be disciplined in spending, reduce unnecessary expenses, avoid too much “wants” and evade buying too many “stuff.” Having budgets and sticking to it is your best strategy in better handling your finances. As your cash flow improves, you will begin to generate more savings.

Reduce or eliminate debt. Borrowings, especially unnecessary borrowing such as consumer debt (credit card debt, personal loan, hulugan, etc.) is very costly because of the interest you pay. Also, it is difficult to have a good level of savings when you owe too much as you end up paying debt against saving money.

Take baby steps in savings and investing. Often, we think we always think too big when it comes to saving and investing. In reality, big savings is really just small savings done very regularly. The same goes for investing. You may want to enroll in an auto-debit program of your bank so you will have forced savings. Some banks like BDO and BPI offer auto debit arrangements that go into an investment account like a mutual fund or a unit investment trust fund.

Review your finances periodically. It is prudent that you inspect what you expect. Regularly check your progress vis-à-vis your goals. Always check your spending, ideally on a daily or weekly basis. Review your savings level also, maybe twice a month or once a month. Look at your investment progress and performance at least on a quarterly basis so you can make changes if need be. Regular reviews not only keep you informed, it also motivates you when you actually see progress.

Communicate with family. This is perhaps the most difficult task of all. Respectfully discuss financial matters with affected members of the family. Let them know that while you really want to help members of the family, you are also limited by your resources and your personal obligation to prepare for your own future. Limits or budgets are a good way to objectively set expectations. Other members should also be given the obligation to provide assistance. It is unfortunate that many families rely on just one member (the one who earns the most), but that shouldn’t be the case. Reliance on just one or two members of the family results in a scrounging dependence by other family members. Communication done with utmost respect and a lot of love will solve many issues of family members. Remember, you need to do this so that you will not be a burden to your children in the future.

Financial planning “Pinoy style” is a bit tricky, but it is not rocket science. The only way for this country to really move towards a financially peaceful future is to start planning today.

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