Question: Our economic fundamentals showed a lot of improvements lately—credit ratings upgrades, BSP rate cuts, lower inflation rates and stock market all-time highs. But it seems Juan dela Cruz doesn’t feel these improvements yet. The poverty and unemployment rates are still high according to news. How long will it take for our poor kababayan to feel the said improvements in our economy?

—Leo Manalaysay via Facebook

Answer: With all that we see and hear about the growth of the Philippine economy, there is real reason to be very optimistic about the future. I share the view of many that the Philippines will be among the most prosperous nations in the near future, all in God’s time.

Economic growth ushers many positive changes and if the government and the business sector will properly manage growth, the benefits will ultimately trickle down to the masses. Economic growth can manifest in different ways but not all of them will have the desired effect. Some growth can be unsustainable and without sound fundamentals. Managing the economy through growth can just be as tricky as managing it through recession. A properly managed growth should be able to create a healthier business environment that will generate more employment and more taxes, and should be sustainable. As more jobs are generated, our kababayans will be able to experience better income opportunities, lower unemployment and underemployment. It is through better employment that economic growth can really trickle down to the masses.

The big issue is when. Typically, it takes time before all the benefits of economic growth can be felt, and business and the government will be the main drivers. Unlike in the stock market, where a report on economic growth can cause an overnight spike in the bourse, it takes time before business can actually experience the gains.

A corporation will want to perform adequate study before going into an expansionary phase, ascertain first if current capacity can accommodate the growth in demand for its products or services.

Companies will not immediately go into hiring more employees because it will need to ensure that the new hires will actually contribute to a better bottom line and not the other way around. Businesses need time to expand as they would still have to raise more capital, study trends and build capacity.

There must be some effects in a year or two, but not in a quarter or two. Will the effects be felt by the masses? Only if growth will result in increased employment.

Another concern is, how ready are we for the change? While many of us will benefit from the growth, how we benefit will differ from one individual to another. Some individuals will use this as an opportunity to save and invest more money that will open more opportunities for wealth accumulation and long-term savings. However, some may opt to use the income improvement for short-term wants and a lifestyle upgrade– when we do so, we will miss the opportunity to have a better quality of life that is sustainable.

While waiting for positive changes to trickle down to us, it is best that we remain prudent with whatever we have. If we can manage the little we have now, we will also be able to manage our resources when they get bigger.

“If you are faithful in little things, you will be faithful in large ones. But if you are dishonest in little things, you won’t be honest with greater responsibilities.” —Luke 16:10, NLT

Question: How much of my income should I save? How much of my savings should I allocate for retirement, education, emergency funds and other future costs?—Allan Magtoto, corporate employee via e-mail

Answer: There are no hard and fast rules when it comes to these things. Personal finance is very personal and concerns like these are relative and subjective. Ratios and formulas are broad gauges and theoretical in nature. A more thorough personal analysis is the best approach to answering your queries and a professional financial planner is the best person to answer your query. It will be in your best interest if you see one.

I can give you some suggestions that may provide some broad stroke answers to your questions.

In my talks and seminars, I often talk about the 70-30 rule at great lengths. It means that for every 100 percent of your net income, you limit your spending to 70 percent and save and invest the remaining 30 percent. In the past, we have heard about saving 10 percent of your income and you will be OK. I’ve done the math and 10 percent will simply not cut it. Considering inflation, accumulating just 10 percent of your income will not be enough for the many life events that you will need to prepare for financially. However, 10 percent is indeed a good start especially for those who are having a difficulty setting aside money on a regular basis. As you get a better handle on your finances and as your income goes up over time, increase the percentage allocated for your savings and investments until it reaches the ideal rate of 30 percent. For the younger ones with no dependents yet, a higher percentage of savings will be a great idea and will allow them to get a much-needed head start in an uncertain future. The 30-percent savings can be used for the many events that we need to plan for.

For emergency funds, allocating three to six months’ worth of your expenses would be a great hedge against whatever emergencies you may have to deal with, including sickness or loss of employment. Many of us do not have emergency funds, which is unwise. I recommend you start with building your emergency funds first before tackling the other concerns. Once you have done this, then you are ready to start preparing for your other life events.

As to education, it is best if you can compute estimates of the escalation of tuition costs and match those with appropriate investment planning, which a professional financial planner should be able to help you with. Again, and for the interest of this column, I would give you a ratio that can be a good broad rule: allocate 10 percent of your income for future educational needs of your children. Savings for education should be invested properly so that the growth of the funds will overtake the rising cost of education. You may want to do regular investing for the next 10 to 15 years of the child, which should be able to cover future education costs. Pooled funds like UITF or mutual funds might be a good choice as an investment instrument, among others. If the funds exceed the actual educational costs of your children, you may want to divert the excess to other needs like retirement funding.

For retirement, 10 percent of your income is also a good theoretical ratio. Retirement, like most things in life is relative. If you plan to have a very comfortable and luxurious retirement, then it will take you more than just 10 percent of your income. However, a decent retirement should be able to be achieved with regular retirement investing for at least 20 years. Retirement is a long-term need so it is best financed by long-term investments like real estate, stocks, mutual funds, UITF and business ventures. The longer you prepare for retirement, the better it will be for you to grow your capital. Long-term investments will allow you to wait out the volatility of the investment environment. As a general rule, investments, though fluctuating, should go up over time.

Another 10 percent of your income can be for a general savings fund, which you can use for other plans like equity for your home, family vacations, seed for business capital. Just make sure that you invest your savings properly and you understand the relationship of risks and returns.

Let me reiterate that what I wrote here are merely broad stroke allocations and should only be followed as a general rule. We all have individual needs and preferences; therefore, we should have individual planning. Certain financial requirements may take precedence over others—a home might be a priority over retirement during the earlier periods of your life.

This column appeared at the Philippine Daily Inquirer.

Question: Is it good idea to invest on UITFs? Which bank has competitive rates so far? – Maria Agustin (@pretours) via Twitter

Answer:

UITFs or Unit Investment Trust Funds are pooled funds offered by the trust department of the major banks of the country.

But what is a UITF? As per the Trust Officers Association of the Philippines (TOAP), they defined it at their website (www.uitf.com.ph) as “an open-ended pooled trust fund denominated in pesos or any acceptable currency, which is operated and administered by a trust entity and made available by participation. Each UITF product is governed by a Declaration of Trust (or Plan Rules) which contains the investment objectives of the UITF as well as the mechanics for investing, operating and administering the fund. Most UITFs are considered medium to long term investments.  Clients considering to invest in UITFs must have the financial resources to stay invested in them for a reasonable period of time in order to maximize earnings potentials.  If the funds to be invested will be needed by the client in the immediate future, the UITFs may not be a suitable investment vehicle for such client.”

A few months ago, I wrote about pooled funds in this column. I mentioned that pooled funds are Pooled funds are investments where people put their money, with an investment manager handling the investments. To explain further, let me use this analogy: Assuming you want to invest but do not know the first thing in investing in stocks or bonds. You can join a “pool” of investors who allow an investment manager to invest for them, subject to the objectives of the fund. Since there are many investors in the fund, the amount generated by the fund becomes sizeable and an investment manager will invest it for you. The investors actually own the funds and the investment manager (usually an institution) simply manages it. Ownership of the fund is through shares, much like owning shares in a corporation. Of course, the investment manager earns from this arrangement through the charging of management fees.

To answer your question if it is a good idea to invest on a UITF, my answer will be “it depends!” Like any investment instrument, you must first ascertain your investment objective, time frame and risk tolerance. UITFs (and Mutual Funds) are not short term investment vehicles. If the purpose of your investment is short term in nature, say less than 3 years then is not a good investment for you because UITFs are marked to market investments. The value of a UITF will be dependent on the performance of the market it is invested in. If the market of the fund you are invested in, say Stock Funds (Equities) are on a rise, expect the value of your UITF to go up, and vice-versa. Pooled funds, of which UITF is one of them, are not bank products and do not carry guarantees. They are not covered by the PDIC as well. However, having a non-guaranteed investment is not necessarily a bad thing because it also means that the yields you can get from investing in them is potentially higher.

If your investment is long term in nature and your risk tolerance is on the moderate to high, UITFs can be a good vehicle for you. Let’s assume that you are investing for retirement, a UITF is a good vehicle to help you build up your retirement funds because the long term nature of your need will allow you to weather the fluctuations in your funds. Even if there is fluctuations or gyrations, investments in UITF (or other pooled funds) are generally on the growth side. Performance is largely dependent on the fund you have chosen to invest in and the rules of risk and return relationship will dictate its performance. Riskier funds like Stock or Equity Funds will generate higher returns than lower risk funds like Bond Funds on good years and of course, expected to have negative growth on bad years. Good years is when the investments environment are doing well like growth in the equities market, bond market and generally when the economy is doing well.

UITFs allows you to invest according to your risk tolerance. Low risks for Bond or Fixed Income Funds, high risk for Stock or Equity Funds and moderate for Balanced Funds which can be a combination of both bonds and stocks. I also like the idea that you don’t need a lot of money to invest on UITFs, most banks will allow you to invest for as low as P10,000.00. BDO even has a program where you can invest as low as P1,000 per month under their Easy Investment Program which is a great idea for many of us. I am sure other banks will come up with a similar program soon.

A big advantage of UITFs is professional investment management. Those entrusted to invest UITFs are well experience full time investment managers who are trained to invest properly, objective and devoid of emotional investing which is a common mistake for newbie investors. Of course, the downside of UITFs is that there is management cost which is only fair. Another problem I see with UITFs is that the branches of the banks are not properly trained in handling inquiries on the UITFs and there have been reports that some branch personnel even discourage their customers from investing in UITFs because of its non-guaranteed nature.

As to which bank is the best performing, you may check out their posted performance in publications and the internet. However, do not look on performance alone. A fund with an aggressive fund manager will do well in good investment markets but will perform poorly on market downs. What you should consider are their long-term performances, like their last 3 or 5 years performance. Lastly, look at their charges too as not all banks offer the same charges.

To learn more about investing, consider attending my Steps to Financial Peace 2012 events on May 18 (V Mall, Green Hills), May 26 (Parklane Hotel, Cebu) and June 2 (Davao). Get in touch with Jen Magalong at 0939-1177856 or [email protected]

“But divide your investments among many places, for you do not know what risks might lie ahead.” – Ecclesiastes 11:2, NLT

 * also appeared in my Inquirer column.