If you have excess funds, where to invest it? Most Filipinos first reaction would likely be to advise you to deposit the money in a bank. To go for time deposit if you don’t need the cash in the short term, otherwise, go for traditional savings account.
This used to be my mentality too when it comes to managing my finances. The only debate centered on where to put the excess cash – in a savings account or time deposit? Those were my only choices, until I discovered the stock market.
In the last two weeks, I’ve been investing in the stock market, and so far the experience has been great. And it is true that the potential rate of return is really high. In just 2 days of trading, I was able to get a P211.71 net return of my stock investment worth P8,815.94. That’s 2.40% roi in just 2 days!
Read this post about JGS stocks profit-taking after two days.
The advantages though of placing your money in a bank are varied:
- Your money is ‘safe’ with bank savings or time deposit in the sense that the risk of losing your capital is zero if your savings is below P500,000. Bank deposits are covered by PDIC insurance up to P500,000.
Plus, if you are banking with big banks like BPI, Metrobank, BDO, Security Bank, etc., there is an added assurance that you are in good hands since these are huge, time-tested, and well-respected banking institutions.
2. It’s easy to withdraw or add funds, you just go to any bank branch or ATM machine and do withdrawal or deposit transaction for regular savings accounts. Other investment vehicles are a bit more complex when it comes to funding / liquidating of asset / investment.
3. Bank savings is hands-free; you just let your money stay with the bank without doing anything, and after a few months or years, you know you will get some earnings when you withdraw your savings investment.
BUT INFLATION WILL GET YOU. There is no running away from inflation.
Example my actual BDO TD placement in 2014:
Date of Placement: February 24, 2014
Principal amount: P50,000
BDO Time Deposit Interest rate: 0.625%
Terms: Auto-renewal every quarter
Net interest earned after 2 years: P518.71
Total amount Principal + Interest: P50,518.71
Screenshot from my BDO Online Access
Now, let’s talk about Inflation
The Philippines inflation rate for 2014 was at 4.1%, for 2015 it’s 1.4%. For the first four months of 2016, the country’s average inflation rate is at 1.1%, lowest in the last 19 years.
Why should we care about inflation rate vis a vis bank savings or time deposit interest rates?
This is because the amount of goods that you can buy with your capital in present time can no longer buy the same amount of goods in a year’s time, after two years, after three years, etc.. Prices of goods and services will go up over time. There is no escaping it.
So back to our sample of P50,000 placed in BDO time deposit in February 2014: if I used this cash to buy everybody’s favorite Jollibee Chicken Spaghetti Meal back then, I’d be able to buy 505 packs of this product at P99 per pack.
Jollibee Chicken and Spaghetti Value Meal price back in February 2014 is P99. See screenshot of Jollibee FB page 2/10/14:
P50,000 / P99 = 505 packs of Jollibee Chicken and Spaghetti value meal
Fast forward to May 2016, this same product from Jollibee is already price at P110.
Source: Jollibee website menu price list.
Let’s go back to our time deposit investment sample:
Since I’ve placed the P50,000 money in a time deposit in BDO, which in turn gave me P518.71 earnings after 2 years, I now have a total of P50,518.71 cash that today I can spend on buying Jollibee Chicken and Spaghetti Meal.
How many packs can I buy with my full TD savings proceed (principal + interest)?
P50,518.71 / P110 = 459 packs of Jollibee value meal Spag + Chicken.
505 less 459 = 46 packs not bought kasi tumaas na yung presyo
RESULT: With the scenario discussed above, nalugi ako with respect to using buying power as measure of a positive ROI. This is due to the offered interest rate in the bank which is way low than the rate of price increases or inflation.
When it comes to investment, to earn in real terms is to place your funds in an instrument that will give you interest rate that is GREATER than inflation. Otherwise, if your chosen investment medium gives you interest rate that is lower than the average inflation, the buying power of your money decreases over time.
Samples above use real prices set by Jollibee in 2014 and 2016.
Although I have to say this, if you are still building your Emergency Fund, it’s best to put the bulk of it in traditional bank deposits. Why? Liquidity is necessary for Emergency Funds. Bank deposits are considered liquid assets.
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