Is my money earning enough?
We have Dreams & Goals for ourselves and for our loved ones. And to accomplish these Goals, we WORK HARD so we could have extra income to SAVE.
At one point in their lives, everyone’s got big dreams and goals. They work very hard so they can generate extra income not just to meet their current needs, but in order to have a little “extra” to achieve their big dreams and goals.
Yet even the most disciplined SAVER is faced with this challenge, and they ask the question: “Is my money earning enough?”
The three key factors that we need to keep in mind to make our money earn more are TIME, MONEY and INTEREST.
You might already be familiar with these three, especially when it comes to loans, but allow me to emphasize how these can also work to our advantage when we are the one saving and investing the money.
When we say we want our money to earn more, we should be practicing these 3 principles:
- We should start saving or investing early to take advantage of TIME
- We should regularly save or invest as much as we can to generate more MONEY
- We should find better-than- inflation rates to maximize the effect of compounding INTEREST
Let’s take a better look at each factor to understand its value.
Why do we need our money to earn more? Investing to Beat Inflation.
Aside from being able to buy more things, our number one goal should be to BEAT INFLATION. Let me illustrate by showing you an example.
Mr. Time Deposit VS Mr. Financial Planner
Let’s look at two individuals who both have One Million Pesos. The first person invested his One Million in a time deposit account and the other invested his money in a different financial product. Both kept it invested for 5 years. After 5 years, both of them wanted to buy a car worth One Million 5 years ago. However, because of INFLATION, or the rise in price of goods, the cost of the car is already at 1,276,282.
Can both of them still afford it?
- Mr. Time Deposit, who invested his money in a time deposit account earning 2.41% per annum would no longer be able to afford it as his One Million grew to only 1,126,450 after 5 years.
- Mr. Financial Planner, who invested his money in a financial product earning 8.0% per annum, on the other hand, can still buy that car as his One Million grew to 1,469,328 after 5 years.
What should we be watching out for then? We should be conscious that the return of the money that we invested is always higher than inflation. In 2013, inflation rate was at 3.0%.
It’s never too early to make the brighter choice!
To appreciate the value of TIME in making money earn more, let’s look at these three individuals who are saving P100,000 annually for a life milestone by the time they turn 60.
• In 20 years, a 40 y/o can set aside 2.0 Mil at age 60.
• In 30 years, a 30 y/o can save 3 Mil at age 60.
• In 35 years, a 25 y/o can set aside 3.5 Mil at age 60.
What does this illustration tell us? It’s never too early to start saving for a life milestone. The earlier you start saving, the more funds you will accumulate for your future. So, make use of your time wisely!
Save as much as you can. The money you don’t spend now is the money you will spend for a life milestone in the future.
The second ingredient to making money earn more is MONEY. Again, we have here three people but this time, they are setting aside different amounts every year. How much will their savings be after 10 years?
• The first person saving 100,000 per year will have 1 Mil.
• The second one allocating 150,000 per year will have 1.5 Mil.
• And finally, the third person makes the bright choice by setting aside more (200,000), every year. In-turn, he will reap a higher fund of 2 Mil after 10 years.
How can we set aside more money?
We can do this by paying ourselves first or also known as the “Income – Savings = Expenses” formula. You can start with a small amount and once you develop the “savings” habit, you can increase the money that you set aside regularly. The important thing is to automatically allocate a portion of your income to your savings. Remember that the money you don’t spend now is the money you will spend for a life milestone in the future.
Finding better returns than all time low savings and time deposit interest rates
And the last, and most important component, in making our money earn more is INTEREST. We have here three individuals who invested one-time the same amount in varying instruments. How much will their 100,000 be after 10 years?
- Man#1 who invested his money in a financial product generating a 1% return will minimally grow his money to 110,462.
- Man#2 who invested in a 5% interest generating instrument will get a slightly higher return of 162,889.
- Evidently, Woman#3 is the one who made the bright choice in this illustration. Investing in an 8% return instrument will generate the highest return of 215,893 after 10 years.
So, what is our takeaway here? Find financial products that will make your money work harder or earn better.
Better interest rates result to higher returns, thus, letting you save more for your life milestones and at the same time, beating inflation.
This table shows HOW LONG it will take you to save for 1 Million pesos. On the left column, you will see various annual contributions, while on the first row above, you will see various rates of return. Inside the table, you will see numbers that refer to the number of years it will take you to save that 1 million.
For example, if you saved 12k annually at a 4% annual return, then it will take us 37 years to save up 1Mil. If you find that too long, let’s go to the other end of the table. With an annual contribution of 60,000 at 10% return per annum, you can save 1Mil in only 10 years! By maximizing your time, money and interest — you can save for a life milestone that is surely worth celebrating for!
At this point you are probably thinking of your future dreams and goals. Do you already know how much it costs and when you intend to achieve it?
To paint a better picture on how you can achieve it, let me share with you some sample solutions that I’ve designed to help my clients achieve their own life milestones.
GOAL: I want to travel around the world!
This sample illustration shows how a client of mine will build her travel fund of 500,000 to achieve her goal of traveling to Europe in 7 years.
I compared two options:
- The first is to build it by saving annually in a 364-day time deposit (TD) earning 2.41% per annum, assuming she can find a rate similar to that nowadays.
- The second is to build it by investing annually in a non-guaranteed financial product like a mutual fund or specifically the Sun Life Prosperity Balanced Fund potentially earning 8.0% per annum.
If she chooses the TD option, she will have to save 64,865 annually for 7 years whereas if she chooses the Sun Life Prosperity Fund, she will only have to invest 51,886 yearly for 7 years.
I can draw up a customized Sun Life Prosperity Fund illustration for you depending on your time horizon and risk appetite. What’s nice about this financial product is that, when your life goals suddenly change, the plan is flexible enough to fulfill your requirements.
GOAL: I want to own properties! (Mutual Funds)
We have here a similar package with a higher target fund of 5 Mil to purchase a home and a longer time horizon of 10 years.
Comparing again two options – 437,595 saved annually in a 364-day time deposit versus 319,581 invested annually in a Sun Life Prosperity Fund to achieve a target fund of 5 Mil.
GOAL: I want to own properties and protect them from estate taxes! (VUL)
Since the target fund is higher and the time horizon longer, some people opt to have themselves insured. This will provide a “safety net” so that if the client should die, then the family will receive a guaranteed cash benefit, or the market value of the fund, whichever is higher.
Here’s an illustration for a 364-day time deposit and an insurance and investment package called Sun FlexiLink1.
To achieve the target fund of 5,000,968, one individual saved 437,595 annually using a 364-time deposit earning 2.41% per annum while another individual placed premium payments of 335,500 annually in a Sun FlexiLink1 policy potentially earning an 8.0% return and with insurance coverage of at least 419,375.
GOAL: I want to provide income as a gift to my loved ones!
This other illustration shows a lump- sum premium payment versus several payments.
In this particular example, the target fund is 10 Mil to be given as a gift to his loved ones after 10 years.
To achieve the target fund of 10,000,128, one individual placed 7,880,910 in a 364-time deposit earning 2.41% per annum while another individual placed a single premium of 4,646,900 in a Sun MaxiLink One policy potentially earning an 8.0% return and with insurance coverage of at least 5,808,625.
In all the other previous illustrations, you would see that the Brighter Choice is to purchase instead a Sun MaxiLink One policy to build a fund for his or her loved ones rather than putting it in a 364-day time deposit account.
Now that you’ve seen how we can save for life milestones using various Sun Life product solutions, I’m sure you’re curious to find out how you can achieve your life milestones too. The good news is that I can calculate this for you very quickly.
Money Monkeys can assist you:
Depending on your budget, we can compute how much you’d need for your future goals. These are the steps that we will go through:
- We will identify and prioritize your future goal needs and shortfall
- We will compute how much those will cost in the future and adjust based on your financial situation
- We will develop a financial plan customized to your goals and budget
IMPLEMENT– We will choose the appropriate product solutions for your life goals
REVIEW– We will track your progress in achieving your life goals