Say we’ve got four people. James, Rika, Eric and Miles.
James is a 30-year old software engineer, newly married and with a kid on the way. Rika is a 25-year old flight attendant. Eric is 55 years old and a full-time private high school teacher. Miles is a self-employed entrepreneur, 62 years young. 🙂
And they’re all going to ask me, hey Hannah, how should I go about investing?
Before you do anything with your money, you have to consider how much you actually have right now and how much you can reasonably expect to gain in the near future.
As a senior software developer in the Philippines, James could earn around 48,000 PHP (source) per month. Rika can expect an amount of 33,000 PHP (source) working for a major local airline company, while Eric could be earning 18,500 PHP (source) in a private school with mid-range tuition. Miles’ income might vary a bit more as she is not reliant on a salary, but for this example, let’s say she’s the sole proprietor of a successful small-scale pastry business who can afford to pay herself 55,000 PHP a month (random estimate).
Do you see yourself in any of them? They’re in different stages of life, so go ahead and read first about the person who most resembles your life at the moment.
Rika, being the youngest of the four, has the most time on her side. This means, if she wants to save up for something long-term (5 to 10 years or more) then she is able to take the most risk. However, seeing as she also has the lowest salary due to being in a junior position, she also has less to invest. So what are Rika’s options?
UITF or Mutual Funds
UITFs and MFs are a great way to start gaining experience as an investor. Since they are supervised by trust managers and fund managers respectively, much of the burden of supervising the funds are removed from Rika’s shoulders. Of course, she will have to know about the asset classes she will invest in, but this is less time-intensive than individually choosing stocks for her investment portfolio.
All she has to do is form a regular habit of making investments and make certain that she does not withdraw her investments before the planned date. UITFs and MFs don’t send reminders to investors to invest, so forming a regular habit is crucial to the success of her plans.
Most people in their 20s don’t have dependents to support, so life insurance products might not be her priority at the moment. However, if she does have people who rely on her income, life insurance would not just be a “nice thing to have”, but a requirement. Applying for insurance early in life is also an advantage in terms of cost, as the older you get, the higher the premiums you pay.
The investment portion in VUL is similar to MFs, where she can pick asset classes to maximize her earning potential. Since it is packaged together with the premium, the company essentially sends her reminders to place her investment, making it easier to form a habit.
At this point, unless Rika is prepared to do research or have someone guide her in making investment decisions, entering the stock market would not be advisable. She could start with MFs or UITFs first, getting a feel for possible losses and gains. Then when she has extra funds and the time and discipline to read up on the companies she is interested to invest in, she could dabble in the stock market. At her age, she has the time to make mistakes and recover from them, provided that they are calculated risks.
Life is starting to fall into place for James and he’s got a family to look after now. His wife has chosen to leave her job and become a full-time mom to better raise their child. They’re currently living in a rented condominium, but James is looking to purchase a house in a five years. His parents are already semi-retired and are able to support themselves, but a few health problems have raised their medical costs. Feeling dutiful, James pitches in from time to time. Occasionally he thinks about the time when he reaches the big six-o. So what are James’ options?
UITF or Mutual Funds
UITFs and Mutual Funds can provide the growth that James is looking for. He just has to consider the timeframe and purpose of his investment, which in this case is purchasing a house in five years. This can still be considered a relatively long term investment; James can take on a little more risk in the form of equity funds, which can give him more potential returns. If James really doesn’t want to risk his funds, he could still put it in a money market mutual fund, which are very low risk, but also low return. Either way, this would allow him to grow his funds compared to leaving his money in the bank, and make a bigger down payment on the house to lessen housing loans.
Seeing as James currently has two dependents, his wife and their child, insurance is a requirement. Without insurance, his family will be very vulnerable to economic difficulty. James can either go for term insurance or a VUL. Term insurance has no investment component, very similar to the concept of car insurance. This makes it cheaper than a VUL. However, the cost of term insurance goes up every five years.
VUL allows the person to stay protected and have an investment at the same time in one package, exempt from estate tax. If James goes for term insurance, he can also invest the remainder of his funds in a UITF or Mutual Fund, however the UITF and Mutual Fund are not exempt from estate tax. Successful investing in UITF and MF requires the power of habit, and if James does not follow through with his plan, he might not get the growth he is looking for.
If James already has experience with some investment instruments such as UITFs and MFs, then he might also try his hand at investing in the stock market. This could give him potentially higher returns, but there is also a very high risk involved. He would be better off taking on blue chip stocks, which are stocks in well-known companies that are reputable and stable. James can also try speculative investments, but only with the money he is willing to lose.
Bonus: Health Insurance
Seeing as his parents have increased their expenses due to medical bills, James should consider protecting himself with health insurance while he is still relatively young and healthy. This could save him from having to take out large amounts of cash from his retirement savings when he suddenly needs to undergo a major medical procedure.
Eric is a career teacher, having worked in his school for almost 30 years. He enjoys the profession, but also knows the reality of teachers not being able to retire due to insufficient savings. Eric is currently debt-free and has regularly contributed to his SSS account, but he is wondering if there is a better way to prepare for retirement. He has ten years before reaching mandatory retirement age. His three children are already financially independent, and his wife already passed away, leaving him to worry only about himself in terms of finances. Eric wants to retire independently, without looking to his children for financial support.
UITF or Mutual Funds
Ten years can be considered a long term investment, which gives Eric some flexibility with risk. However, since the funds he will be investing are his retirement funds, he should be careful of how he spreads out his risk.
Part of the fund can always be put into a money market fund, which give better growth than banks while remaining relatively low risk, while the rest can be placed in a slightly more aggressive fund. Towards the end of the ten years, Eric can gradually increase the percentage placed in the money market fund to minimize risk as he approaches retirement date.
Seeing as Eric does not have any more dependents or have debt to pay, it is no longer a requirement for him to maintain an additional life insurance policy. If he wishes to pass on something for his children to inherit, he can consider taking on a VUL, but at his age, term insurance is no longer practical as it has no investment component.
VULs can also have additional benefits that can help him with his medical needs later on, such as hospital income benefits, as well as critical illness benefits, which could help him protect his retirement fund.
Eric is already over age 50, and considering his income level, it may be harder for him to regain losses if the stock market goes down. He is also investing his retirement fund, so he should be absolutely certain that the portion he will invest is only a minor portion of his investment portfolio. Speculative investments are not advisable at this point, but he can work together with a financial advisor to choose blue chip stocks that can provide some added gains to increase his retirement fund.
Bonus: Health Insurance
Medical expenses are a major concern of people as they age. Health insurance can help prevent Eric from digging into his retirement funds when he needs to undergo major medical procedures. Some products also have cash value, which returns some of the payments to him when he reaches a certain age or finishes the plan.
With eight grandchildren from her five kids, and a great-grandchild on the way, Miles is the successful matriarch of a big family. She busies herself by dabbling in various small businesses, the most successful being her pie-baking enterprise located in Tagaytay. Her husband also manages a small chain of grocery stores, but he is soon passing the business to one of their sons. Miles is also about to hand over her business to their daughters. Faced with the prospect of retirement, Miles is interested in finding ways to make sure her funds don’t stay stagnant when she is no longer involved in the business.
UITF or Mutual Funds
At this stage in life, Miles can now enjoy her hard earned money. Placing it in risky instruments is no longer advisable if she only wishes to see short-term gains. Though if she is planning to leave a fund for her children and grandchildren, she can invest it in a bond or equities fund with the goal of long term growth, but the gains are still taxable by the government if she passes on.
Taking on insurance to cover herself at this age might no longer practical for Miles, unless she has some business debts to cover or minimize estate tax costs. Due to her age, premiums are usually already high for regular payments. In addition to this, the maximum age most plans can be started is age 65.
Miles would be better off funding the insurance policies of one of her children or grandchildren to teach them the value of financial preparedness.
Even if Miles is retired, she still has a stream of income from her businesses, which means that she has a surplus of funds she can invest. If she has no intention of using the funds in the short term, she can invest a portion in stocks, as the money is better off growing than stagnating in a savings account.