Building your personal wealth through savings and investments is often a pretty challenging feat for the regular investor. Many factors and risks remain unseen. This is where you need the guidance of financial experts to assess your appetite for risk, your investment goals, and investment horizon. Meet Clive Wee Sit.
Like anyone keen on investing, day in and day out, Clive Wee Sit, a Portfolio Officer at Bank of the Philippine Islands, scours the financial markets for the best investment instruments; the only difference is that it’s not for his personal investment portfolio, but the bank’s. He belongs to a team that constantly searches for opportunities to invest the bank’s excess funds in instruments that provide the highest possible return, given acceptable risk levels.
According to Wee Sit, the same investment principles apply in growing one’s personal wealth through savings and investments, where a key deciding factor for choosing between available opportunities is the return on investment also called yield or simply, interest rate—where the higher the interest rate is not necessarily always better.
Safer or less risky investment assets bear lower interest rates compared to investments that promise a higher return, which are intrinsically riskier. So if you’re thinking of investing, diversification (the combining of investments with varying risks and features) is recommended so you can manage risks while simultaneously increasing the average interest rate or return.
The former part-time faculty of De La Salle University–Manila and Ateneo de Manila University (who made sure that his students fully understood the financial principles surrounding interest rates) shares with Pursuit of Passion the basic tenets of interest rates and making it work for you and your money.
Basics of Interest Rates
Simply put, you can look at interest rates in two ways: First as the cost of borrowing – it is the expense you incur (on top of the amount that you owe or borrowed) when taking out a loan. Second, as the cost of lending – it is what you receive from the bank or borrower (on top of the principal amount) because you lent them your excess money in the form of savings, or investments. Either way, interest rates act as transaction costs between you, the borrower, and the bank, the lender.
Intrest Rates on Savings and Investments
The interest rate on a savings or investment instrument is the amount that the bank or institution is willing to pay depositors/investors for temporarily putting their excess cash aside in savings/investment vehicles instead of spending it today. Interest rates on savings and investment products vary depending on traits like liquidity, amount or size, inherent risks, and reflects the bank’s appetite and need for cash.
Intrest Rates in Loans
The interest rate on loan transactions leaves both parties—lender and borrower—better-off. It allows the borrower to raise funds for an expense, while the lender is able to take advantage of the borrower’s immediate need for funds, earning interest on his excess money that would otherwise have been idle.
We can view interest rates as the fair price that people pay to get access to funding; facilitating the transfer of money between those who have excess and those who need it. Done right, these transactions help optimize people’s use of money—and can make the economy healthier.
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Filipinos and investing
Although there’s already a wide range of investment alternatives that are available to Filipinos these days, the less financially knowledgeable many still subscribe to “get rich quick” investment schemes that ultimately lead to major financial losses. Though the outcome of investments can never be completely risk-free or predictable, the best way to mitigate potential future losses is for investors to be as informed as possible. By understanding all of the probable risks of an investment, it will be easier to make a firm investment decision.
Where to save
It is common knowledge that deposit rates of banks on regular savings and checking accounts are very low (even lower when you account for taxes). However, banks offer other types of deposit products that carry interest rates higher than your regular savings or checking accounts.
If you have idle funds that you know you won’t need in the near future, you may want to consider investing in a time deposit (TD) product. TDs have tenors ranging from 1-month, to 3-months, or even up to a year. The farther away the maturity date (or the longer the tenor), the higher the interest rate. There are pre-termination charges if the TD is redeemed ahead of the maturity date, so make sure you only place funds you know you won’t need until the TD matures.
Now that you’ve brushed up on the basics, let’s close the gap between knowledge and action. How are you going to apply this new knowledge to your financial transactions and needs?
Paying bills: Cash or auto-charge on Credit card
A credit card is a great tool to help manage the timing of your cash flows when used to consolidate your payment of bills. By using the auto-charge function or enrolling your bills with your credit card company, you need not line up in different payment centers and it helps ensure that bills are paid on time.
Take note, however, that credit cards act like short-term borrowing, which allows you to settle financial obligations instead of using cash, but charges you an interest rate if you don’t settle the amount in full and on time. You may also end up paying finance and late payment charges that may have been avoided had you paid your bills in cash.
Investments: High-risk, high-return schemes
Investment schemes that are too complex to understand or promise returns that sound too good to be true are more often than not a fraud.
By using a pyramid or multi-layered structure, scammers deliberately make it difficult for investors to evaluate the investment and capitalize on the prospect of making quick gains to lure people into the scheme without them fully understanding it. And if it becomes almost impossible to know where the underlying cash flows on the investment are coming from, chances are, it is a scam.
Buying a house: rent or own (loan from bank)
In recent years, banks have been aggressively marketing their housing loan products by reducing approval turnaround time and slashing loan interest rates to very attractive levels. In fact, some banks offer housing loans where the monthly amortizations on the loan are at par or even lower than the rent charged on properties being leased. If you have a stable long-term source of income, paying fixed amounts monthly over many years may be a more sensible decision versus paying rent because, with a housing loan, you ultimately get to own the property.
Enriching your knowledge on principles like interest rates will allow you to be more confident about making decisions to support and propel the achievement of your financial goals.
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