As discussed on my previous post, Saving vs. Investing, only put 3-6 months worth of your expenses. So if your monthly expense is at Php 20,000, just keep Php 60,000-120,000 in the bank. This will be your EF or emergency funds. Why 3-6 months? So when your income stops, or perhaps lost your job, you have ample time to look for a new one. When you get sick and get hospitalized, you will have enough money in the bank that you can withdraw right away. Even when you start your own business, when things don’t go your way, you don’t need to call your bank manager to borrow money. The good thing about banks is its liquidity. You can have access to it anytime.
The reason behind this is that your money in the bank sleeps. They do nothing. Nada. When that happens, because of inflation, the value of your money depreciates. I’ll give you an example, let’s say you put your Php 1,000 in the bank that gives you 1% interest annually. After a year, your Php 1,000 earns Php 10. Sounds great right? Not really. Average inflation now is 4%, so if you think about it that 1% interest you earned is not enough to beat the inflation. The items that you used to buy with your Php 1,000, after a year it’s worth Php 1,040. You are still short of Php 30. That’s the reality. Just when you thought you earned money, technically, it’s the other way around.
Don’t tell me you truly believe that when you deposit your Php 5,000 (or any amount) in the bank, it will be placed in a vault with multiple locks, 24 hour CCTV and security guards. I feel bad about you, unfortunately, that’s not how it works. Of course they loan it to other people and give them like 8-12% interest annually. And you? What do you get? You get 1% interest annually. So whose money was it that was loaned? Yours. Who made more business and earned more? The banks. Am I making sense here so far? That’s how the bank works. They are not in the business of just keeping your money. They use your money for them to earn more money.
I don’t get it why people still chooses to put their money in the bank. Yes, risks are lower, but if you want to make your money grow and make it work harder for you, you have to take a risk. So what’s my point here? Saving money in the bank is ok, investing your money is way much better. I’m not saying you invest everything you have in your savings account, but start investing part of it. You have to start somewhere correct?
Here’s what you do, when you’re done saving up for your emergency funds, whatever is left, you invest. Look for an investment that would give you 8-12% interest rates or at least interest rate that is higher than the inflation rate. You have to look for an investment that would yield more than the inflation. You have to BEAT the inflation.