I had an interesting conversation yesterday about investment. He was in his late twenties, had worked at a BPO for over a year at that point, had a nice phone and, like most guys in their late twenties, he felt things were looking pretty up for him. So when I asked him about what his investment goals were, he gave me a puzzled look,
“I’m making pretty good money in a pretty secure job,” he said, “so why would I need you? Why do I need to get into investment?”
Coming from a person who clearly had disposable income to play with, this was a little shocking. But it shouldn’t have been. In the 4th financial literacy index survey conducted by Mastercard in 2014, which basically measured how much people understood about money, and the management of money, financial literacy levels fell across the Asia Pacific in all but a few countries. This includes the Philippines. The Philippines also ranked 68th in the ADB study in 2013.
You cannot blame people alone for lacking financial literacy. The Philippines is an emerging economy that lacks a nationwide framework for financial education (unlike, say, Indonesia), and is limited to BSP publicity stunts, which are basically a desperate way for the central bank to remain relevant. The Philippines also holds the dubious distinction of having the least financially literate married 30 year olds in Asia.
There are basic answers to why you would want to get into investment, but Filipinos often brush it aside as something only “rich” people do, yet complain about it for their entire lives.
Predictably, this is what ends up happening:
- You’re 30, and you wish you saved up more for your marriage.
- You’re 40, and you wish you saved up more for your house
- You’re 50, and you wish you saved up more for your retirement.
Here’s another very real downside to the lack of financial literacy in the Philippines: 23 Million Filipinos sometimes or regularly run out of money for basic necessities every year according to the World Bank even amongst those earning more than P50,000 per month. 94% borrow to cover their costs, and 90% of the population is unbanked.
So, why get into investment?
Investing is a confusing concept to many individuals. They have heard mixed signals from the talking heads on CNN, ABS-CBN and many other official looking news services. Big words, complex concepts, and rapid fire speech basically make investment of any form look like an unsolvable rubik’s cube.
But the concept of investment is really quite simple. It’s the practice of lending or giving your money to someone, who will use it to generate more value, and return your money back to you with a little bit extra at some point. The actual asset vehicle you use could be a business, it could be directly lending money, or, in this case, it could be real estate.
Basically, people invest to make more money.
Investment beats inflation
A more technical reason for people to get into investment is to beat inflation. Investopedia defines inflation as this:
…a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.
Basically, you remember the time when rice used to cost less that P20 per kilogram? Yup, it’s price rose over time partly because of inflation (if you know anything about the rice trade, excuse my extreme over-simplification)
Pretty crappy, right? Over time your peso buys less and less than it used to and putting it in a bank gets you less than 1% interest per year.
If you were that late twenties guy, who worked in a BPO with his flashy phone, something should have dawned on you by now. By not investing, you are literally losing money. Your capital decreases as your purchasing power is eroded by inflation (fancy words meaning the same thing).
Investment has historically provided a way to outpace inflation and grow your wealth, particularly in real estate, which has been throughout history, a hedge against inflation.
Inflation in the Philippines is averaging roughly 3-4% a year, while real estate in prime areas has roughly doubled that. To put that in real terms, let’s say you put P100 under your bed, and another P100 into prime real estate, after 20 years, your P100 under your bed would have lost 51% of its value, while the other P100 invested into real estate will have grown by 386%.
Investment for goals
Investment isn’t just about making money. As a human being you probably have some goals in mind, whether that’s going on a holiday, sending the kids to a good school or planning for a long retirement.
At the end of the day investment can offer you financial freedom. The freedom to really afford something and not just delude yourself into loading up the credit card, and forgetting about it until it bites you in the bum later. And if you do it long enough, investment can also offer the possibility of a passive income you can live on. At that point, you could pretty much do whatever career, hobby or lifestyle you want, without being shackled to your paycheck.
Perhaps more than that, it means that getting sick, retiring, or having a loved one going through these things, doesn’t become a mortal wound, financially speaking. This is especially the case in the Philippines, where the level of healthcare you receive is often dependant on the amount of money you’re willing to put in.
Ask these questions of yourself: what would you do if you got so sick that you were no longer able to work? What sort of burden would that place on you and your family?
I’m pretty sure our twenty something BPO worker with the flash phone, would be asking different questions if he had to contemplate that.