Our wealth management seminars concluded last week, and did I learn a lot! It was a real wake up call on how we should not take money matters for granted, especially when preparing for the future. I'll try to write some entries regarding my "learnings."
First off, we should define what financial independence is. Financial independence, according to experts, is "the ability to live the lifestyle we deserve without having to work or rely on anyone else" (-- definition given by Philam Life).
So how do we become financially independent? Of course, we should still work as hard as we can now, while we still can, but we should know how to grow our money enough so that money can later work for us and not us forever working for the money. This basically means that we should try to save enough money so that we can live off merely on the interest. And I guess this is how the rich manage to just laze around the beach all day and still be earning. They'll be earning practically even as they sleep! That's because their money never stops generating interest.
And now comes the hard part. How do we earn enough so that the interest it earns sustains our lifestyle? Of course, we have to save, save, save! And probably venture into investments or businesses. But will saving in the bank suffice to make our money grow that much? Well, if the bank offers a 1% interest per year, your money doubles every 72 years (based on the rule of 72)! Err, I don't think so!
Bank or Mutual Funds?
Insurance/Mutual fund companies say that they don't compete with the banks because they serve a different purpose from the banks.
We basically use banks to store our money, particularly our immediate cash needs. We also store our emergency fund in the bank. Experts suggest that we should have an emergency fund amounting to 6-12 months of our monthly pay or monthly expenses. This way, you'll still be assured of sustaining your lifestyle should an emergency occur. For example, should you suddenly lose your job then you can live off on your emergency fund for the next 6-12 months while you look for another job.
After you've grown your money (supposedly by the time you retire), you also store it in the bank so that it can gain interest which you later live off on.
But as you're still growing your money, mutual funds, I think, is something worth looking into. With mutual funds, your money can earn from 6-12% interest or even more. From the sample computation Philam Life gave us, just putting in P1,000.00/month for the next 20+ or 30 (not really sure, sorry!) years will earn you over P3,000,000.00! I think P1000.00/month is doable. If you can put in even more then you'll earn even more!
We should consider the inflation rate when planning for our future. As a sample computation that an agent I met made, if you need P30,000.00/month now to sustain your lifestyle, you'd be needing around P150,000.00/month to sustain the same lifestyle in 30 years (please don't ask for the detailed computation -- that's way beyond my league!). And to earn a monthly interest amounting to P150,000, you should have around P18M in the bank...woah! Of course, those wanting to raise a family also have children's education to consider, and that, too, is subject to inflation. Just an FYI, to earn P18M in 30 years, you must put in around P7000.00/month into your mutual fund account (provided you're investing in equity funds that earn a 12% interest). And oops, of course you should have the discipline not to touch the money until the right time =)
So wisen up on where you put your money while you're still strong and healthy enough to work! You wouldn't want to still be overworking yourself when you're supposedly just enjoying your retirement.
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