Saving Money through Investment Better than Banking

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As we strive to improve our lives, there is only one direction we go — either up or down. We always look for ways to save money.

Financial management takes priority. Ultimately, progress is the only place that we see ourselves to be, 3-years or 5-years or 10-years from now.

We feel we're on the right path on how to save money when:

• We knuckle down daily to prepare for the future.
• We set aside money daily for our savings.
• We work hard on making extra money.
• We do tight in budgeting, etc.

Those would add up, or so we thought. Well, if you have a financial goal that you hope you can achieve in 5-years, the best strategy in saving money must be planned.

We have to see beyond piggy-bank, and regular savings account mentalities. We've got to have a clear concept of how the money that we saved so far can help us in reaching our financial goals.

Once you have already accumulated a decent amount of money in your savings, it's time to think on the next level of making your financial dream a reality. It's the right time to consider yourself as an investment personality.

As an investment personality, you think in a more broader avenue of saving money, which gives you more possibilities when it comes to facing the level of risks. There are four investment personalities.

Investment personalities

1. Conservative
2. Moderately conservative
3. Moderately aggressive
4. Aggressive

Investment personalities definitions

1. Conservative

You don't want to face risks in investing your money. You want to be assured that your money will earn at any market condition. Low-returns — is acceptable to you so long as your principal is secured and guaranteed.

2. Moderately conservative

Low volatility is acceptable to you. You know that you'll lose money. But you also know that it is only temporary. You're looking at the rate of return, which is a bit higher than the bank's rate.

3. Moderately aggressive

Your time frame in investment is long term. And you know that your capital will yield a high return in the end. Even if the risk is a bit high than those portfolios belong to moderately conservative investment.

4. Aggressive

You want to get the maximum returns for your investment. You are willing to take high risks for that. The most optimistic of all investment personalities, you are a fervent believer that the market will climb up in the long term.

Your investment personality

Before you can start in becoming an investment personality, you must determine first what type of personality you have when in comes to investment.

• Which among the four investment personalities above fits you?
• In other words, what is your risk-profile?

To answer these questions, you must learn about different kinds of investments available for you. But before that, you must be clear about your understanding of the term savings.

What is — savings?

Can we define savings? Only a few people know the definition of savings.

In the concept of setting aside from our paycheck a small amount and putting it into the piggy bank, savings can be defined as — income not spent.

The money you have saved in your piggy bank can get a long way in the right investment vehicle.

What we do is getting hold of part of our salary regularly and save it. It's income and, it's not spent. Instead, it goes to our savings. For what? So that in the future you can collect the sum of all the small amounts that you have saved. And that's all about it. It's good because it promotes discipline on how you handle your income.

Are there other options to obtain or realize a financial goal by not spending part of our income?

With knowledge of your investment personality, you can grow part of your income and attain financial success.

Yes, there are options.. And we call them investments.

Technically, you will also resort to not spending part of your income.

But it is invested in a financial vehicle not structured in a passion that the money is only kept for the future.

Here, the money doesn't just sit there. Rather, it works for you.

When we invest, we level ourselves to entrepreneurs in the sense that we set our eyes on profit. There's always material gain in investment. If you invest your money, your money is like your employee. It will be working to deliver you the profit. That's the difference between saving your money and investing it.

At this point in this article, you should have already determined your investment personality.

You can refer back to the list above and identify yourself to any of the listed investment personalities.

And now, we're on to the next topic — types of investment.

So, what are the types of investments and what type of investment is available for your investment personality?

Types of investment

1. Money Market

The money market invests in securities that are less than one year. The money market in financial terms is a debt instrument.

So the company borrows money short term, less than one year. So this fund actually invests in securities or commercial papers that are less than one year. Because it is less than 1-year money market is conservative.

2. Bonds

Bonds are also debt instruments. Instead of borrowing from banks, a corporate or governmental entity issues bonds.

They offer bonds to the public that in turn loan money to them. Let's say you invest 250,000 pesos for a defined period of 5-years and with the interest rate of 4%. Every year your earning is 10,000 pesos less tax.

It's like I will borrow 10 billion at the rate of 8% and, on the 8th year I will give you back what I owed. And this is traded in the market illustrated in Philippine Stock Exchange Index.

3. Equity Market

It's what called stocks — corporate stocks. When you invest in a stock, you turn yourself into a part owner of a corporation.

For example, if you buy a share of stocks of PLDT, you can proudly say you're a part owner of PLDT technically. As part owner, you know that the income of any institution is not fixed. That's why the price of the stock is fluctuating.

Here, funds are invested in blue chip (large corporations) stocks, e.g., Ayala, PLDT, etc. This is a high risk investment. And it's highly recommended you invest your money in stocks for at least 5-years.

Investment product vs bank deposit

As you have already learned what is savings in a simple definition, you might wonder how would you make a decision to shift from deposit account to investment account.

I will give you a simple illustration here to differentiate a bank deposit account and an investment plan.

What is the basic difference between the time deposit and money market?

• The time deposit is actually a time deposit instrument. As it is a deposit, it is PDIC insured.
• Money market fund has a higher income potential, not PDIC insured because it is not a deposit product.
• And money market has only a 7-day holding period compare to time deposit which you can not withdraw for at least 30-days.

Time deposit vs money market simple illustration

So let's say you put your money on a time deposit, you expect to get a net interest of .8 percent, you can't withdraw t for 30-days.

But if you invested it in money market last year, the potential return is 1.17 %. The good thing is you have a holding period of only 7-days.

Another thing — there are banks in the Philippines which tag your investment with your savings account. So, there will be no physical cash transfer.

Everything is electronic when you invest from your savings account to your investment.

There is no volatility because of the volume. These banks can bargain from other banks' higher time deposits.

Money market — investment type for a conservative investor

In the illustration above, we cited the most conservative type of investments — money market.

As the money market is for a conservative personality of the investor, it has the lowest interest rate among all types of investment, e.g., bonds and equity.

Nevertheless, as you've seen already, money market commands the higher rate compared to the regular savings account and even the time deposit account.

As for interest rates of other investment types, the potential return for the bond is 3.60% to 4% per annum, and the stock has an annualized return of 11.65%.

Tips in investing

1. Get investment advice from right persons. Major banks in the Philippines where you bank can direct you to their investment department where trusted financial advisers are utterly reliable and credible.
2. Think twice before you make your initial investment. It is not like you're opening a bank account. Here money should not be touched for the long haul to make pretty decent earnings for the principal.
3. Make sure you have an emergency fund. Make sure you have extra savings equivalent to six times of your monthly expenses. If something happens like emergencies and for the immediate source of funding for any expenditure, i.e., hospitalization, car broke down, etc.
4. Expect for what investment insiders termed “unrealized loses” to happen. It will only happen if you stick to your investment plan when the market value goes down. If your plan is for 5-years, you just need to wait, because the only way to recover your loses is to continue.
5. In finding our your risk profile, look at factors that determine where you fall to identify your investment personality accurately. Do not look at the interest rate of investment plans for each personality. If you do, you'll end up not continuing the plan you get and, you'll lose money.

Final thoughts

You have learned here why investment is better than bank deposit in saving money and preparing for your financial future. The ball is in your hands now to decide what route to take.

Months and years quickly pass when we equate them with accomplishing our goals. Making the right decision in realizing our dream is ultimately vital in getting to where we want to be.

What is your opinion about investing? Which do you prefer - investment or banking? Share your thoughts in the comments' below.

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Vernie Mallorca

Vernie Mallorca is an entrepreneur and blogger with years of experience in selling to institutional accounts. He gradually shifted to blogging when he found out that it is his calling to write timely and helpful articles online that can help others to save money, make money, and secure their future by handling their income smartly. In this blog, he shares both managing your finances, however small it is and valuable information on running a small business.