Guide to Building Your Wealth

Guide to Building Your Wealth

1. What affects the value of money?

Money has a tendency to lose its value over time because the price of goods and services usually

goes up. This is called inflation. Here are some factors that could lower the value of your money:

Inflation

Simply, inflation occurs when the prices of goods and services rise. When prices go up, people

will ask for a rise in salary. That's why 10 years from now, the money you earn today will be worth

less than its present value.

Interest rate fluctuations

A drop in interest rates means a smaller return on your deposits, and if the interest rate is lower

than the rate of inflation, your savings will lose value. But for some investments, such as equities

and bonds, the value of your investment may rise because of the drop in interest rates. This is

because bond prices are inversely related to interest rates. When interest rates go down, bond

prices go up and vice versa.

Economic trends

What happens in the economy you are in and in other economies can affect the value of your

money. Political circumstances, GDP growth, and stock-market indices in other countries can all

have an impact on the buying power of your currency.

2. When should I start planning for the future?

The sooner you start, the better. The example below shows the difference in accumulative savings between an Early Investor and a Late Investor, who start saving at different times. At age 36, the Early Investor starts saving P100,000 every year at 7% per annum. If he stops saving the said amount at age 45, by the time he is 65, he would have P5,720,786 even if he only saved for 10 years. At age 46, the Late Investor begins saving P100,000 ever year at 7% per annum. Even if he saves yearly until the age of 65, he would have only saved P4,386,518. That’s P1,334,269 less than the Early Investor who

only saved money for a total of ten years. The difference is, he started to save earlier. In most cases, the sooner you invest your money, the longer it works for you and the faster it grows.

* Please see chart below

Age     Early Investor's      Early Investor's              Late Investor's             Late Investor's

           Annual Savings   Accumulated Savings      Annual Savings        Accumulated Savings

36           100,000                   107,000                                  -                                         -

37           100,000                   221,490                                  -                                         -

38           100,000                   343,994                                  -                                         -

39           100,000                   475,074                                  -                                         -

40           100,000                   615,329                                  -                                         -

41           100,000                   765,402                                  -                                         -

42           100,000                   925,980                                  -                                         -

43           100,000                1,097,799                                  -                                         -

44           100,000                1,281,645                                  -                                         -

45           100,000                1,478,360                                  -                                         -

46                -                      1,581,845                              100,000                             107,000

47                -                      1,692,574                              100,000                             221,490

48                -                      1,811,054                              100,000                             343,994

49                -                      1,937,828                              100,000                             475,074

50                -                      2,073,476                              100,000                             615,329

51                -                      2,218,620                              100,000                             765,402

52                -                      2,373,923                              100,000                             925,980

53                -                      2,540,098                              100,000                          1,097,799

54                -                      2,717,904                              100,000                          1,281,645

55                -                      2,908,158                              100,000                          1,478,360

56                -                      3,111,729                              100,000                          1,688,845

57                -                      3,329,550                              100,000                          1,914,064

58                -                      3,562,618                              100,000                          2,155,049

59                -                      3,812,002                              100,000                          2,412,902

60              -                        4,078,842                             100,000                           2,688,805

61              -                        4,364,361                             100,000                           2,984,022

62              -                        4,669,866                             100,000                           3,299,903

63              -                        4,996,756                             100,000                           3,637,896

64              -                        5,346,529                             100,000                           3,999,549

65              -                        5,720,786                             100,000                           4,386,518

3. I am new at investing. What are the basic rules to investing wisely?

Know your current financial situation. Before you begin to think about investing your money, you

should know how much you could spare each month. How much do you need for expenses? How

much can you save? Naturally, the more you can put aside now, the better it will be for your

future. It's up to you to achieve a balance between your current lifestyle and your future

expectations.

Calculate your income and expenses taking into account the following:

• Mortgage Payments • Car Expenses

• Personal Tax • Entertainment

• Loans and Interest Payments • Holidays

• Living Expenses • School Fees

• Emergency Funds • Family Commitments

Generally speaking, whatever spare cash you have after allowing for all your expenses is what

you can afford to invest. You can commit a certain amount each month and consider it a monthly

expense. As your salary increases, you should also increase the amount you invest

proportionately. By doing this, you'll be keeping up with inflation and your money will be working

harder for you.

4. I know how much I have to invest, now what?

Once you know how much you can afford to invest, you can set your objectives - why you are

investing and how you are planning to use your investments. Your objectives could incorporate

any combination of the following:

• Retirement

• Protection for your family

• Education for your children

• Special needs or emergencies

• Specific occasions (e.g. a wedding, buying a house, emigrating)

• Wealth accrual

Now make a list of your objectives, in order of priority, because you may not be able to afford to

achieve every single goal. Divide your objectives also into long-, medium- and short-term goals.

This will help you choose the type of investment you want to make. For example: if you plan to

save for your child’s university education in 10 years time, it may be a good idea to invest your

money now. Let your money work for you over the years in order to reach your goal . Remember

in most cases, the sooner your money is invested, the longer it works for you and the faster it

grows. Think about when you will need the return as it also helps to determine the time horizon of

your investment.

5. How do I determine my risk level?

Keeping your objectives in mind, determine how much risk you're prepared to take. Do you want

to adopt a conservative, moderate or aggressive investment strategy? Ask yourself the following

questions before you make your decision:

• Are you prepared to make long-term investments, which will allow you to take greater risks

for higher returns?

• If you're going for short-term, high-risk investments, can you afford to lose some of the

money you invest?

• If you're married with children, what level of risk can you take and still be certain of their

future?

• If you want your money to be safe, will you be content with a moderate rate of return?

• If you opt for safe investments, will the returns be enough to cover inflation?

The important thing to remember is that, in general, you can afford to choose higher-risk

investment tools for longer-term investments because, even if they go down in the short term,

they are likely to show an overall upward trend over a long period of time. But for short-term

investments, you will find low-risk products are a more reliable and safer option.

6. What types of financial tools can I invest my money in?

You can choose from two main financial tools with varying degrees of risk:

• Deposits

• Investments

Traditionally, savings accounts are the safest place to put your money. They provide high liquidity

- you can quickly and easily retrieve your money - but offer lower rates of interest. Investment

tools offer potentially higher returns but with a greater risk.

7. What investment products are available in the market?

One thing to remember about investments is that the level of return is generally proportionate to

the level of risk. Thus an investment offering potentially high returns will usually have a high-risk

element.

• Securities

• Stocks

• Bonds

• Foreign Currency

• Funds

8. What are securities?

Securities is the generic name for shares and other investments traded in financial markets.

Individuals may invest in securities, and check the progress of their investment every day in the

newspapers or on the Internet.

It is possible to enjoy a higher rate of return from investing in securities than from savings

accounts. Stock market securities in thriving economic climates will generally show an increase

over time, and sometimes within a very short period. However, all stock markets are volatile and

buying securities should not be seen as a short-term method of making money.

Buying securities also costs money. Stockbrokers make various charges for their services, such

as commission.

Other than investing in securities by yourself, you can assign asset management professionals or

companies to invest on your behalf.

Government securities (or Government bonds) are what the government gives you when you lend

them money. In effect you are investing in the government. In return the government will pay you

interest (known as a coupon payment) They will also pay back your principal at a specified time

(the maturity date).

10. What are funds?

Funds are an attractive medium- to long-term investment tool. They give investors the opportunity

to diversify even a small investment in securities, bonds, currencies and commodities in markets

around the world. This is achieved by combining the resources of many investors into one large

pool, which can be spread over a number of different investments and over a wide geographical

area. This range of investments is called a portfolio.

Funds have a number of benefits:

! Diversification, thus spreading the risk.

You spread your investment across a diverse portfolio. This is usually safer than

investing in a single share. Of course, levels of risk and return also vary among different

funds.

! Professional management.

Fund managers spend their working lives researching and managing investments. It

would be very difficult for an individual to have an in-depth knowledge of markets around

the world. With a unit trust, their expertise is working for you.

! Access to worldwide markets.

Your money can be invested in overseas markets, which may not be easily accessible by

individuals. The minimum investment amounts are usually very affordable.

! Economies of scale.

With a large number of investors contributing to a single fund, operating costs and

commissions can be amortised. Individual investors thus pay lower fees.

! Liquidity.

You can buy and sell trustsfunds on any dealing day (taking into account the required

holding periods of some funds).

! Potential to earn higher yields.

Although most funds do not guarantee specific rates, they do give investors the

opportunity to earn potentially higher yields than time deposits since the proceeds are

invested in the various bond, stock, currency or commodity markets.

10. How do I invest in foreign currency?

There are two ways to gain a return on your capital from foreign currency, either through interestrate

differences or exchange-rate fluctuations.

Many financial institutions offer margin trading on foreign currencies. This means you can

speculate on a large amount while investing only a small amount. Of course, this is a more

aggressive investment strategy and can be extremely risky. You may potentially earn a very high

yield, but you may also lose part of your original investment.

11. What are bonds?

Bonds are issued by governments and companies in order to raise money, and are a relatively

safe investment . Bonds are like loans to governments or corporations. They are usually seen as

long-term investments and can have terms of up to 30 years, although five to 10 years is the

normal investment period. Many fund managers use bonds as a stable element in their portfolios.

12. How do I choose the right investment partner?

Many people in the past have lost money through unwise investments or lack of relevant

information and assistance. Some have even been victims of unscrupulous brokers. If you're

thinking of making an investment, here are some questions to consider:

• Are you dealing with a reputable financial institution?

• Is the company registered with the appropriate government bodies?

• Is the company large, stable, and does it have a global presence?

• If you're at all unsure with whom you're dealing with, seek the advice of an accountant, a

financial advisor or your bank manager.

• Compare the services offered and the fees charged with other companies.

13. How can I research and keep track of my investments?

The more you know about what you're investing in, the better. Stock and fund prices are quoted

in the newspapers and on the Internet. If you're thinking of buying shares in a particular company,

ask the company or your broker for their annual report. This will give you valuable information

about the company's performance, its financial situation and future plans.

Many investment companies also hold seminars, especially when

they're launching a new fund. Banks also host similar events for the

benefit of their customers. Attending them can be informative and

useful.

Constant review helps to keep your investments up to date. In order

to maximise the money you invest, it is necessary to review your

investment portfolio on a regular basis. Your financial situation and

your investment goals could change, and markets are constantly

moving.

New opportunities and investment tools also emerge from time to time, and it is possible that

some investments you are holding are not performing to your expectations. If that is the case, you

may consider revising your portfolio.

Happy Investing