Last Friday, I defended my dissertation proposal for my Doctor of Business Administration degree. As a financial management major and a registered financial planner, I want to determine the factors that would affect a person’s financial literacy and eventually lead to his or her intentions to invest in the stock market. According to Roel Refran, chief operating officer of the Philippine Stock Exchange, fewer than 1% of Filipinos invest in the stock market. Hopefully, my study will help potential investors to face their fears, and assume risks, and increase the percentage of Filipino stock market players.
Most of us have life goals that will require financial resources; hence our need to be financially fit. Over my 15 years of experience, I have learned the following financial lessons that I would like to share with you. Some of them relate to the stock market; others do not.
1 Always have at least six months’ worth of expenses as an emergency fund. If you lose your job or get sick, you have a buffer to draw from as you look for a new job or recover from sickness.
2 Follow the reverse rule of how much of your salary to spend. Most of us have learned that Savings is equal to Income minus Expenses. However, the better equation to follow is Expenses are equal to Income less Savings. This paradigm shift induces you to save a percentage of your income and spend only what is left. When you have savings, eventually you will have funds to invest.
3 Have both active and passive income. An active income is one that you devote time and work to such as a full-time job; passive income is one that you earn without devoting time to it such as stock dividends.
4 Follow the Rule of 72. Divide 72 by the annual compounded interest to determine how many years it will take for your money to double. For example, if an investment pays 10% per year, your money will double in 7 years. Obviously, the higher the interest rate, the shorter the time it will take for your money to double. I use this measure to see whether I should invest or not.
5 Buy low, sell high. This concept applies to all investments, whether they be property, stocks, mutual funds, or bonds. I bought a house and lot that cost less than a million pesos in 2010; now the market value is almost twice the original cost. Unfortunately, I also bought a lot that did not appreciate in value because of problems of the property developer.
6 Buy insurance policies. There are some reasons why people should not invest in insurance: they won’t ever get sick, no one depends on them, and they will not die. In other words, all of us need both life and health insurance. I myself have two life insurance policies and two health insurance policies.
7 Diversify your investments. Doing so allows you to spread your risks and minimize your losses. Several investments I have are in property, stocks, unit investment trust funds (UITFs), and life insurance. Each of these investments has its own purposes. For example, I invest in UITFs to fund my son’s tuition and other school fees that I pay in cash annually. I also have a diversified portfolio that includes only blue chip stocks.
I would like to end this by quoting a universal bank’s tag line for its financial literacy advocacy: “It is not how much you have, but what you do with what you have.”
Let us all be financially literate and achieve our life goals!
Azenith H. Castillo teaches Corporate Social Responsibility and Corporate Governance at De La Salle University.