If you ask most Filipinos on how they could accumulate wealth, most of them will answering, placing their savings in a bank. The usually will tell you that placing your money in the bank is the safest way to achieving wealth since their savings are covered by the PDIC up to Php500,000. What most of them fail to realize is that their actually losing money by placing it in the bank. Although they are not losing physical money, they are losing the value of their money through the effects of inflation.
So is investing in the volatile stock market riskier than a bank savings account. To understand this more clearly we will explore the different ways of accumulating a million pesos by using different methods in achieving our goal. If a person with a salary of Php10,000 sets aside twenty percent of his income or Php 2,000 for investment how long will it take him to reach Php 1,000,000. We will also take into consideration the effect of inflation on the accumulated wealth once the goal of Php 1,000,000 is reached. The average inflation rate in the Philippines for the past 20 years is 6% per year.
|MODE OF INVESTMENT||INTEREST RATE||DURATION||TOTAL INVESTMENT||PURCHASING POWER||PRICE INCREASE DUE TO INFLATION|
|PIGGY BANK||0%||41 YRS & 8 MO.||PhP 1,000,000||PhP 87,796.31||1039%|
|SAVINGS ACCOUNT||0.03%||39 YRS & 7 MO.||PhP 950,000||PhP 99,601.59||904%|
|TIME DEPOSIT||1%||35 YRS.||PhP 840,000||PhP 130,039.01||869%|
|LONG TERM TIME DEPOSIT||5%||23 YEARS||PhP 552,000||PhP 261,780.1||282%|
|STOCK MARKET AVERAGE||10%||17 YEARS||PhP 408,000||PhP 371,747.21||169%|
|STOCK MARKET 1986 - 2013||15.64%||13 YEARS||PhP 312,000||PhP 469,483.57||113%|
Based on the chart above, investing your money in equities is safer compared to just placing your money in a piggy bank or savings account. Inflation affects the value of your money through time. In order to counter inflation you must find investments which are higher compared to the annual inflation rate.
If you carefully analyze the chart above, the duration on reaching a takes years since this was based on a person with an average income. Even if we invested in the stock market it still took a minimum of 13 years to achieve a million. Asides from the interest rate of the investment vehicles we , another important factor when it comes to accumulating wealth is TIME. It can either be your ally or your greatest enemy. You should let your money work for you through investing instead of just placing it in a safe or savings account. Always remind yourself that the value of your money is diminishing every year. Take a look at how inflation diminished the value of a million within 41 years. A million today is not as valuable as a million 41 years after.
Changing ones mind set can make a huge different in the long run. You should learn to minimize your fear of losing your money and realize that your losing money just by not doing anything with your money. Most people think that investing in stocks is dangerous since it is too volatile. One way of reducing the risk in investing in stock is through cost averaging. This is basically investing your money on a regular basis and not worrying whether or not the market is up or down. When the market is down, you are buying stocks at a cheap price. When the market is up, the value of your stocks increases.
Whatever type of investment you choose it is important that you let your money earn for you. It doesn't matter what kind of investment vehicle you use as long as it earns higher than the inflation rate. The only safe way for you to keep your money safe is to make it earn for your.
For more details about Cost Averaging visit my previous post Equity Investment Strategies - Cost Averaging