Ph inflation was pegged at 6.3% last August 2022 and we do not see it slowing down. In fact, some economists forecast that inflation by 6.7% by October this year. The rising inflation is forcing Central Banks all over the world to hike their interest rates and have bettered currencies like the Philippine Peso.
Let’s talk about INFLATION!
On October 2, 2022 (Sunday), let’s have a livestream to discuss this issue. What’s going on? What can we do? Will investments still recover amidst the backdrop of high inflation and high USD? Join the livestream!
Here are 5 questions that I got regarding personal finance. I kept the answers short and practical.
1) Monica wants to know what are UITFs?
UITF stands for Unit Investment Trust Funds, it is a kind of investment that is being offered by the trust departments of big banks. UITFs are pooled funds, where investors put money in a fund and there is a fund manager that will invest for them according to the objectives of the fund. Depending on where it is invested, UITFs can be conservative, moderate or high-risk investments. UITFs are good investments for long-term objectives such as retirement or the college education of young children. Though they are not guaranteed investments, they have proved themselves to be a good way to grow your money in the long-run. Remember that UITFs are long term investments so if you plan to use your money in the short term, do not put them in UITFs.
2) Should I invest my money in business or in the stock market, Christine wonders.
Comparing a business and stocks is difficult, like comparing apples and oranges. While both are investments and both are risky ones at that, they operate and function differently. Owning a business means you are operating it yourself and you are on top of the company. You have a direct involvement on how the company operates. The benefit of having your business is that you own all the profits and the gains of the business. The downside is that should the business fail, you will bear all the losses and you may not have the competence and experience to make a business succeed. Stocks are fractional ownership of businesses, big ones at that. Buying stocks lets you have a part of a successfully big company or several companies and you stand to earn dividends or capital gain of your shares when you trade them in the stock market. Downside of stocks vs. business is your gain, an issue of scale. You stand to get a much better return for your money when your business succeeds as against stocks.
3) Patrick wants to know what the risks are in investing your money.
Well Patrick, the biggest risk involved in investing is capital loss. While some investments are guaranteed, the good ones where you can earn more are never guaranteed. Returns are always a function of the risk you take – the higher the risks are, the higher the potential returns. Some investments like stocks and mutual funds are fluctuating – they do not appreciate in a straight line and expect them to be fluctuating constantly. But if you invest over a long period, like over 5 years, the chances of loss of money is minimized as investments fluctuate up over the years. Low risk investments are not necessarily free of risk – the biggest risk for guaranteed or low investments is inflation. Low risk means low return and they are often below inflation rates.
4) John asks who should be in charge of the money, the husband or the wife?
Our Filipino custom dictates that the wife should be in charge of the finances. However, our customs are not always right. Finances are conjugal and how to manage money should likewise be conjugal. I don’t think only one spouse should
be given the sole responsibility on how to be in charge of the money – both should discuss and agree as to what to do with their finances. The operation of the family budget like payment of bills, balancing of the check book and the like can be delegated to the husband or the wife. Which spouse? Well, the one who is more financially disciplined should be the one – whether a husband or a wife.
5) Bianca is wondering if there is a formula to be able to build wealth.
Yes Bianca, there is a formula — a fundamental process that you can follow that will allow you to build your wealth. Let me first say that achieving wealth is a process and there are no short cuts to wealth. In my book No Nonsense Personal Finance, I outlined 5 steps for wealth. First step is to increase cash flow; you can achieve this by earning more money and spending less money. Step 2 is getting out of debt – as debt will prevent you from achieving your goals. Step 3 is building your emergency fund – 3 to 6 months worth of your expenses is a good measure. Step 4 is getting insurance for your protection. Finally, the 5th step is learning to invest for your future.
A recent report has pegged the Philippine inflation at 4.5%, quite a high number which caused a lot of concern for many. My friend & respected economist Dr. Alvin Ang says that the inflation is mainly due to increasing food prices which can be partly blamed on Typhoon Yolanda. The government is unfazed with the high inflation number and are still confident that they can keep inflation within acceptable limits. There are talks that interest rates might go up as a means to control inflation.
Just what is inflation? Investopedia defines inflation as “the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.”
Someone asked me what inflation is and how it can affect them? Let me answer in a more practical way — simply put, inflation is a measure being used to track the rising costs of general goods and services. Because of inflation, the purchasing power of our peso will actually deteriorate. Countering inflation is done through an increase in income– as long as the increase in income is equal or higher than inflation, things will be ok. The case for your savings is a different one. If your savings do not appreciate faster than inflation, the real value of your savings will go down in terms of what goods and services it can buy. The solution to this is investing your money where it can grow faster than inflation.
Now, where can you invest your money where it can grow faster than inflation? Typically, stocks or equity-laced funds (mutual funds, UITF & VUL) and real-estate are good investments that will can outperform inflation in the long run — emphasis on the long run… meaning, in the long-term…. as in after many, many years. When investing for long-term objectives like retirement, be mindful of inflation.
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