You could be the most diligent saver in the world but you can still fall short of your financial goals if you don’t know how to grow those savings. Keeping your funds in a low-interest savings account is not the mark of a smart saver. It is important that you know where to put your money so that it will have the potential to grow considerably. Keep the following rules in mind when choosing where to put your hard-earned savings.

1. Always invest with a goal

Having clearly defined goals will allow you to choose the right mix of investment products so you can achieve your targets. Just like knowing which particular mall you want to go to so you can choose the “best” route to get there. Typical examples of investment goals are building up funds for down payment for a house or car, saving up for a family vacation abroad, preparing for your kids college education or for a comfortable retirement.

Make your goals specific & measurable (include details and a specific amount) and set deadlines. “I want to be rich” is not a smart & clearly defined investment goal; so you’re not likely to accomplish it.

2. Keep your money where you can’t easily reach it

It is in the nature of most Pinoys to spend money that he can get his hands on. So if you’re one of them, it’s best to put your savings where you can’t easily access it. A bank account with an ATM card will be too accessible; try a passbook account instead. Or better yet put it where you have to go through some paper work to get back your money like time deposit (TD) accounts, unit investment trust funds (UITFs) of banks and mutual funds; hopefully the extra effort will discourage you from pulling out your money prematurely.

For those with extremely “itchy” hands, try insurance & pre-need products because with these you can’t get all the money you put in if you cancel the plan. To get your money’s worth you will have to wait until it matures or die (in the case of life insurance plans).

3. Always stay ahead of inflation

Inflation measures how much prices of goods and services have increased; a high inflation rate means a bigger increase in prices. Smart savers should only put their money where it can grow faster than the inflation rate (which is currently at 3-4%). That means regular savings accounts giving only 1% in interest is not a good choice. Your better options are TD accounts, government securities, bonds, UITFs and mutual funds. Only your emergency fund should be placed in a low-interest but easily accessible savings account.

4. Assess your tolerance for risk

Different investment products carry different degrees of risk. The rule of thumb is: the higher the interest or return rate of an investment, the greater the risk. Investors fall under three categories: conservative (low risk tolerance), moderate (can take a fair amount of risk) or aggressive (eats risk for breakfast).

If you feel dizzy at the prospect of even the slightest decrease in your money’s value avoid high-risk investments like stocks and stock or equity funds; stay with investments with guaranteed returns like time deposits and bonds. But remember, you have to learn to take a healthy amount of risk to stay ahead of the game.

5. Always compare rates

Why will you put your money in a bank’s TD account that pays 5% interest if you can get 7% in another bank? One reason is trust & confidence in the bank. But with all other things equal, you should always go for the one with a higher interest or potential return.

A difference of just 1% can mean a lot of money over the long term. Consider two investments of P25,000 each; investment A earns 6%, investment B, 7%. After 10 years, A is ahead by P3,720. At 20 years, A is bigger by P14,770. By the 40th year, investment A is way ahead, P107,000 more than investment B.

6. Always read the fine print

Review carefully all documents related to an investment. Be sure you understand the terms and conditions and you are aware of any “hidden” fees & charges and penalties that will affect your overall return. As a rule, do not invest in something you do not understand and when in doubt, don’t!

7. Do not invest in something that decreases in value

Smart savers avoid accumulating things that decrease in value as it gets older. Many consider a car as a good investment. It’s not, unless you use it for commercial purposes. Car insurance, maintenance and fuel costs all add a big chunk to a family’s expenses. Other “negative” investments: expensive cellphones, PDAs, iPods and other electronic gadgets, high-end computers, laptops and expensive furniture & appliances.

8. Do not put all your eggs in one basket

It would be such a pity if you lose all your lifetime’s savings in a single failed investment. Make a habit of spreading your money among different types of investments and different companies to lower your overall risk. Consider also investments with different maturities. If you put all your funds in a TD account that matures in 5 years, where will you get the money to sustain you from years 1 to 4 or when a better investment opportunity comes your way.

9. If it’s too good to be true, it’s probably a scam

Avoid investments that promise incredibly high interest rates, especially if they guarantee your earnings even if you do nothing. These investments are very risky and possibly a scam. The highest guaranteed (meaning, you get it whatever happens) interest that you can expect from a legal investment is the 13-15% per year of the “double-your-money” deposit accounts of some banks that mature in 5 to 6 years. Anything higher than this is no longer guaranteed. Mutual funds, UITFs and stocks can have higher returns but their growth is not guaranteed, in fact, sometimes they even shrink in value.

10. Seek professional advice

Today, there are hundreds of investment products & opportunities out there and banks & other financial companies continue to come up with more sophisticated products which can easily confuse the ordinary investor. If you have questions or doubts about an investment product it is best to ask a professional, not your neighbor’s barber.

Some sources of valuable information about investments are financial planners and officers of banks, insurance, pre-need & mutual fund companies and business groups. Financial planners can also assist you in setting your financial goals and drafting a plan to help you achieve them.

Last update: February 14, 2008
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