Choosing the best financial product

Different financial products are readily available in the market and since there are so many options, it made difficulties for us to choose the best one to a point that we become paralyzed by it and end up relying on the sales agent’s recommendation which might not always be suitable for us.

People who have bought these recommendations then ask other people who bought the same product to affirm them which may be good at some point but in reality, the financial product they’ve bought are not what they really needed.

To avoid this, we must carefully asses ourselves so that we can match the best product available in the market to our specific needs.

Choosing the best financial product could be daunting but actually it is really simple.

Let me share you the principle that I use on how to choose the best financial product.

The Principle of Suitability

The reason why Personal Finance is called personal finance is because it is ‘PERSONAL‘ meaning it is unique. All of us are unique and that’s why financial products should match that uniqueness within us.

The key will be self awareness, knowing one’s self is the key to filter what products we should choose that would best benefit our interests.

Let me give you an example

Juan and Pedro are both single. They have the same job, the same salary and they live on the same house. They earn 20,000 pesos every month and they share their expenses at home. Both of them manages to save 5000 pesos per month and they put it in each of their own piggy bank so that they could buy themselves something they want in the future.

One day a banker met with them and offered them to invest and grow their money. The banker offered them two options:

Option 1 : Invest 5000 pesos per month at an interest rate of 15% compounded annually and can be withdrawn anytime.

Option 2 : Invest 5000 pesos per month at an interest rate of 10% compounded annually and can only be withdrawn after 10 years.

Both Juan and Pedro thought about it very carefully.

Pedro chose option 1 while Juan chose option 2.

Now my question is, who do you think chose the best financial product? Is it Juan or is it Pedro? Who ended up having more money?

If we based our answer mathematically the clear winner would be Pedro. It is very obvious that option 1 is better than the other. With 15% interest rate and no liquidity issue Pedro would end up having more money.

But let me continue my story.

Juan and Pedro are both spenders. When they see a big amount of money they are always tempted to spend it.

They save 5000 pesos per month and when it reaches a big amount, they will use it all by buying something or using it to travel somewhere.

Every year they both check their investments and when Pedro checked his investments on the first year, it grew by 15% just like what the banker has told him. Same with Juan, his investments grew by 10% in the first year.

When they knew that their investments grew, they wanted to use it. Pedro withdrawn his investments so that he could travel while Juan can’t because he can only withdraw after 10 years.

Pedro went on a travel while poor Juan wasn’t able to withdraw.

Every year this happens, Pedro enjoys his money after every year while poor Juan can’t withdraw until the 10th year.

When the 10th year came. Both of them checked their investments and  as usual Pedro is very happy and excited to withdraw his money while Juan was shocked with what he saw. His money grew to a million pesos while Pedro only have 69000 pesos on that year.

The total money of Pedro for ten years was 690,000 pesos because he withdraws and travels every year while Juan, at the end of the 10th year have grown his investments to 1,051,870 pesos.

So who ended up with more money? Clearly Juan did but who is more happy? We cannot tell because both of them are really happy.

Pedro….

Pedro chose option 1 because he wants to explore the world and travel, that was his dream. That is why every year he withdraws his money and use it as a travel fund. He was very happy because the investment vehicle made his dreams come true. He didn’t regret of having less money in the end because he know that no amount of money could exchange with his satisfaction on realizing his dreams of travelling.

Juan….

Juan chose option 2 because he knows that he is a spender like Pedro but travelling is not that of a big deal to him. What he really wanted is to buy a house and option 2 made him stick with that goal.

If he chose option 1 then it will be faster for him to buy a house but he could have ended up travelling with Pedro every year and might not be able to stick with his main goal.

He withdrawn all of his money after the 10th year and bought his dream house. Smart Juan!

Wrap Up

When choosing the best financial product your best metric is your knowledge on how much you know of who you truly are and what you want in life. Often times people look only at the monetary value of what the financial product could give without looking at the whole picture.

The principle of suitability tells us that everyone of us is unique and the financial product that we will buy should suit well with our uniqueness.

Know how unique you are in your finances, analyze your spending habits, financial behaviors, goals in life, and what really makes you happy and secured.

The more you know of yourself the easier for you to choose the best suited financial product for you that you wouldn’t regret. (ever!)

 

After all, money is meaningless if we aren’t happy and full of regrets in life.


Photo Credits : Jeremy Brooks

 

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