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Option 1 : Invest 5000 pesos per month at an interest rate of 15% compounded annually and can be withdrawn anytime.

Option 2 : Invest 5000 pesos per month at an interest rate of 10% compounded annually and can only be withdrawn after 10 years.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

 

3 Reasons ‘Why’ My Finances Changed in Two Years

Last 2013, a friend in church approached me and asked me about saving for my retirement. Yes ‘retirement’ and it sounds awkward and weird to me back then. Imagine asking a young engineer who’s just been working for less than three months about retirement. I mean I’ve just started working and I am still enjoying the fruits of my labor.

Can I enjoy it first while I’m still starting?

If you share the same reaction as mine. Then let me share to you how this question changed my financial state.

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Working inside the plant

Being Curious..

That question made me curious, I was seeking for answers and assessing myself on how will I truly prepare for my retirement. The only thing I know that time was to save money so I started from there. Upon searching on the internet, I stumbled upon the 10-20-70 principle, where it says that 20% of my income should go to savings first and budget what’s left from my income.

Applying it…

When I learned about the 10-20-70 budget, I tried to discipline myself, stick to this idea and apply it. To prioritize savings and budget what’s left for expenses, unfortunately this budget didn’t work out for me. When I was doing it the 70% of the budget wasn’t enough for our expenses at home. So that time, I only set aside 10% for my savings and allot 80% for our expenses.

Having this in mind I am very thankful to that friend in church for asking me about my retirement because that question led me from inconsistency to consistency in managing my finances. Though I was saving small that time, it planted a seed in me for something better in the future.

Making the habit..

After several months of saving, I became a regular employee in the company, I had an increase in my salary plus daily living allowances. I was really happy because this time I can now follow the 10-20-70 rule. I didn’t change my lifestyle so my expenses were still the same. Now because of that raise, I have increased my tithe and my savings as well.

Every paycheck, I disciplined myself to automatically save money and make the habit of saving. Since the company started to give me daily allowances, that’s the time I also started raising my emergency fund.

I changed my budget to 10% tithe 10% savings 20% emergency fund and 60% expenses.

Focusing on short-term goals…

After a year in the company, I got promoted and had a significant increase. Again, I was really happy because I have increased my tithe and savings for the 2nd time.

Having a bigger income doesn’t mean I need to have a change in lifestyle, so I continued to live my simple and frugal life.

That time I was focused in completing my emergency fund, it has accumulated to 2 months of our expenses already and my target was only 3 months of expenses.

I believe that I was right on track.

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My first time working abroad

Last 2014, I was assigned abroad for 3 months. That’s my first time to handle big amounts of money, at first I was overwhelmed but I know I was prepared for it.

I have completed my 3 months’ worth of emergency fund so I added another 3 months to it to have 6 months’ worth of emergency fund from my earnings abroad. I have used the remaining money to renovate a part of our old house.

Having these short-term goals helped me a lot in managing my finances

And it was worth my spending..

After 3 months abroad..

I am in the Philippines again earning back to my regular income. I’m still living the same simple and frugal life, and I am content and happy about it.

I know I can spend on luxuries but I don’t prefer to do it yet. There are still goals that I need to accomplish and that is my priority.

Contentment is a choice and everyone has it, some people just lack the courage to choose it.

From 2013 (when my friend in church asked me about retirement) up to 2015 (after my job abroad), my financial state became better than before, I have 6 months’ worth of emergency fund, I have no debts, and most of my money is invested (up to now).

My budget for every paycheck now is 10% tithe 50% savings and 40% expenses.

In a span of 2 years my financial status has changed for the better and it was because of having the right foundations and discipline in applying it.

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Me, helping with the renovation

The 3 Main Reasons why my finances changed

Hunger for Knowledge

When my friend asked me about my retirement, I had no idea how to answer before which led me to curiosity and eventually made me hungry for knowledge. I attended seminars, read books and try to apply it one step at a time.  In the same way, I believe that every one of us can change our financial state if we are hungry enough to be financially literate. Truly investing in knowledge has the best gains.

Disciplined as a Rock.

Knowing personal finance is one thing but applying it is another. It will take a lot of discipline and changed mindsets before getting used to it. It may be hard at first but we don’t have to make giant leaps. Baby steps will make the habit in us and these little acts of change will eventually lead us to financial freedom.

God is our provider; always be faithful with what you have

I believe that God is the one who gives us the ability to produce wealth. And by that I know that we have security in him. We might have a small income today but if you are faithful with it, I know that it will eventually grow. As we become more knowledgeable of Him and in our personal finance, the more it opens opportunities for us to grow as good stewards. Just continue to invest in knowledge and be disciplined enough to follow it.

With an ounce of faith, room for knowledge, and discipline in applying it, I believe that we can prepare ourselves to retire comfortably after 20 or 30 years and become a channel of blessing to people.

 

Thank you for the recognition SunLife #SINAG Awards

Last year on December 10, 2015, Sunlife Financial held its SINAG 2015 Financial Literacy Journalism Awards which seeks to encourage Filipinos to become more financially prepared through well-written articles/stories. I was blessed because my entries won 2nd-runner up along with my co-winners mommy Lace Llanora and momblogger Noemi Lardizabal-Dado, you can find their blog at www.mommylace.com and aboutmyrecovery.com respectively.

 

Sunlife SINAG
I’m really thankful for the recognition that I got from Sunlife. It has given me the confidence in what I write and as I continue to write more stuff here in my blog I pray that it would inspire more people, activate them into action and give them hope in their financial lives.
Awarding
Winners of #SINAG Financial Literacy Digital Journalism Awards

Here are the articles that made me won (2nd-runner up)

How to know the Price tag of your emergency fund

How to save effectively as a young 20s professional

7 things to master while in your 20s for a better financial life

My story

Marvin Germo
With Stock Smart’s Marvin Germo

I had a great time in the awarding ceremony not just because of the prizes that I won but because I felt the burning desire Sunlife has in advocating financial literacy in the country. They are really investing time and resources in financial literacy programs for a brighter future.

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tokens of appreciation from Sunlife

I was inspired by that because it is a great advocacy of reaching out to people shedding light on how to become financially independent. I can just imagine a better and brighter Philippines for the next generations to come as more and more people become good stewards.

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