Contributed by Melvin J. Esteban, FLMI, AFSI, RFP, CFC
There are a good number of instruments that we can recommend but the most important consideration in this case is liquidity. Liquidity is the ability to convert your investment back to cash without losing your principal.
Bank Products. Banks can be a very good source of these products and are an excellent starting point. Open a savings account or a checking account that can be accessed through an ATM. This account should be used for your usual normal expenses so you don’t need to bring a lot of cash every time you go out. You can withdraw only when you need cash. Because of the slight inconvenience of looking for an ATM and lining up, and with the limited amount you can withdraw every time, using the ATM helps you reduce impulse buying. From a practical standpoint, I recommend that you maintain an amount equivalent to one month’s expenses (at most) or 10% less than your monthly income, whichever is lower. Again, by maintaining such amount, your will avoid the temptation to withdraw more than your usual month spending.
The next two to five months’ equivalent can now be placed in a relatively longer bank product. I suggest a Certificate of Deposit or a Time Deposit. This product usually has a minimum maturity of 30 days to as long as 5 years. However, in the interest of our topic, I suggest two to twelve months. Try to spread your money into in different periods. One-fourth can be placed for two months, another fourth for six months and the rest, 12 months. On a worst-case scenario, you can always pre-terminate them without loss of principal, anyway.
Other products that you can find in a bank are Money Markets or Unit Investment Trust Funds (UITF). These are also good choices. These products are very liquid and will earn you a little higher return than a Time Deposit. With these products, your money is pooled with other people’s money, and is invested directly in a variety of short-term instruments. Directly investing in these instruments allows you to earn a relatively higher return, but you also bear the risk in the case of a default or non-payment of the investments.
Money Market Mutual Funds (MM Mutual Funds). These funds are very similar to the product mentioned earlier. The only difference is that a Mutual Fund Company, and not a bank, offers it. Since a company manages UITF and MM Mutual Funds, they earn by charging you a management fee. Different companies have different rates, so make sure you shop around. Also, note that some may charge more than the management fees, so make sure to ask for all the fees and obligations. Obviously, the lower the charge, the better it is for you.
Life Insurance. Other than protecting your family, life insurance can also provide a good secondary source of funds. So when purchasing insurance, you may want to choose one that has a good cash value accumulation and that is guaranteed. You can loan from this cash value at favorable rates. It’s like having a relatively cheap credit line. Whole life or endowment type insurance may be a better choice instead of Variable Life or Unit Linked Insurance since you are looking for guaranteed cash value.
Melvin J. Esteban is CEO of Motivating Minds, one of the leading consultancy groups in the country. He is the first Filipino to win the prestigious “Young ASEAN Manager Award” given by the ASEAN Insurance Council in 2007; and was the youngest to achieve vice presidency during his stint in insurance at AIG and Philamlife. Melvin has over 14 years of experience in the financial services industry, working in financial services marketing, product development, and strategic business development. You can reach him at email@example.com.