“Sir Jaycee, what are possible investment options for our emergency fund and college funds? It is currently in our bank and is not earning. Is there a low-risk investment vehicle that will allow us to withdraw ASAP in case the need arises?”
Sugar knew that there is risk involved in all types of investment. Happily, there’s no need to work on her psychology just to make her acknowledge that, if she wants to set aside funds for emergency and educational purposes, she has to embrace calculated or controlled risks.
Sugar might be aware already that money invested in bank is slowly losing its buying power month after month and year after year because of the average inflation rate of 4% per year. Take a look at the historical data of our inflation rate in the Philippines for the past 10 years and this 2014.
In my vocabulary, education and emergency funds are two different beasts in the same forest.
Both funds allow you to have something to pull out when a certain need arises.
For your education fund, perhaps, you already know when you’ll be needing it. That pre-defined “when” is the missing element in an emergency fund. You don’t know when will an emergency arise (unless you treat those ‘mid-year sale – up to 50% off’ signage on malls as emergency signals).
Let’s Split Sugar’s Question Into Two
1. In which investment vehicle, with the lowest risk possible, may I put in my education fund?
2. In which investment vehicle, with the lowest risk possible, may I put in my emergency fund?
My risk appetite is very high when it comes to investing, but I’ll answer each question based on what I would do if I were Sugar.
Sugar, Where Should You Put Your Education Fund?
Considering your low-risk appetite, I’d recommend you to put your education fund in a mutual fund.
Mutual Funds Have Three Asset Classes: Equity Fund, Bond Fund And Balanced Fund.
The money you invest in an equity fund goes to the stock market. It is also called “stock fund”. Among the three, it has the highest level of risk.
This asset class allows your investment to earn a fixed income. Your money is invested to bonds and Treasury Bills. This has the lowest risk level among the three.
This asset class is a combination of equity and bond fund. The risk level is average.
Looking at each class’ risk level, bond fund is perfect for you. Your money’s potential yield is surely better than the 0.5-1% interest rate you’re currently getting from your savings account.
My Personal Advice Once Your Risk Profile Goes to a Higher Level
However, when the time comes that your risk appetite goes to a higher level, as far as mutual fund is concerned, my personal recommendation is to invest 100% in equity. Remember, the higher the risk, the higher the yield.
If this education fund is meant for your young son or daughter, ask your financial advisor about their procedures when opening an In-Trust-For (ITF) mutual fund account. That’s what we did when we opened an ITF account for our son in AXA Philippines. This is not a recommendation to only choose AXA and forget all others. There are many brokers. It just so happened that AXA Philippines has earned our trust and confidence in them. The financial advisor assigned to us has always been very accommodating to our requests.
My Recommendations When Choosing a Mutual Fund Broker
- Visit as many brokers as you can.
- Check the quality of their customer service and the knitty-gritty of the investment vehicles they’re presenting to you.
- Ask a lot. When I say that, I mean A LOT. When my wife and I went to AXA Philippines’ in Metrobank, we spent 3 hours with our financial advisor. I asked about every single technical term that I didn’t understand.
- Know where exactly your money goes. Ask your financial advisor where do they invest the money in every asset class so you can quantify and re-calibrate yourself with the risk level that you can only handle.
- Ask your financial advisor for the historical data of the performance of each asset class that they have for you.
- Tell your financial advisor to present the options they have for you in such a way that you can easily compare and differentiate them on your level. Even if you already know very little things about it, pretend that you don’t.
Now, let’s talk about your emergency fund.
Sugar, Where Should You Put Your Emergency Fund?
Let it stay in your savings account.
My wife and I have our emergency fund in a passbook-only savings account. No ATM. No checkbook. It’s a passbook-only account so that it’ll remind us that we really need to exert some efforts just so we can withdraw an amount – big or small.
If it’s not an emergency and we feel the temptation to touch that fund, it makes us think, “Do I really have to visit the bank where we put our emergency fund, line-up and do an over-the-counter transaction for a non-emergency reason?”
My wife and I are a couple of discipline when it comes to money. But knowing the human nature to get lavished at times, we got to be proactive in building our offense and defense for that reason.
Maybe you’re asking, “How I will withdraw it instantly if it doesn’t have an ATM?”
Gauge your discipline level. If you think and feel you can resist the temptation of withdrawing for a non-emergency reason, it’s up to you if you’d like to open a savings account with an ATM card.
Two Reasons Why I Suggest You Put Your Emergency Fund in a Savings Account
1. It’s liquid.
2. It’s PDIC-insured.
What Does It Mean by Liquid When I Say “It’s liquid”?
You can get your money almost instantly. You can withdraw during banking hours. If you have an ATM, you can withdraw almost instantly. If you will put your money in other investment vehicles (e.g. mutual fund or stock market), you’ll have to wait for days or weeks to receive your cash. If your emergency is a matter of life and death, putting your emergency fund in an illiquid account is not a wise decision.
What Does PDIC-insured Mean?
Your deposited amount is insured by the Philippine Deposit Insurance Corporation (PDIC) up to PHP500,000.00. If you put your money under the mattress and your house burned down (knock on the wood) for an unknown reason, remind yourself that your money is not fireproof.
My Personal Recommendation When It Comes to Emergency Funds
Because of the maximum insured amount, I would recommend you to deposit a maximum of PHP500,000.00 per account per bank for your emergency funds. Just in case something bad happens to your bank, your deposit is still 100% intact.
In a Nutshell
Remember to check your risk appetite when investing in mutual funds for your education fund. You increase the risk, you increase the yield. Study your options very well. Before you sign the paper, make sure you were able to convince yourself that that’s what you are really looking for.
On the other hand, emergency funds should really be kept in a place where you can easily withdraw it. However, guard yourself from touching it for non-emergency cases.
Share this to a friend who also has a concern with regard to emergency and education funds. Share this on your social media accounts.
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