by Jet Villamor
I was very fortunate to have been given the opportunity to sit-in a session entitled, “Build your Financial Services Practice”, conducted by one of my mentors in investment and I should say an investment guru. Alijeffty C. Gonzales, CIS, RFP. If you want to know more about him and his work you may log on to www.acgadvisors.net
I was amazed but not at all surprised at the figures he showed us, knowing the mentality of Filipinos with regards to savings and investments. The disturbing figures he presented to us are the total amount of money in demand deposits. He figured a total of P4.39 trillion in demand deposits sitting in the banks all over the country. In Region 11 alone, a total of P132.29 billion is just there in the banks. Now what? And others may say, “So”?… – Do you realize how big a trillion is?
For us to appreciate how big one trillion is, lets start with one million. Do you know how long it will take for us to count one million? Let’s simplify our math, let us assume that we can count one number per second, in reality, we cannot because it will actually take us, more or less, four (4) seconds to count a number like 857,378. If we can count a number per second, it will take us more than 10 days and 10 nights without stopping to count to a million. Without taking a break in 10 days and nights we would arrive at the number 864,000 because that is how many seconds there are in 10 days and 10 nights. Now, imagine counting a billion with one thousand millions, then try to count one trillion with one million millions – its mind boggling, but that’s actually beside the point.
The point being, more and more Filipinos are putting their money on demand deposits without knowing that their hard earned money is slowly eroded by a thief, that almost instantly takes away from them the moment they so decide to place it for a longer period of time in a vehicle they call deposit.
The average interest rate given by the banks for the last 10 years all things considered is actually playing at a 4% rate, while on the other hand the average inflation from the year 1997 up to 2008 is at 6.5% the thief I was actually talking about is inflation. The problem actually stems from our own concept and criteria of a “safe investment” because we are used to look only at the figures in our passbook. Usually our concept of a safe investment is when our capital is preserved or intact while a certain rate of return is realized. In this case, we are only looking at the nominal value.
Allow me to illustrate it a little further. If you have P10,000 today, that same P10,000 is worth the same amount of goods and services if you’ll spend it today. Say, because we were trained and we are told to save in the bank, we decided to put that same P10,000 in the bank knowing fully well that the interest rate is 4%. A year after, you updated your account and you’ve noticed that your money is now P10,400. Can you say honestly that you’ve just made a good investment decision? Absolutely, yes – remember our criteria of a safe investment are safe capital and realized return. But when we will try to look at it with a little science and very objectively we will realize that in fact we have just wasted 2.5% of our money. When it is true that we earned 4% because of the rate of return that the deposit gave us, we are actually at the same time losing 6.5% due to inflation. Hence, the net effect is we are losing 2.5%. What does this actually mean?
There are two ways for us to consider for us to know whether we’ve made the right investment decision or not – the usual, unenlightened way and the right way. The usual way is for us to look into the figures of our passbook; we are only looking at the nominal value. The right way is for us to impute inflation into the equation so we will be able to determine the real value of our money.
As I’ve mentioned, off hand, we have just surrendered to inflation without a fight a substantial portion of the value of our money when we put our money on a vehicle which will give us a return of lower than the inflation rate.
How safe is your money?
More on this next week.
(For questions, comments, suggestions and reactions email @ jvvillamor@insular.com.ph)
