BUILDING wealth is a goal for many Filipinos. As a growing economy, this is the time when working professionals and business owners have the potential to grow their finances plus access to information and various platforms that can help us.
Building wealth can be sometimes overwhelming, in reality, it takes time, effort and discipline to be successful with this goal. Get-rich-quick schemes or too-good-to-be-true opportunities can be dangerous and hopefully, the following principles can help you in your journey.
The earlier you start applying these principles, the higher change that you will achieve your financial goals at an earlier stage.
1. How to earn money. This step may seem basic but this is the most fundamental. There are two ways to make money, it is either earned income or passive income.
As defined by Investopedia, “earned income is money received as pay for work performed, such as wages, salaries, bonuses, commissions, tips and net earnings from self-employment.” It can also include long-term disability, union strike benefits and, in some cases, payments from certain deferred retirement compensation arrangements.
Meanwhile, passive income is revenue that takes negligible effort to acquire. It includes earnings from rental properties, limited partnerships and other projects where you’re not involved in the continued generation of earnings. While these moneymaking ventures may have initially required your resources, time, or efforts, they generally eventually pay out automatically without you breaking a sweat.
After understanding these two ways, we can be more strategic to start on how we can have multiple sources of income which can cater to different needs/goals. If you are just starting to build your career or business, you may still explore different industries to identify your strengths and weaknesses. In the long run, let’s say after 10 years, you will have a more focused skillset which gives you higher income opportunity.
If you are an engineer, for example, you may start earning a decent amount of income after five years of solid experience then upon building your business in the future, you now have the opportunity to earn unlimited by having clients that you will serve.
2. Set goals and develop a plan. Setting a clear “Why” in your investments can help you be committed in your journey. Start by defining your financial goals, could it be saving for your retirement, preparing for educational funds of your children or paying of debts. Regularly review your progress and make adjustments as needed.
3. Check your portfolio if a re-balancing is needed. While buying and selling investments on a regular basis such as annually, quarterly or every three years, your financial needs will change depending on your life season. As market segments move in and out of your favor, some areas of your portfolio might not be aligned with your short term goals. For example if the mixture of your investments are 50-percent conservative and 50-percent aggressive, you may consider changing it to 60-percent conservative and 40-percent aggressive. There’s no specific formula that will be applicable for all but atleast discussing this with a finance professional, you can assess and allocate to a mixture that is suitable to your life stage. Sharing herewith also some of the strategies that we can apply.
1. Switch your actively managed funds to index funds. Index funds are passive investments that is already diversified to the top 30 companies in the country.
2. Delegate some of your asset allocation to a target date fund. Having a specific target date can give you a firm commitment for a specific strategy if you will still hold a particular fund or not. Let’s say if you have a target fund by 2050, you can be firm that the allocation will be aggressive type of fund since you have more time to endure the fluctuations and expect higher returns in the long run.
3. Consider investing in international stocks. International stocks have two main advantages: Diversification and potential perform better than local stocks over certain periods. In the periods of the 1980s, the years 2002 and 2008, international stocks have fared better even in the US counterparts. If you are investing in the Philippine market, you will now have an opportunity to invest in companies that are part of the S&P 500, you just need to study which platform will be applicable for you. It could be through banks, insurance companies or online stock brokerage platforms.
Considering the strategies that we’ve shared, always remember to pause, reflect and consult a professional before executing your plans. May you have a fruitful investing journey in 2024.
Karlo Biglang-awa is a registered financial planner of RFP Philippines. To learn more about financial planning, attend the 105th RFP program this January 2024. Please email info@rfp.ph or visit rfp.ph for details