Personal Finance with Friends

My high school friends and I met up yesterday to informally discuss about personal finance. They said that this year, they plan to seriously manage their finances and they would also like to try investing (two of them admitted that they only keep their money on savings account.)

One of them asked my opinion on an investment instrument offered by an agent. He said that with this instrument, he'll pay Php 30,000 annually. Portion of which will be invested in equity, and some part will be for insurance. He can get the investment whenever he wanted to. The agent also claimed that this investment is "walang lugi" because of cost-averaging and that this is way better than UITF which earns only 4% per annum, a rate less than the inflation. As for the insurance, he'll be insured for Php 1M. My friend wanted to know if this is a good investment.

Before answering that, I first made sure that:

1. His debts are properly managed and he has an emergency fund in place. 

Investing when you're neck-deep in debt spells suicide. It is advisable to minimize the debt to a manageable level. How manageable is manageable? For me, it actually depends. Personally though, when I really, really need to use my credit card, I try to keep my total payable at 10% of my take home pay (maybe 15% max). In this way, I still have enough funds for my basic needs (25%), savings (more or less at 30%), household contribution (20%), and the rest for my discretionary expense of choice. I don't know if there's a hard and fast rule for this, but for me, as long as I don't feel that 100% of my salary goes to expenses and on top of that, I still have some breathing room for simple joys that let me enjoy my hard-earned moolah (I love eating out!!!), then I'm fine with it.

As for the emergency fund, I suggested listing down all his expenses, further identifying the "needs" from the "wants." His emergency fund of 3-6 months of expenses should be based on the "needs" (plus 20% for good measure). The "wants" are the things he can do without.

2. His objective is in line with the investment instrument

Just like skinny jeans, not all investment instruments are fit for everyone. It is important to take into account, among others, the objective, time horizon, and the level of risk. You should not invest your funds in equity if this will be used for your child's tuition next month. In the same manner, it is not advisable to put your retirement fund in money market because you will be losing an opportunity to grow your money more (unless you're going to retire next year.)

My friend would like to invest for his retirement fund (he said that his debt and emergency fund is ok). Clearly, what is being offered to him is a VUL (Variable Universal Life Insurance). While I am not against VULs, I feel that if he just want to invest for long term, he is better off putting it on mutual funds (equities). In this way, 100% of his funds will go to investment. However, if he wants an investment and an insurance and he only got a limited budget, then VUL is a good choice.

3. Information is correct

Some people will exaggerate (or understate) information para makabenta lang. While it is true that you should not invest in an instrument that earns less than the inflation, you should also compare apples to apples. If the said fund will be invested in equities, then you should compare it to the performance of other funds also invested in equities. I gave him this site that compares the performance of UITF for one, three, and five-year period. The site shows that UITF equity has an average return way more than what the agent claimed. The 4% return can be seen on bonds and money market which are conservative funds. Lastly, the agent should have not claimed that the investment is "walang lugi" as all investments have risks.

In the end, he decided to invest in mutual funds, while my two other friends plan to write all their expenses starting next month to build their emergency fund. They admitted that they are ok with mutual funds but they are not yet ready for stock market investing, which is just fine. I'm happy and I'm confident that this is just the start.