Recently updated on: September 18, 2023
The bank is one of the oldest financial instruments available to man. Because of this, it's deeply embedded in our society that the bank is where we should put our savings.
Growing up, a typical value passed down to us is saving money for a rainy day. They mean to say that we should constantly increase our money in the bank in case of emergency.
Though this advice is good, as I grew older, I realized that it is not the best way to preserve the value of our hard-earned money in the long run.
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Don't put more than P120K in the bank.
Tradition banks in the Philippines are currently paying as little as 0.25% per annum of interest, while inflation is typically around 2-4%, but has recently grew to more than 8%.
Assuming the inflation is at 4%, this means that while you gain 25 cents on every P100 you have in the bank, you also lose P4 per P100. That leaves you a net loss of P3.75 per P100.
To better visualize this, if you have P100,000 in the bank, it loses P3,750.00 per year. This does not mean that your P100,000 will be P96,250.00 after a year.
It just shows that after a year, your P100,000 in the bank will have lesser buying power than it has now.
For those still unfamiliar with the concept of inflation, it is the rise in the prices of goods and services that we commonly consume, such as food, beverages, transportation, education, and more.
Suppose you think inflation is bad for the people putting all of their savings in the bank. In that case, it is worse if you save your cash in a jar at your house, like what is often shown in social media's #IponChallenge.
Aside from losing value to inflation, it is also at risk of being stolen, eaten by rats or insects, or even burned in case of a fire.
The P120,000 is only a representation of your emergency fund. As I've written before, an emergency fund is three to six months of your expenses (or salary) that you save to cover your emergency expenses such as illnesses, loss of job or income, repairs, and many more as they come.
The P120,000 is NOT an absolute value but only acts as a placeholder. If your current monthly expense is only P10,000, then you should have P30K to 60K in the bank.
However, if your monthly expense is P50,000, then your bank balance should be P150 to 300K.
Also, always remember that building up an emergency fund should be your top priority.
Please don't put it in only a single bank.
A rule of thumb that I usually follow is to divide my cash into at least two different banks, just in case my main bank goes offline and I needed some money for an emergency expense.
Also, don't use your payroll bank account to hold all of your cash. It will be harder to sort your money out whenever your salary arrives.
What to do with your excess? Invest.
As the quote says, money is a good servant but a terrible master. It means that you should never allow money to be the center of your life. It would be best if you were not striving day in and day out to earn money, to buy things that you don't need to impress the people you don't even like.
Money is just a tool, so use it as such.
There are so many investment vehicles to choose from, which you have to study and understand first before diving in. Some investment options that you may consider are mutual funds, VULs, stock market, PAG-IBIG MP2, Forex, Cryptocurrency, Businesses, Real Estate, and many more.
Just remember to only invest in the things that you fully understand. Many people, driven by greed and the hope to make a quick buck, are victimized by scams. So do your due diligence as well.
What if I needed more than P120,000?
Your money in the bank is your initial buffer in case of an emergency. It will serve as a liquid asset that you can easily take out. If you need more than what you have in the bank, you will still have enough time to liquidate some of your assets, such as mutual funds or your money in the stock market.
Other assets like real estate will usually take a long time before you can liquidate. So, it would be best if you diversified your investments appropriately.
As a final note, the P120,000 is just that, a number. It can be less or more, but the important thing is the value that it represents.
A much more important reminder is to not go into debt as much as possible. First, save for your emergency fund, then if needed, let your emergency fund do its job.