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3-6 months of you salary. Yes, just this much. This is what we call a cash buffer - an amount that should cover your 1.) monthly cash flow needs like paying your utility bills, and any 2.) emergency needs like medicine in case you get sick or if a family member unexpectedly borrows money from you.
You should always have this much liquid amount which is why it is best to put it in the bank.
To know more about stocks, bonds, and mutual funds, CLICK HERE.
If you are saving up for retirement, putting your money in the bank is not a good idea as the returns from the bank is most usually lower than inflation. That means the money that you have worked hard to save loses its value every year. So if you have retirement savings that you are not planning to use in the short term, might as well invest it.
In what investment to put them in would depend on your risk appetite. There are instruments that can provide guaranteed but minimal return while there are others that can provide big returns but with no guarantee. There is always a profitability and risk tradeoff.
To know more about profitability and risk tradeoff, CLICK HERE.
Don't get too comfortable with putting all your money in the bank. Try to find out more about other investments/instruments. The main selling point if putting your money in the bank is that it provides security and liquidity. If you are looking for "returns", the bank will provide very little of that for you.
I know a lot of people who want to invest but have none to little knowledge about it. Having graduated from business school with enough knowledge on investment concepts and actually investing already, they ask me to talk them through it and give some tips, which I was very willing to do so. And that's when I realized this as a calling of mine - to educated people on investments and financial planning. And in order to reach more people, I created this blog. :)
So to you reader who I assume is very interested in investing thus landing on this blog, below is my first lesson to you. To kickoff your investment plans, you need to first understand 2 very basic concepts in order to manage your expectations regarding investments.
1. TIME VALUE OF MONEY
The value of money does not stay constant, it changes throughout time. It can work against you because of inflation, or it can work to your advantage through investments.
Inflation is the yearly increase in the cost of basic goods. Let's say you put $100 in a bank deposit where it stays there for 5 years. At 5 years, the nominal value of you money did not change, it's still $100. BUT, what did change is the value of the items you can buy with 100$. Before, you could probably buy a full cart of groceries. Now, you can only buy a basket full of groceries.
So if you're someone whose saving money consistently for retirement and putting it all in a bank, you might not actually be doing yourself a favor since whatever you are saving, it's value would have been brought down significantly by inflation when you retire.
This is why it's very important to invest. By definition, an investment is an instrument where there is an expected amount of return to be gained. There are a myriad samples of investments but there are 3 which are very popular and widely discussed - stocks, bonds and mutual funds.
To know more about stocks bonds and mutual funds, CLICK HERE.
By putting your money in investment instruments, you can beat inflation AND earn additional revenue. If you put $100 in an investment and let it stay there for 5 years, if it's an agressive investment, then it might have already become $150-$250 already.
All investments have a tradeoff between profitability and risk. If an investment promises higher returns, the tradeoff is that there is more risk. If it promises, less risk, then the tradeoff is that there is lower returns.
We define risk as the variability of returns. This means that if an investment promises higher returns, there is NO guarantee. The performance of the investment will depend on the market. If the market is bullish (upward trend), then it can earn very high. If the market is bearish (downward trend), then it can earn equally big losses. An example of a high return, high risk investment is stocks.
If the investment promises guaranteed constant return, whether the market is up or down, the tradeoff is that it won't be a high return rate. An example of this is bonds. Bonds offer a fixed rate of return and thus can guarantee you that return even if the market is bearish. But if the market is bullish, you miss out on the potential to earn more. Also, bond rates are generally way lower than what you can potentially earn in stocks.
There is no perfect instrument that can promise high returns with low risk. If someone promises such to you, be wary! It's either that someone doesn't really understand what he is talking about or it's a scam. If there is such a perfect instrument then we'd all be rich, but were not. A good question to throw at anybody selling you an investment is to ask them how it works; how does it earns money; and how much involvement is required from you?
To know more about how stocks bonds and mutual funds work, CLICK HERE.
Keep these two concepts in mind always as you will encounter them a lot especially when you start investing already. More articles to come so subscribe to this blog now! :)
Investment 101 - What are Stocks, Bonds, and Mutual Funds?
As financial needs are very specific, life insurance policies have become highly customizable. Below are the points you need to be aware of in order to formulate a policy that can best address your needs. Don't rely soley on what your insurance agent tells you. They earn from commisions and therefore have interests that conflict your's. Review these items before you see an agent so you are knowledgeable of what you are commiting to and the options that are available to you.
Face Amount - the amount you are insured for. This is the minimum amount that will be given to your beneficiaries upon your demise. This is the main and basic component of your life insurance policy.
Premium - the amount you need to pay regularly to be insured. Understandably, the bigger the face amount, the bigger the premium.
Living Benefit - the amount that will be given to you in the event that you are still alive but want to surrender your policy. This value increases given that you constantly pay your premiums but takes significant time before you break even, usually in the range of 10-20 years.
Death Benefit - the full amount that will be given to your beneficiary. This is comprised of the face amount plus cash value plus dividends.
Paying Period - the number of years you are required to pay premiums.
Insurance policies are usually lifetime to pay. However, there will come a point when your cash value and dividends are big enough to pay premiums for you, in which case, even if you don't pay premiums, your life insurance policy can take care of itself.
Or, you can be upfront with your agent that you only want to pay for a certain period only, let's say 10 years. If so, premiums will be adjusted, usually made bigger, to make sure that in 10 years of paying, your cash value and dividends will be big enough to sustain you policy without paying premiums anymore.
Riders - accessory/add-on protection. When you get a life insurance policy, you are basically insured against death. However, you can also get insured against disability, dismemberment, critical illnesses, etc. through riders. These are accessory protection and cannot be availed on their own. A main policy (life insurance against death) must exist first in order to get riders. These also have associated additional costs that will be added to your premium.
Dividends - bonuses given by an insurance company. These usually depend on the performance of a company thus these are not guaranteed and may or may not be given. And if given, there are no fixed rates.
Dividend Options - options on how to manage dividends. There are several options and below are the basic ones.
1. Dividends to be automatically paid to you in cash
2. Dividends to be kept and accumulate in the safekeeping of the isurance company and in turn, earn you interest
3. Dividends to be automaticaly used to reduce premuim payments
As with all investments, there is associated risk. The associated risk would be the same risk of the underlying investment. So if you choose stock funds as your choice of mutual fund, then there is bigger risk compare to a bonds mutual fund, but the potential return, is of course bigger with a stock mutual fund. This risk will be shouldered by the policy holder - meaning the insurance company will not guarantee returns and depending on the performance of the market, the returns may be positive or negative (loss).I want to share with you this haunting and powerful poem the movie was named after, Invictus, written by British poet William Ernest Henley. This poem is Nelson Madela's favorite and served as one of his greatest inspiration and source of power during his 29 years of prison before his presidency.
Invictus
Out of the night that covers me,
Black as the Pit from pole to pole,
I thank whatever gods may be
For my unconquerable soul.
In the fell clutch of circumstance
I have not winced nor cried aloud.
Under the bludgeonings of chance
My head is bloody, but unbowed.
Beyond this place of wrath and tears
Looms but the Horror of the shade,
And yet the menace of the years
Finds, and shall find, me unafraid.
It matters not how strait the gate,
How charged with punishments the scroll.
I am the master of my fate;
I am the captain of my soul.
1. "Silence" Alarm Clock
Here's a video demo.
Lastly, we have the...
4. Carpet Alarm Clock
