Why it's never too early (or too late) to start your nest egg
MANILA, Philippines - Building your nest egg could be farthest from your mind when you are young and free of domestic and filial responsibilities that eventually crop up along the way as you age. But time does not stand still, and sooner or later, you would find yourself embracing more responsibilities and realizing that you have to plan your finances for the future.
There is no timetable for starting your nest egg. Whether you’re on your first job, or in the midst of starting a family, you can begin to put together a fund to see you through your senior years.
If there’s one thing you have to remember, it’s that the earlier you start putting your nest egg together, the better for you. This is because a longer time horizon allows your money to earn more. Time also accords you the flexibility to let take on more risk (which means greater yields) and ride out short-term fluctuations in your investment plan.
Here are some things to think about in planning and starting your nest egg:
Define your goals.
To start planning your nest egg, you have to think about your life goals and your financial goals. Although these are not set in stone, they would guide your planning process. Your goals, alongside your timetable and financial situation, would determine your investment strategy. Life goals include what you plan to attain in all spheres of your life, including career, family, education of your children, lifestyle, and retirement, among others. This would also include possible relocation and asset acquisitions.
Your life goals would feed into your financial goals. Estimate how much you would need to fund these needs in the years to come. This would give you an idea of how much you should save to meet your targets.
Cover the basics.
Make sure you have social security. In the Philippines, social security is compulsory if you are employed, but just in case you aren’t, sign up for voluntary contributions with the Social Security System. This is a good way to cover you for many of your needs, including health, throughout your life.
Protect your income.
An insurance plan provides you basic protection cover and is cheaper to purchase when you are younger. It will answer your need to provide financial protection for your future family, and as such, would serve as an important component of your portfolio. Some insurance plans include add-ons such as health coverage and other benefits which you may or may not take, depending on your individual needs.
Maximize your benefits.
If you are employed, go through your benefits and see if your company offers a pension or a retirement plan. In cases like these, your employer matches your pension contributions. This works to your advantage since you are, for all intents and purposes, getting free funds toward your retirement. See if your company pension plan allows you to pay more than your predefined contribution. If so, go for the maximum contribution that you can afford. Also look at employee stock option plans and take advantage of these offerings to add to your portfolio.
Try to put as much as you can into savings. Although there are no hard and fast rules on what percentage of your income you should put your savings, aspire to put at least 10-15% into savings. Some financial experts stress the importance of paying yourself first—meaning, put a set amount into savings before spending your money, as opposed to saving what is left of your money. Do not wipe out your bonuses and other financial windfalls but instead, put some into your savings. A sinking fund, wherein you can park a set amount regularly—every payday, for instance—is a good way to jumpstart your retirement fund. Look into joining an employees’ cooperative, if this is available in the company you work for.
Look for right investments.
Do not let inflation erode the purchasing power of your funds. Savings accounts, for instance, do not offer much in terms of yield. In contrast, equities offer a bigger upside but entail more risk. If you do not understand these vehicles, start with mutual funds or unit investment trust funds (UITFs). These are managed by professionals, and there are a host of funds to match specific financial profiles. Find one that is closest to your financial profile vis a vis your investment goal.
Stay away from get-rich schemes.
Think twice when you are offered something that offers quick returns and handsome returns for your money. You may discover that you are being offered something that is risky or worse, may not even be legitimate. You wouldn’t want to waste your precious savings on schemes that may, in the end, jeopardize your ability to grow your nest egg.
If you need clarification or assistance, do not hesitate to consult professionals. They can clarify matters to you and guide you in your decision making process.
Grow Your Money is an editorial partnership between ABS-CBNnews.com and Citi Philippines to promote financial education and provide helpful information to Filipinos on how to better manage their personal finances.
Visit www.citibank.com.ph for more information.