In my early 20s, I kept most of my earnings in my bank account. I cannot explain the unique kind of joy I feel whenever it was pay day and I would see the balance of my bank account go up and the slight tinge of anguish whenever I would withdraw money from my ATM. But being an avid reader of economic and financial concepts, there’s something I learned that made me feel otherwise.
There’s a culprit in maintaining a huge bank account.
"I always thought that saving was the most responsible thing to do. But what I didn’t realize that there was a culprit called inflation. With inflation, you will be getting less goods, services or experiences for the same amount of money."
I slightly talked about inflation in my previous blog “The New Definition of Money That Can Change Your Life” and I also mentioned about the concept of stored labor – that money represents all your hard work in the form of paper bills.
Imagine this. You’ve been working very hard month-on-month. It took you at least 200 working hours per month plus countless overtime, sleepless nights, long hours of commute, stress and anxiety, and times you turned down family and friends’ invites. Sure you do because you’re a responsible adult and you want to live a better life.
For example, you earn about Php80,000 (net of taxes) per month. Let’s say you choose to spend 50% of it to food, shopping, and travel because these are all important for you. Then you keep the balance 50% (Php40,000) in your bank account. With inflation which is around 3% annually over the past 5 years, this may not seem like a lot, but if you consider the compounding effect of inflation, you will see the true effects of inflation. If you keep the same Php40,000 in the bank for five years because you want to save, your purchasing power will drop to Php34,500, or a 14% decrease, which means less food, less shopping, less travel, and less of what you could have needed or wanted.
Take note, you’ve spent the same number of working hours and all the sacrifices that came with it for less amount of goods or experiences.
"So the bigger your bank account, the more you will be losing due to inflation. The longer you keep your money free, the less valuable it will become. "
Financial liquidity might not be a priority for now.
I now keep a relatively small amount in my bank account in case of emergencies – an amount equivalent to six to eight months of my monthly cash outlay. This amount may vary depending on your life stage and responsibilities.
When you are in your late-20s to early 30s like me, you are either approaching or are already within your peak earnings growth years. This is the time when your income grows at a very fast pace from one year to the next. At this stage, I am guessing that you have probably been promoted at least twice in your professional life; you’re young and very healthy; and that you still don’t have kids in grade school. If you answered yes to all these, then having high financial liquidity or huge free cash should not be your priority. Your priority is to invest as much as you can so you can get the most out of your hard-earned money.
So what do I do with the rest of my cash? I’ve invested them in real estate, particularly in condo units where I have enjoyed double digit gains every year since I started. The bonus part – I’m happily living in one of these investments.
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ABOUT THE AUTHOR
Edric Maguan is an avid real estate investor, an experienced and accredited Real Estate Broker of several top developers, and a Certified Public Accountant from University of the Philippines - Diliman. He found his passion in inspiring and empowering people to make the most out of their hard-earned money through real estate investment. Read full biography here.