Frequently Asked Questions Part 1

1. How do you define INVESTING?

My personal definition of investing is this: it is a series of actions that begins with saving or deferring present consumption and reallocating it along with other factors of production in exchange for a certain profit that will hopefully result to acquiring more consumables after the investment period. Investing begins with savings. You can save by reducing, deferring / postponing, or totally abandoning some consumption.

The next step would be to place these savings where it would produce a certain return or income. The savings considerably change; if it began as cash on hand then it could end up as cash in the bank where it will earn interest. This new form of savings, the cash in the bank, should produce enough interest income in such a way that the original amount or principal plus the interest it earned at the end of the investment period should be able to buy more goods than what the principal alone could buy at the beginning prior to investing.
An easy example to illustrate this would be the following: suppose P10,000.00 in savings is made and this was deposited in a bank. Suppose this amount of money in a bank earns an interest rate of 4% per year. The interest amount earned after one year is P400.00. Suppose that prior to investing, rice is priced at P1,000.00 per sack. Therefore, the original amount can buy 10 sacks of rice. Suppose then that a year after investing, the price of rice remains the same at P1,000.00 per sack. Therefore, after one year the total amount including interest would be P10,400.00 which can now buy 10.4 sacks of rice. In this situation, the savings grew by 4%. In this example, there is no increase in the price of rice or there is a zero inflation rate.
            However, in reality there is inflation wherein there is an increase in the price of commodities. Suppose that instead of remaining the same, the price of a sack of rice increases to P1,050.00 after a year. The total amount including interest would still be P10,400.00 but now it can only buy 9.905 sacks of rice. In this scenario the savings actually shrunk by .95% in terms of goods that it can buy before and after the investment period of one year. This last scenario is actually happening as long as your interest income is less than that of the inflation rate. On the other hand, do not be tempted to place your money in high interest rate deposits especially if you are not 100% sure of the bank’s reputation.

2. I will be buying a house for the first time. Can you give me some guides?

Here are a few common mistakes for first time homebuyers you should be aware of and try to avoid:

  1. Trying to buy a house that is way above than what you can really afford. This may result to delays in the purchase. A delay in the purchase would mean money spent for rentals instead of being able to use that money in acquiring an affordable modest home.
  2. Failure to learn about current house prices resulting in delays in the purchase. There is the danger of house prices going up.
  3. Being in a hurry to buy resulting in paying more than real market value.
  4. Not having someone who is knowledgeable and willing to help about buying houses; or relying too much on the advice of friends and relative rather than real estate professionals.
  5. Spending too much time looking for a house before establishing how much you can afford. Knowing your capacity to buy, in terms of cash purchase, or if in installment purchase, in terms of what down payment you can put up and monthly payments that you can afford.
  6. Not knowing that you have to set aside some amount of money for closing costs.
  7. Unaware of the different types of government subsidized housing loans and mortgages available to a first-time buyer.
  8. Failure to conduct a thorough inspection of the house with an engineer or real estate professional before closing a purchase.
  9. Failure to check the contract of sale thoroughly for unfavorable clauses.
  10. When buying from build and sell developers, failure to check out the reputation of the builder by interviewing people who are living in houses that the builder previously made.