Tuesday, November 13, 2012

Short Answers to Unanswered Questions: Emergency Fund for Emergencies and Investing From Abroad


Dear Investor Juan,

I'm Alexander, 23 y.o. I'm currently trying to create a sound financial plan for my accumulated savings. So far, i have roughly 150,000 in savings and i'll be setting aside 72,000 as an emergency/buffer fund (i pegged it at 6 months at Php 12,000 per month). The rest (at around 78k) i'm planning to put aside in high-yield investment instruments or maybe add it to the 7,000 i have in an equity fund which i opened last May. :)

Any advise where it's best to keep an emergency fund without exposing it to substantial risk but still guaranteeing sound returns? I checked BPI's Short term money market fund but it has this "Special Expense" quoted (Please see attached) which costs Php 2,000 p.a. I haven't checked with BPI yet but any idea if they charge it to you directly? (Php 2,000 is quite big of an expense!).

I currently have a maxi-saver account in BPI where i keep my emergency fund; it yields 2.250% gross interest p.a. (around 1.8% net after withholding tax) provided that no withdrawals are made within a month. the interest is also credited monthly so it's easy for me too keep track. but of course the 1.8% net yield is still quite low when you consider the annual inflation rate of around 3%. haha :)

With that i need your expert opinion on what is the best plan of action. i shall definitely consider it as an option in allocating my finances. Dealing with all the computations and options by myself is sometimes too taxing. :)

Thanks IJ.


Dear Alexander,

There's a saying, "You can't have you cake and eat it too." In finance, there's a similar saying, "There's no such thing as a free lunch."

Emergency funds are for emergencies, so they must be always readily available and liquid, and liquidity comes at a cost--lower returns. So I suggest to keep it simple and just park your emergency funds in a savings account. The extra return that you lose (~3% from a money market fund or time deposit minus ~1% from a savings account = 2% x 72,000 = 1,440 pesos per year) should be worth the extra liquidity and convenience that you gain.

If you want to invest in a money market fund, then by all means do so, but treat it for what it is--an investment in a low-risk, low-yield asset, and not an emergency fund.


Dear Investor Juan,

I just came your blog recently when was searching about UITF.

I just want to know your opinion on an idea that I'm contemplating. I'm in Australia and currently have a mortgage on a 3 bedroom unit I just acquire a year ago. I have about AUD 150K (PHP 6M) equity and with low interest rate at the moment (5%), I'm think of investing some of my equity in the Philippines in UITF/MF. I'm also looking at opening a Investment Manage Account in BDO or BPI. Do you think my idea is feasible? Will I likely earn more than 5% in the Philippines?

Kind regards,
Pinoy in OZ

Dear Pinoy in OZ,

What kind of investment gives you 5% a year in Australia? If that comes from fixed income securities or funds, you'll get the same of even a lower yield for the same kind of investment in the Philippines (the price we pay for a "better" investment climate). If that comes from equities, the local stock market has been able to provide more returns than that in the past couple of years (but understand that this does not guarantee that these high returns will persist in the foreseeable future). The point is, we can only compare returns of investments with the same risk, that is, fixed income to fixed income, equity to equity.

If you are keen on investing in Philippine securities, yes, you might want to consider getting investment/wealth management services. It's really a convenient way for Filipinos abroad to manage funds in the Philippines. I have just opened such an account, and will write about it this month. So stay tuned. :)

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