Last Tuesday I moderated the Business world insights panel titled “Savings, Expenses, Invest: Achieving financial goals even in the midst of a crisis ”with the best financial advisers in the country – Aira Gaspar de Manulife, Kelvin Ang of AIA, Edser Trinidad of FAMI, and lawyer Lorraine Saguinsin of UnionBank. A lot of the things they said were intuitive, but a lot were also quite shocking conservatism. In a study Ms.. Gaspar shared the financial habits of millennials and millennials during the pandemic, it has been shown that they save more, are very cautious – with 77% buying necessities instead of wants, and are downpours at risk with 82% not wanting to go into debt. Mr. Ang reiterated how, even though people save more in terms of habits and percentage, the absolute amount is still lower. The pandemic has affected us all and reduced our level of savings. In fact, in his study, 77% of those questioned would like to save more, including 74% looking for better returns, unhappy with the low interest rates on their bank deposits. Mr Trinidad reiterated the conservative approach that people are starting to establish financial buffers, and finally Mrs. Saguinsin stressed on the elephant in the room of each household: transition of wealth during contingencies.
This column builds on that discussion and reflects on whether and how to redefine financial stability for current and future generations. I have been taught and continue to teach my OFW Financial Literacy students the basics of saving a third of income as the first “expense,” having six month’ net salary sitting in a stocking–risk instrument as an emergency fund, such as having life insurance once you have dependents, health insurance once you are financially independent, and finally creating a Excel chart of long-term retirement goals whose goal is to have sufficient passive income to cover today’s active income. Is it still realistic today? Is it still possible now?
Active income, the wage derived from daily productivity has summer significantly reduced or in many cases (currently 7.7% of the unemployed population) – has been reduced to zero, not just for a month or two, but for a very prolonged period. No productivity in the economy equals no active income. For anyone who has kept their job, their income is very unlikely to increase in the next few years. three to five years, the predicted timeframe in which top economists predict the Philippine GDP will return to pre-pandemic levels. And yet, since the start of the year, inflation has still exceeded 4%, and property prices continue to soar as incomes contract. And with interest rates at historically low levels, most investments pay negative real rates.
As active income is no longer reliable, passive income cannot be increased. And even if there was excess capital to put into an investment, there would be no investment that would yield more than the cost of the debt to fund it, with banks remaining conservative and tightly controlling their non-performing loans.
All that, sure, is subject to even more pain: the relentless possibility that the emergency will no longer be an unprecedented surprise event, but rather something statistically more likely to happen than not, if one is not extremely careful. How can insurers even make money these days? How can they pool their beneficiaries’ assets to spread the risk when everyone is at equal high risk? Where would the diversification take place? We might as well keep the money for ourselves, because if you think about it theoretically, as a healthy person, putting your money in an insurance fund would be like financing a person at risk today. And yet we keep thinking in our heads, insurance is a must. A hard nut to wrap my head around. We need to rethink the theoretical role of insurance when “everyone” has to withdraw from the insurance fund at the same time.
All forms of financial literacy training are gone in these times. When my friends ask me where to invest their money, I have to answer: keep the cash. It was the same feeling in the event today: to stay austere. Reduce expenses. Focus on health care spending, the bottom of Maslow’s hierarchy of needs, stick to the basics.
And yet, if we all did this, if we all decided to save rather than spend, to wait for active incomes to improve before investing, how would the wheel of the economy turn? Indeed, I can live long periods without shopping, without eating in restaurants, without using my car. But where would that leave retail, restaurants, real estate, banks (if indeed I would never need to borrow money)? In the end it would all stop and we would go back to the pre-Adam Smith days where I did my job and you would do yours and we autarky keep our lives detached from a financial and market economy where we hang out. instead, let’s focus on our health and well-being, just another example of the failures of capitalism.
What then is my solution? I had already said that. I had thought about it a lot. I must have thought that my consumption and spending was benefiting another person in terms of income. That income would eventually come back to me, whether it was a higher salary or dividends from a business that is doing better, or an appreciation in property prices in a booming economy. And I believe that today our financial health will be more and more cyclical. The time is over when we would do get rich slowly to relax at the end of life. When’s the end of life anyway? Isn’t that imminent these days? These are the days of enjoying wealth when you can, being austere when you need to, regaining it and losing it.
And this is where the diversification game lies: when people’s incomes fluctuate dramatically relative to abundance. To bit by bit, we must spend in times of plenty and save in times of little to return to plenty. A meal at a restaurant when I get my salary. Donate to the community pantry when I have money aside. A little ayuda bonus to my employees when things go better. It’s psychologically liberating to look at a bank account and feel stability, and that’s important. But whenever your sanity can withstand a blow, perhaps we can consider feeling a little discomfort in our financial situation to contribute to someone else’s desperate need for rest.
Daniela “Danie” Luz Laurel is a business journalist and anchor producer of Business world Live on One News, formerly Bloomberg TV Philippines. Previously, she was a permanent professor of finance at IÉSEG School of Management in Paris and maintains teaching affiliations with IÉSEG and Ateneo School of Government. She also worked as an investment banker in the Netherlands. Ms. Laurel holds a doctorate. in management engineering with concentrations in finance and accounting from the Politecnico di Milano in Italy and an MBA from Carlos III University in Madrid.