For sure you’ve heard the saying “Life begins at 40.” It sure will if you can retire at 40! The truth is you don’t have to wait until 65 to watch the grass grow or see the world via Royal Caribbean. I have friends who retired at 40; some of them are already in the mid 50’s, and for them, it was the best decision they ever made. How did they do it? They invested their money early in their career. In this article, we will share top 10 investing tips so you can retire at 40.
Times Have Changed… For the Worse!
When I was working as a Section Manager in an investments firm, my boss shared what he felt was the most important advice for young people starting their career in the business world.
He said, “If you don’t have at least 50,000 Pesos in your savings bank account three years into your career, you will never be rich.”
This was in 1992. I was 25 years old at the time, and my section was the most productive in the company. We hit quota 10 out of 12 months, and our clients were happy with their investments.
My basic pay wasn’t much; 5,500 Pesos per month, but the commissions were good and certainly helped push my savings over 50,000 Pesos.
In the 90’s, the average salary was 3,500 to 5,000 Pesos per month. I remember being interviewed by a now-defunct bank and offered 4,500 Pesos starting salary.
This was good money back then. In the early 1990’s, I could get a full tank of gas with 100 Pesos.
My boss’s advice became more poignant when the company closed down one year later. Instead of looking for work, I decided to enroll in computer school to enhance my marketability. Within six months, everything I had worked for was nearly gone.
I only had 11,000 Pesos in my savings account!
Fast forward to the present day; I come across a startling article on how much money the typical Filipino has in his or her savings account.
Here are the results:
- 4% – 1,001 to 5,000
- 4% – 1,000 and below
- 3% – 5,001 to 10,000
- 7% – 10,001 to 20,000
- 10% – 20,001 to 50,000
- 1% – 50,001 to 100,000
- 9% – 100,001 to 500,000
- 3% – 5,000,001 and up
- 7% – 500,001 to 1,000,000
- 6% – 1,000,001 to 5,000,000
According to a 2016 study by the World Bank, the average monthly income of the Filipino is US$298 or roughly 14,980 Pesos assuming a 50 Pesos to US$1 exchange rate.
If we get the aggregate, 74.8% of Filipinos have less than 50,000 in their savings account. And it’s not because Filipinos are big spenders; we’re not.
We’re the country that made the ukay ukay fashionable, trendy and cool. We can get by eating street food. 95% of mobile subscriptions in the Philippines are pre-paid.
Majority of Filipinos are practical when it comes to spending their hard earned money. The reality is times are much harder now compared to the 1990’s.
And it’s not going to get any easier. Today a full tank of gas will cost me 2,000 Pesos.
The Economics of Investments
One of the important concepts I learned in Economics 101 was the Savings Equation:
S = Y – I; whereby,
S – Savings
Y – Income
I – Investments
Thus your total savings is equivalent to the income you earn less the investments you’ve made. What you don’t invest constitutes as your savings.
Savings is a key component because it represents the money you have on hand to invest. If you don’t have savings, what will you invest?
I = Y – S
In other words, the money you save can be invested.
But as we have discussed earlier, the average Filipino hardly has any savings. To open a Savings Account, most banks will require an initial deposit of 5,000 to 10,000 Pesos.
Related: Top 10 Best Investment Ideas in the Philippines 2017
If your Average Daily Balance (ADB) falls below the minimum, you will be levied penalty charges.
Let’s go back to the data on the average savings account balance of the Filipino: 63.1% have less than 10,000 Pesos to their name.
Penalty charges and taxes are just eating their money. Only the bank is making money through these charges and by lending out the principal to borrowers at usurious rates.
The Pareto Principle and the Savings Conundrum
So how do we solve this conundrum?
The first step lies with having the discipline and commitment to save money every month.
Apply the Pareto Principle or the 80-20 Rule which states:
20% of your inputs will be responsible for 80% of the outcomes.
You need money to make money. You can’t establish a business without money. You can’t place investments without money. So if you want to generate higher streams of income, you have to start saving money.
If you are presently employed, every 15th and 30th, save 20% of your salary. Put it in the bank for safekeeping. At least it will earn interest no matter how infinitesimal.
It will not be easy, but neither is climbing Mount Everest, running the Boston Marathon or swimming the English Channel. If you want something bad enough, you must be willing to make sacrifices and compromises.
With consistency, you might be surprised at how much money you have saved in your bank account after one year.
If you are earning the average monthly salary of 14,980 Pesos, you would have 35,952 Pesos in your savings account after 12 months. You would need only 4 – 5 months to hit the 50,000 Pesos benchmark.
But as mentioned, you cannot and should not rely on bank savings to help you create wealth. You need to invest part of your savings.
Top 10 Investing Tips on How to Retire at 40
Building your wealth is important especially as you near retirement age. A study by the Social Security System (SSS) showed that 70% of Filipino elderly live with their children. This is a built-in cultural belief that children should eventually support their own parents.
While this is a noble endeavor, it puts greater pressure on the average Filipino’s efforts to save money.
Savings alone will not get the job done. You have to look for other avenues to add new streams of income to your pockets. These new avenues can be created by the investments you choose to make.
An investment is a placement which involves an exchange of money for an asset that is expected to yield favorable returns at some future date. You cannot make investments unless you have available funds to invest.
Reviewing our savings equation:
S = Y – I
Unless you have savings, you will not have any money to invest. Therefore an investment is a way to grow the money that you have saved.
When you bring up investments, most Filipinos will think of the stock market, time deposits and real estate as these placements have the highest recall. But investing is not just about the asset.
There are two important factors you should always consider:
- Risk – In investments, there is the risk/reward tradeoff which means the higher the risk, the higher the potential reward or return. Conversely, the lower the risk, the lower the potential reward or return.
Before investing, decide on how much money you are willing to risk. A few stock brokers I know refer to investible funds as money you are willing to lose.
The presence of risk leads some to view investments as a form of gambling. That is far from the truth.
In the first place, no one enters the market without strategy or a game plan. You should know your entry and exit points, as well as the cut-off point, should the market run contrary to your initial position.
When gambling in a casino or playing lotto, you are leaving your fortunes to chance. It is all about probability; the veritable luck of the draw. There is no system in place that will increase your chances of winning versus the “house.”
- Term or Maturity – You can find placements which offer a fixed return on your principal amount over a fixed term or period of time such as 30 days or 60 days.
Then you have real estate where patience is truly a virtue. Some real estate investments will pay out double or triple the acquired value after five years.
Before investing any amount, ask yourself “When do I need my money back?” For example, you decided to invest your child’s 250,000 Pesos college fund in government bonds.
You can leave it there and allow it to be rolled over after every maturity date until such time that your child needs it to cover his or her college expenses.
Keep these two factors in mind when deciding on investments. Generally, it would depend on your level of liquidity.
If your stream of income is unstable or inconsistent, it would be best not to take risky investments and instead park your money in short-term placements with a fixed return.
Here are my top 10 investing tips on how to retire at 40:
1. Identify Your Financial Targets
I’ve attended seminars where the speaker would ask you “How much money do you want to make by the time you hit 40? 10 Million? 100 Million? 1 Billion?”
Obviously, the opening statement was successful in capturing the attention of the audience. After all, this is what they came for right? The speaker makes it sound as if anyone can make 1 Billion in a few years’ time.
That was the wind-up. Now here’s the pitch:
“If you sign up for my courses…”
If you’re earning 15,000 Pesos per month and you have bills to pay or a family to feed, you’ll need to take care of these expenses first and have enough money left over to deposit in your bank account.
It would be great to save 20% to 30% of your income, but the amount will be far off pace the 10 Million, 100 Million and especially the 1 Billion mark.
You have to set realistic targets. Don’t set the bar so high you end up compromising your obligations. Set a target that you can hit. If successful, go for a larger target next year.
If you saved 24,000 Pesos last year, challenge yourself to double that figure this year. Assuming you ended the year with 50,000 Pesos in savings, you now have more flexibility in financial planning. The higher your savings, the more funds you have to invest.
2. Talk to a Fund Manager
If you are not sure how to go about investments, talk to a fund manager. Your bank branch manager can give you advice on where to invest or set you an appointment with a fund manager from their head office.
You can also meet with a fund manager from a securities investments firm or a stock brokerage company. Many of them have a Master’s degree in Business Administration (MBA), are certified as financial managers and have a wealth of experience managing investments.
Before meeting with a fund manager, conduct your own research on the types of investments available in the market so you won’t get lost in the discussion. Also, keep in mind that fund managers are looking to expand their portfolios.
Take their advice to heart but do not get pressured to decide to invest right away.
3. Think About Getting Good Insurance Plans
A home will be one of the biggest investments you will ever make. Not only will it provide you shelter but you could create wealth through recurring rental income or outright sale of the property upon appreciation.
An investment of this magnitude should be protected with insurance. If something should happen to your home such as fire, burglary or damage from flooding, the insurance company will cover all or part of your risk.
I think of insurance as forced savings that give you peace of mind. It is a way to protect an asset that you have invested on. You are passing your risk to an insurance company in exchange for a premium.
Other insurance policies you should think of getting are:
- Long Term Disability Insurance
- Life Insurance
- Health Insurance
You never know what the future has in store for you. Having these insurance policies in place will keep you and your loved ones financially covered should your ability to work and earn income be compromised.
4. Diversify Your Investments
For sure many of you have heard of the “Investment Risk Pyramid.” It is a visual that is used to reference how you allocate or distribute your investible funds according to the risk profile of an asset or security.
The Investment Risk Pyramid has three sections:
- The Base – Composed of low-risk investments with foreseeable returns.
- The Middle – Slightly risky but with strong potential for capital appreciation. Investments in this section are still considered relatively safe.
- The Summit – Covers high-risk but high-return investments. This is money you should be ready to lose.
Diversifying your investments means not putting your eggs in one basket. You have to know how to maximize opportunities while managing the risk involved.
Here’s a distribution schedule that you can consider:
- Allocate 20% of your savings to investments.
- Of the 20%, invest 60% in assets and securities that fall under The Base.
- Allocate 34% to The Middle.
- Invest 6% in high-risk placements
The “6% Rule” states that you should only place no more than 6% of your investible capital to high-risk investments. You start out with only 2% and if your investment becomes profitable, buy additional positions in increments of 2%.
5. Find Ways to Increase Your Cash Flow
If your basic salary isn’t enough to cover your obligations, current lifestyle and generate significant savings, you should sit down and assess your cash flow.
You don’t need an accountant to prepare your cash flow.
Simply list down your sources of income and create a list of your monthly expenses. Deduct the summary of expenses from total income and the final figure will determine if you have positive cash flow (gain) or negative cash flow (loss).
You can improve cash flow by addressing both variables in the equation: cash inflow and cash outflow.
- Cash Inflow (Sources of Income) – Why not consider a sideline or taking a second job? Online work or telecommuting is widely popular, and the Philippines is a primary destination for outsourcing is a hotbed for talent.
If you have a knack for virtual assistance, take in a client who can give you 10 hours of work every week. Assuming the client pays you $7 per week, you can add $280 to your pockets every month.
- Cash Outflow (Summary of Expenses) – I’ve heard it all before. People say they “can’t” when the reality is they “won’t.” If you want to increase cash flow, you have to “trim the fat” so to speak.
Prioritize key expenses for the family, the household and financial obligations.
When I lost a big client, I suspended my gym membership, cut out cable TV, put a moratorium on dining out, ate once a day and canceled the annual vacation. I did this for three years!
It was not easy, but the sacrifices were worth it. As the saying goes, “If there is a will there is a way!”
6. Start a Business
We’ve published several articles in tycoon.ph on how to start a business in the Philippines because we’re encouraging Filipinos to become entrepreneurs. Entrepreneurship is the new engine of economic growth in the Philippines.
Starting a business is the best way to gain financial independence; it means investing in your dream.
It’s a great time to become an entrepreneur because the Internet has made it easier to set up a business. E-commerce is the preferred business model of today’s entrepreneurs.
With an E-commerce business, you don’t have to set up a physical shop and pay exorbitant rental fees to commercial establishments. You only need to purchase a domain name, build a website and subscribe to a good Internet service provider.
An E-commerce business is open 24/7!
Of course, you should find reliable suppliers and have an efficient delivery system in place. But the overall cost of setting up an E-commerce business is much cheaper than a brick-and-mortar store.
Related: How to Start Your Own E-Commerce Business in the Philippines
If not an E-commerce business, why not come up with a home-based business? We’ve written some articles on the best home-based businesses in the Philippines.
Here are other popular home-based small business ideas:
- Virtual assistance
- English Tutorial
- Computer repair
- Internet Shop or Pisonet
- Barber Shop
- Candle making
- Car Wash
- Sari-Sari store
Starting a business is never easy. But once it gains traction, it could lead to something bigger for you.
Alfredo Yao started out making juices in his kitchen. Today he is more popularly known as the founder of the highly successful Zest-O Corporation.
7. Consider Becoming an Angel Investor
If you feel you don’t have the requisite skills to manage your own business, why not help another person make his or her dream a reality?
One of the biggest challenges in starting a business is finding capital. At the start-up stage, the entrepreneur needs to put up funding to cover pre-operating expenses, deposits, capital improvements and working capital good enough for six months.
As an angel investor, you invest in an entrepreneur’s business idea in exchange for equity or ownership stake. It is venture capital for small businesses.
An angel investor often pools his or her money with other angel investors to increase the number of investible funds. It is not an easy process.
First, the entrepreneur has to convince you that the business has tremendous upside. Second, you and the entrepreneur have to agree on the distribution of equity and working arrangement.
The advantage of becoming an angel investor is that you can capitalize on the ideas of others. But the best part is helping an entrepreneur realize his or her dream of starting a business.
8. Invest in the Stock Market
The stock market is the venue where equities or stocks of publicly-listed companies, bonds and other types of securities are exchanged for cash so that investors can own a part of the company.
It is alternatively referred to as the “Equities Market” and is considered a medium-risk investment.
The concept of trading in the stock market follows the same principle as buying and selling of commodities: You buy low and sell high. But the process of deciding which stock to buy is not so simple.
This is where hiring the services of a licensed stockbroker becomes important.
It should not be enough for a stockbroker to advise you to buy a specific stock at a particular price. The stockbroker should validate his recommendations by providing the following pieces of information:
- The general trend of the stock market.
- The financial position of the recommended company to buy into.
- Analysis of technical indicators: moving averages, strength indices, and stochastics.
- Presentation of entry, exit, and cut loss points.
- Risk management strategy.
You should also assess the trustworthiness of the stockbroker. Some stockbrokers are notorious for doing aggressive day trading; they go in and out of multiple positions in a single day to earn larger commissions.
The law of probability also applies to the stock market: The more frequent you trade, the higher the risk of incurring a loss.
9. Study the Real Estate Market
If you have the capital for it, invest in real estate. This is an investment that will pay out over time. The key is to know the best areas to buy property. Just like other investment opportunities, real estate is subject to the law of supply and demand.
What factors influence demand for real estate?
- Population growth either through increased birth rate or interstate migration.
- Level of commercial development in the area.
- Interest rates.
- Foreign investment or foreign buying.
- Employment rate.
You shouldn’t discount areas which appear rundown and abandoned. Keep in mind that the Philippines has a population of 103 Million people. This is expected to hit 110 Million by the year 2020.
Eventually, there will be a shortage of housing. The government will have to fund gentrification projects in areas or cities which can be developed as future sites for additional housing.
Here’s an interesting statistic: Eight of the Philippines’ 10 Billionaires in 2017 are invested in real estate!
10. Manage Your Debt Wisely
Many Filipinos have fallen into a debt trap because they viewed credit as easy money. It’s easy to abuse credit. You can acquire an item and pay for it at a later date. There is no cashout, and you only have to pay a small percentage of the amount.
Eventually, the interest accumulates to the point that you can no longer cover the minimum amount of payment.
Some people borrow money to fund their businesses. Their projections show the loan can be settled within the year. If things don’t go as planned, your business will be in trouble with the bank.
Some people borrow money to buy property and put up a house. As a rule, if the amount of the amortization is greater than 25% of your monthly income, don’t get a housing loan! Chances are you will lose your house to the bank.
Even if you try to negotiate for terms, the most you might get is a short sale. You might not earn anything from the sale even if the property appreciates in value.
Always practice prudence when it comes to credit. Consult with your accountant on the amount you should borrow and the ideal terms.
Finally, shop around for the best loan package.Talk to at least five banks and figure out which one can offer you the friendliest arrangement. Read the loan agreement very well. If possible, discuss it with your lawyer.
In the late 1990’s the “NBC Today Show” aired a segment which featured Americans who retired by the time they hit 40.
One guy decided to buy a Harley Davidson and tour the United States on his bike. Another guy bought a sailboat and went on a one-man expedition around the world.
I remember telling myself, “I want to be like those guys. I want to retire by the time I’m 40. I would spend my retirement traveling around the world.”
Of course, it never happened. I started my first company at 42. My partners and I ventured into outsourcing.
We were extremely successful for three years, and perhaps if we were able to sustain the business for another five years, I could have retired before I turned 50.
But business is a tricky proposition. You never control all the cards. There will always be variables that you cannot control. It was a difficult but enriching experience.
When I started my second company, Benchmark Global Management Solutions, we stumbled right off the blocks. The client we signed up backed out after three months.
But we persisted and signed up three clients before the end of our first year. We’ve been in the outsourcing business for four years and have managed over 40 clients.
Can I retire now? No, because Benchmark is still growing. Why should I abandon the business before it has reached its full potential?
This is a company I grew on my own. I have no partners. It’s a culmination of years of sacrifice; blood, sweat, and tears.
Besides, I don’t ride motorcycles or sailboats!
The time in 1993 when I was down to only 11,000 Pesos in my bank account I decided to invest half of it in the stock market. That was the time when Initial Public Offerings (IPO) were the big thing.
I talked my way into getting allocations for Petron and Filinvest and all the hot IPOs coming into the market. When Petron was listed in 1994, I sold half of my allocations and bought shares in other companies.
I was fortunate enough to have a stockbroker I could trust. Our venture into the stock market allowed me to recover financially. However, in 2016, I liquidated all my stock investments before the Philippine Presidential elections then shifted to real estate.
The bottom line is, if you want to retire at 40 or any age, you will be able to do it assuming you draw up a plan and are prepared to do whatever it takes to attain that goal.
You should never surrender to your current financial situation. There are many different avenues to growing your wealth. The most important thing is to choose a path then take that first step.