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.
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.