Question: I have been saving money since I started working several years ago but I don’t seem to have grown my money enough to meet retirement needs in the future. What should I do? – Dorothy via email

Answer: While it is good that you have the discipline to save, keeping all your money in the bank is not enough. Saving is just one way to build your cash reserve but in order to make it grow, you need to invest it.

Investing comes in various forms. Depending on your risk profile, you can invest in different assets and come up with the best combination that will give you the highest return possible at the risk you are most comfortable with.

Here are the five ways on how to grow your savings and make those savings make money for you:

1. Invest in fixed income securities

If you are the conservative type of an investor, you can choose to invest in money market funds that pay regular interest. You can buy commercial papers issued by listed companies or bonds issued by the government.

Interest rates vary according to the length of term. The longer the term, the higher is the interest rate. Government issued securities are normally risk free, meaning, when you lend your money to the government by buying bonds, there is no chance that the government will default on it because it can always print money to pay you.

If you invest in securities issued by private and public companies, the interest rate must always be higher than those by the government because of the possible default risk.

When you invest, make sure that you stick to it to maturity.  Pre-terminating your money market funds may incur you additional charges, which may lower your income. This is not to mention the possibility of capital losses if you liquidate your bonds or commercial paper at lower valuation in the market.

2. Invest in preferred shares

If you want higher yield, you can buy preferred shares of listed companies in the stock exchange. There are very few preferred shares available in the market but they can be a good alternative to fixed income. 

Preferred shares offer around 5 to 7 percent per annum, plus potential for capital gains when its share price goes up. Preferred share prices are normally stable and are not as volatile as the common shares. When you buy, make sure that the preferred shares are liquid and actively traded so you can sell it anytime you need cash.

3. Invest in growth and dividend stocks

If you want more risk for higher returns, you can buy some stocks for long-term capital gains. In the past ten years, Philippine stocks have generated excess returns of over 15 percent over fixed income securities. Buy promising stocks that have the potential of at least doubling its share price over the long term. Choose stocks that have great earnings growth prospects. The share price of a stock increases as earnings grow. 

If you want to be conservative with stocks, you can simply invest in dividend stocks. There are stocks that pay dividends regularly similar to preferred shares. The only difference is that the amount of dividends they pay is based on net income. If income is growing, dividends can increase, too.

Also, because stock prices fluctuate daily, you can target your own dividend yield by buying stocks at lower prices. When share prices fall, you can buy more to average down your cost per share and at the same time, increase your dividend yield.

Stocks that pay regular dividends are normally classified as blue chips. They are mature companies that have stable income with minimal growth per year. They are safer in the sense that they have a stable earnings track record and are generally followed by fund managers.

4. Invest in real estate

You can also diversify into real estate. You can buy real estate for regular cash flows and long-term capital gain. For example, you can invest in condominium units for rental income. Your annual rental income can give you average yield after commission and expenses at 7 to 8 percent.

You can also leverage your investment by paying only the equity portion of the property, which is around 20 to 30 percent of the market value, and by financing the balance with a bank loan. If your rental income is higher than your monthly amortization, you could make at least a 10 percent cash-to-cash return on your down payment, as well as enabling you to possibly earn capital gains over the price appreciation of your property.

If you have excess cash, you can also buy raw lands that have the potential to appreciate in the future. Buying raw lands is one good way to protect your money from the effects of inflation. Prices of raw land normally appreciate over time. It is not advisable to speculate if you have limited investible funds as this kind of investment generate limited or no cash flow at all.

5. Invest in business 

If you are willing to assume more risks to earn higher return for your investment, you can invest your money in putting up a business startup. Startups are not the sure way to make money since about 90 percent of them normally fail in the first few years, but when they do succeed, the returns can be massive. There have been a lot of stories about successful entrepreneurs who started with almost nothing, and that have become very big with just a small capital. If you have the business idea and the skill to manage and grow a business, then entrepreneurship may be for you.

If you want to lower your risk, you can also invest as a partner with other entrepreneurs in starting up a business. You can invest in other people’s ideas and skills and become a co-founder.

Investing is all about managing your risk. You can only manage your risk if you know what you are doing. Taking time to learn and getting yourself financially educated is the first step to succeed in investing.



Henry Ong is an entrepreneur, investor, researcher and business columnist for more than 20 years. He holds double degree in accountancy and applied economics, a Registered Financial Planner (RFP) and Certified Management Consultant (CMC). Follow him on twitter @henryong888