Business World 011705: Keep less money in banks

Business World Online
MANILA, PHILIPPINES | Monday, January 17, 2005

Keep less money in banks

By JENNEE U. RUBRICO, Senior Reporter

Filipinos put too much money in banks when they should be investing it elsewhere, the Asia chairman of the International Association of Registered Financial Consultants (IARFC) said.

In an interview with BusinessWorld last Friday, Jeffrey Chiew Kim Chwee, Asia chairman of the IARFC, said it was not wise for people to put all their money in banks as their would only be eroded by inflation, or the increase in the general price level of goods and services.

"There's too much money in the banking system in the Philippines. People put a lot of money in the banking system, earning very low rates of return ... It's quite risky. The longer you go, cash in the bank becomes inflationary in nature," he said.

The consumer price index or CPI, which the government uses to measure inflation, is also not an accurate gauge of inflation's impact on one's money, he said.

Personal inflation rate, which is CPI plus "lifestyle inflation," should be taken into consideration, he said.

"Let's say the CPI is 6.5% and my lifestyle is 3.5% -- because I don't eat just rice and sugar. I go to Starbucks every other day, and with the cost of transportation in Metro Manila more than in the province, my personal inflation becomes 10%. If you put your money in the bank and it earns 8% gross, you lose every year," he said.

He also said that money in banks were considered "low risk" only for five years.

Money in a bank for five to 10 years places it medium risk, but money in a bank for over 10 years is high risk, Mr. Chiew said.

To illustrate, Mr. Chiew said $30,000 in a bank for 10 years would just lose its value. He noted that 10 years ago, this amount could buy two Volvos. But now, even if it grows to $40,000, the money can no longer buy one Volvo, he said.

"Inflation does not affect you too much in two years. You do not feel the impact. But after 10 years, it can kill you," he added.

Mr. Chiew also said that pople should keep only three to six months' worth of salaries in banks. This, he said, should serve as an emergency fund.

"It [deposit level] depends on your business. If you are a government servant, three months will suffice. But if you have a business, six months will suffice. Anything more is excessive. Anything more, you lose the money," he said.

He also said that given the impact of inflation on money, investment was no longer a choice but a necessity.

"You have to invest because of the impact of personal inflation rate and because we are living longer," he said.

But among the obstacles to investing are the lack of investment products.

"There is a lack of products from which consumers get a fair return for their investment," he said.

He also said Filipinos have a "less than average" financial literacy.

"While the Philippines is growing in sophistication, financial literacy still has to catch up," he said, noting that consumerism was still very strong in the country.