DIY Investing vs let the bank manage your money

I've come across an article about investing in UITFs. The article's called Philippine UITFs you can invest in from 1000 and up and posted on www.imoney.ph website.

 Here's the link: http://www.imoney.ph/articles/philippine-uitf/

UITF stand for Unit Investment Trust Fund. It sounds complicated but it just means that the bank will pool money from their participating clients into a fund. That fund will be used to buy stocks chosen by their financial experts.

In my opinion, saving money into a fund is better than not saving at all. My only concern is that the bank and their financial experts need to be paid. They will charge you 1 to 2 percents each year. If your account is making money or not, they'll get their fee anyway. If you're losing money that year, they'll just blame the economy but they'll still get their fee.

Of course, they have this expertise that makes them better than us. But are they really much better than us?

I'm wondering this because they are choosing stocks from the same pool of stocks we choose from. If we buy more or less the same stocks they do, we can get the same performance but with no fee at all.

That's why I want to compare their performance vs mine. Here's the table:

As you see, my performance is not the best, it's only the second to the best! Not bad for someone with little financial expertise. But the other difference is that I don't have any fee to pay each year. I just do it myself. I perform more or less the same as the other funds but I don't have to pay anyone for my performance :)

Even worse, most other fund are performing worst than me but still, they'll make you pay for their "bad" performance. You might really want to think about doing it yourself.

So this is my advice. Start your online trading account and choose 5 to 10 stocks to purchase. These should be well established companies in different industries. These companies must sell something that everyone need. Then buy more of the same stocks every month with the money you have saved. If the stock goes up or down, still buy. That's the secret.

If you do it yourself, you don't have to pay anyone every year and the performance is more or less the same or even better than the banks.

Do you know how much you're worth?

I know, it's a catchy title that might offend some of you. I know you're worth much more than the amount of money you have in your account.

But, do you know how much asset you have? Do you know your net worth?

Your net worth is simply your assets minus your liabilities. Knowing it is good to know but the most important thing is to know the trend of it.

Is your net worth increase or decrease over the years?

This is really important. If you read my previous article http://pinoyfinancialcoach.blogspot.com/2015/05/middle-class-vs-rich-people.html I mentioned that rich people collect assets. In that case better if you know if your assets or net worth increase over the years.

Start a new Excel document where you state all your assets:

- House
- Bank accounts
- Saving accounts
- Stocks
- Bonds
- Cars
- Jewelry

Total the amount and subtract that total with your total liabilities.

Liabilities are:

- House mortgage
- Car loan
- Student loan
- Money you owe
- etc.

The result is your net worth.

Then do this exercise each year and calculate how much does your net worth increase or decrease over the years.

Better, set a goal of increasing your net worth by let's say 5% every year and use your Excel sheet to see if you reached your goal.

How to save money on a car. Part 2.

In the previous post, we learned that buying a second hand car is a financially wise choice since depreciation in the five first years of a brand new car will cost you 565,000 php while it will only cost you 160,000 pesos if you buy a five year old car and keep it for five years.

Depreciation is the biggest cost of ownership. The second one being the cost of financing.

It is estimated the bank charges you 42,000 pesos a year for getting a loan. If you add this up, it's 210,000 for your 5 years loan.

I hope you'll realize now that your 965,000 Mazda 3 will cost you 1,175,000 by taking a loan.

Let's recap for a while:

Your Mazda 3 purchase price = 965,000 pesos
Bank financing = 210,000 pesos
Total: 1,175,000 pesos

After 5 years, you'll only sell your car for 400,000.

1,175,000 - 400,000 = 775,000 pesos!

By taking a loan and by buying a brand new car will cost you 775,000 pesos if you sell it after 5 years!

My advice: don't buy a brand new car and don't take a loan.

Just buy a car that you can afford cash. If you only have 100,000 pesos, buy a car sold for that price. If you don't have enough cash for buying the car you want, just save for it. Don't take a loan!

I usually buy a car that is between 200,000 and 300,000. I pay it cash.

Let's say you sell your 200,000 car after 5 years for 100,000. The depreciation will only be of 100,000 or 20,000 per year. Since you didn't take a loan, there's no bank financing charges. It's still much cheaper to lose 100,000 in 5 years than 775,000 for the same amount of time.

I know that a second hand car will need maintenance and fixing. On my 200,000 car example, I estimate to spend around 100,000 pesos on maintenance.

I'm not saying that you shouldn't buy brand new car. I'm sure there's no other best feeling than driving a brand new one. At least, with these simple mathematic computation, you'll know how much it will cost you and you can compare it to other options like buying second hand.

How to save money on a car. Part 1

Back to the study assessing the cost of car ownership, we learned that a normal sedan costs us 195,000 php a year.

The biggest chunk of this cost is:

1. Depreciation around 85,000 pesos
2. Cost of financing around 45,000 pesos

It means that if you want to reduce the cost of ownership of your future car,  you must work on one of those.

1. Depreciation:

Since depreciation is a big cost, why not buying a car that has depreciated already. Yes, it means a second hand car.

Let's study 2 cases. Let's compare buying a brand new with buying a second hand car.

I love the Mazda 3. It's a beautiful car well made and that drives really well. I'll use it for this example.

Let's buy a brand new Mazda 3 and sell it 5 years after. Let's also buy a 2010 Mazda 3 and sell it 5 years later.

The prices are based on the selling price found on www.olx.ph.

Here's the comparison:

A brand new Mazda 3 costs 965,000. If you sell it 5 years later, you can expect to sell it at 400,000. 

A 5 years old Mazda 3 costs around 400,000 and if you sell it 5 years later, you can expect to sell it 240,000.

It becomes obvious that the brand new car will depreciate at a much faster rate than the second hand car because it has already depreciated a lot.

The brand new car will lose 565,000 of its purchase price while the second hand one will only lose 160,000.

What a difference!

The difference is roughly 400,000 pesos!

In the span of 5 years, you will lose 400,000 pesos if you buy a brand new car. That's roughly 80,000 a year.