The most important thing you need to know before you invest

Investing can be very overwhelming, even for professionals. Saan ba maganda mag-invest, pure investments or with insurance, who is the best provider for these financial products?

And as you ask around, from friends, colleagues, and family, they will give you different answers. You’ll get more confused. But I would say, WAIT! Before jumping into investing, have you already built your financial foundation? If your answer is no, step back first and create your financial plan.

Based on my personal experience, a more structured (and for me, effective) financial planning is the one that follows your hierarchy of financial needs. Parang yung tinuro sa atin sa school, Maslow’s hierarchy of needs.

Familiar, right? To simplify, before we invest, ask yourself:

• Am I able to satisfy my basic needs?
• Am I financially secure? i.e. I have an insurance, I’ve set up my emergency fund, etc.

If both answers are yes, then let’s start growing your wealth!

Para kanino ka ba bumabangon?

Some of you might ask, can I not proceed with investing before I get insurance? Is insurance necessary? Let me answer this with another question: Why are you working so hard? As the commercial says, para kanino ka ba bumabangon?

Whether we’re employees or entreps, we work and save to provide for our family, educate our kids, live more comfortably, and have enough for medical bills. To meet this need, you should know your real answer to this question: If an unforeseen event happens, does your family have enough? How much can you leave your loved ones, and how long will it last? If a family member gets seriously ill, can you cover the expenses of long treatment? So, ano sa tingin nyo? Kailangan ba talaga natin ng protection/insurance?

So going back, wealth accumulation is like growing assets for long-term success. To build your portfolio, you must invest in different kinds of assets like money market, bonds, and equities; you must allow your investment to have exposure locally and globally. As we commonly say it, do not put all your eggs in one basket. Diversify! Diversify! Diversify!

You might say that you don’t have the time to do this, or the knowledge. Don’t fret, there are many funds where experts manage the assets and make the daily decisions for you. You do pay management fees -- but for this minimal cost, you avoid the hassle of asset selection, analysis, monitoring and administration. The experts do this for you, with the skills, tools, and resources they’ve developed for years.

Wealth accumulation also means saving for retirement and paying down your debt (not just loans but mortgages, etc.), to carry as little debt as possible. Avoid lifestyle inflation, defined by Investopedia as increasing your spending when your income increases. Common events that can trigger lifestyle inflation are graduation from college, a job promotion, or a significant raise. Ang tanong ko nga rito, why increase your spending at all? When these positive events happen to us, we should take them as signs to save more, invest more and continue to live simply and practically.

Once you’ve established your wealth, then pwede mo nang sabihin that you have financial freedom. You can seriously plan for long-term goals and begin to check off your bucket lists and lifetime dreams. As said in Maslow’s theory, these are for our esteem-related needs, such as self-respect and personal accomplishment.

In the end we all want to leave our legacy. This highest level of financial need can be business succession planning, estate planning, etc. It is actually a financial version of the self-actualization in Maslow’s theory.

This is not to say that you postpone life indefinitely while waiting to move up. We all have expenses that won’t wait, education, a car or home, a wedding or birth. But by keeping our ladder in mind, we can plan for these and spend reasonably instead of impulsively. When you jump ahead, it feels fun to fly – just make sure you have enough to land on.

To illustrate financial planning as a pyramid:

We all have different financial needs, and your order of priority can shift. But generally, following this sequence – one step then the other, steadily up the ladder -- gives you a higher chance to stay financially healthy and achieve your financial goals.

Now that you know that having a financial foundation is important, you can start laying one of the foundations by building an emergency fund.