WWII veteran asks where to invest money INQUIRER.net
September 15, 2009
( This is part of Take Charge of Your Money, a partnership between INQUIRER.net and Citibank to help readers handle their personal finances well.)
Q: My father is a veteran of World War II. He is anticipating receiving from the US government soon his compensation for his services during the war. This will amount to $9,000. We want him to keep the money so that he will have something to use when he gets sick. Where can we advise him to put his money so that it will earn for the meantime? – Rachel
A: Better late than never—this is what many World War II veterans from the Philippines have said regarding their long overdue compensation from the US government. They fought alongside American soldiers against the Japanese during WW II and have been promised benefits. Now, more than half a century later, the surviving veterans will finally be receiving what is due them.
It is good that your family feels your father should keep the money for his needs. At his age (in his 80s, most probably), he most likely does not have income coming in regularly anymore. And although his daily living expenses may be lower, health care costs may be higher since this is the time when illnesses crop up.
We don't know how many more years your father has on earth. He may live to a ripe old age of 100 or more, or leave earth sooner. That lump sum payment he will receive should then be preserved as much as possible so it can last long enough to meet his needs. In the book 'The Citibank Guide to Building Personal Wealth,' it says: “Protecting your capital from loss becomes more important than ever before, because you cannot be certain how long you will live. If you live until you are 100, you will need your capital to last that long at least.” This calls for a conservative strategy in investment.
Here are some options available to your father on where he can put his money:
1. Savings account: It's safe to keep money in a savings account, but interest rate will be quite low. Still, it's better than hiding money in one's closet or under the bed. We suggest that some of your father's money be kept in a high-yielding savings account so it can be easily withdrawn within 24 hours should an emergency arise. Make a survey among the banks in your area to see what interest rates they offer. Choose a stable bank for your peace of mind.
2. Time deposit: Money kept in a time deposit means the money will be locked up in the bank for an agreed upon term (e.g., 30 days, 90 days or more). In return, the bank will offer a higher interest rate than that offered by savings accounts. Keep some of your father's money here too so it will earn a little bit more. And as with savings accounts, ask around among the banks for time deposit rates. The smaller banks may give higher rates, but you may be more at peace having the bigger banks take care of your money for you.
3. Treasury bills: These are short-term government securities, and as such, can be less risky—meaning, the government guarantees that it will pay the investor the face amount of the Treasury bill at maturity date. Interest, which is subject to 20 percent withholding tax, will be credited to the investor's bank account on a pre-determined schedule. The interest earned may be higher than what time deposits offer, so consider putting more money here than in time deposits. You may inquire about this from your bank.
There are other investment products that yield a bit more but comes with some risk:
4. Money market fund: This is a fund pooled among investors and the money is invested in a combination of short-term government securities and corporate papers maturing within a year. The rate may be higher than a time deposit. It may be offered as mutual fund (run by finance companies) or unit investment trust fund or UITF (run by banks), and you may be charged a certain amount for fund fees. There is some risk involved and you could lose your principal. Interest is subject to withholding tax.
5. Fixed income fund: This is also a pooled fund run as mutual fund or UITF. However, the money is invested in a combination of short-term and long-term fixed income securities. Again, it comes with risk and you could lose your principal. Interest is also subject to withholding tax and fund fees.
6. Bond fund: Like the money market fund and fixed income fund, the bond fund is a pooled fund available as a mutual fund or UITF. The money pooled from investors will be invested in bonds, which carry risk. You may be able to earn money more than what other forms of investment may give you, but you may also see your capital lose in value should the market be down. You will be charged a certain amount for fund fees, and interest is subject to withholding tax.
We will not recommend investing in stocks given your father's age. He may not have enough time to ride out market fluctuations, so it is best to stick to investments that will preserve his capital.
There are also other places he can put his money in: a business, jewelry, fine art, car, property or any other asset. However, bear in mind that a business carries with it a higher amount of risk as compared to the investment funds mentioned above. As for jewelry, fine art, cars, property, or other assets, it may be difficult to convert these to cash should emergencies arise.
All prudent investors have a diverse investment portfolio. They don't put their money in one basket or one form of investment. The same should be done by your father. Don't let him put the entire $9,000 in a savings account, or in property, or in one type of investment fund. Spread the capital so the risk is also spread among different asset classes. In that way, should one asset be down (e.g., bond fund), the gains from the other forms of investment may possibly help cover some of the loss that may be incurred. However, you will also need to consider the fees that may be incurred in investing in these various forms of investments.
Study all options carefully and discuss it with your father. Advise your father to keep all investment and legal documents in a safe place.
(INQUIRER.net and Citibank invite readers to ask questions regarding financial matters. Send your questions to personal_finance@inquirer.net or comment through our personal finance blog called MoneySmarts.)
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