the rabbit hole of personal finance
24 Jul 2024Recently, I’ve become semi-obsessed (slight exaggeration) with finance topics.
This started with and was a result of finally being able to withdraw all the allowance I had accumulated over years of studying at Philippine Science High School. My allowance money from those 6 years was a respectable 6 figures, and I was looking for a place to park it, and maybe earn some additional cash.
The first place I turned to was BPI Savings. This was the bank my family transacted with for all of their savings accounts, personal loans, business loans, and investments. BPI is a large and ubiquitious bank in the Philippines, so naturally, I wanted to store my money with them.
However, when I looked at the interest rates on their savings accounts, I saw that they were a measley 0.0925%. Now, when I first saw this figure, it meant nothing to me — I wasn’t knowledgeable about typical savings account interest rates. However, I did know that the yearly inflation in the Philippines was well above that. According to the Philippine Statistics Authority(PSA), the year-to-date headline inflation rate (as of the time of writing) is 3.5%. That’s 37.8 times greater than the interest rate offered by BPI’s #SaveUp Peso Savings account.
That meant that if I simply parked my money in a typical BPI savings account, it would be decaying 37.8 times faster than it would be growing — a mind boggling fact for me. If I did nothing, assuming a 3.5% inflation rate for 20 years, the value of my cash would be HALVED.
Of course, I didn’t want this to happen. I did more research, and I stumbled upon Maya — a former digital payments-only service known as PayMaya turned digital payments and banking service. I was especially intrigued by the interest rates they were promoting — 3.5% base interest rate just by putting the money into a Maya Savings account.
How does Maya offer such a higher rate?
Maya Bank is known as a "digital bank", a type of bank that exists completely digitally and operates no physical branches. As such, the costs associated with running physical branches as well as servicing the needs of physical cash such as transporting cash to branches and ATM machines are completely non-existent. This allows Maya to transfer their savings on operating costs to the consumer, in the form of higher interest rates. In the future, if digital banks succeed in dominating a large part of the market, expect rates to lower as the need for customer acquisition lessens.Notes on computation
The following figures are computed without considering the 20% tax on interest earnings, as well as inflation rates, mostly because I am lazy.| Institution | Account | Interest Rate | 10-year return on P1m |
|---|---|---|---|
| BPI | #SaveUp Peso Savings | 0.0925% | P1,009,288.60 |
| BDO | Peso Savings ATM | 0.0625% | P1,006,267.61 |
| MetroBank | Regular Savings | 0.0625% | P1,006,267.61 |
| LBP | ATM Savings Account | 0.05% | P1,005,011.27 |
| Maya | Savings | 3.5% | P1,410,598.76 |
On the other hand, we have time deposits. Time deposits are fixed-income securities — contracts with a principal, interest rate, and maturity date. In this case, time deposit account owners deposit a principal, from which they receive back in full plus interest by the maturity date. The principal must not be touched by the depositor until the maturity date. Consequences for withdrawal from the time deposit account depend on the product being offered.
For example, BPI has a number of time deposit products. The simplest Plan Ahead Time Deposit is a 5 year contract with a P50,000 minimum deposit. Unfortunately, the website delegates interest rate offerings to the individual branches, so one has to consult a branch to find out the interest rate for this product. Another BPI time deposit product, the Auto Renew Time Deposit has interest rates readily available, however.
| Required Daily Balance to Earn Interest | 35 days | 63 days | 91 days | 182 days | 365 days |
|---|---|---|---|---|---|
| Php 50,000 — Php 499,999 | 0.2500% | 0.2500% | 0.3750% | 0.3750% | 0.5000% |
| Php 500,000 — Php 999,999 | 0.3750% | 0.5000% | 0.5000% | 0.5000% | 0.5000% |
| Php 1,000,000 — Php 4,999,999 | 0.3750% | 0.5000% | 0.5000% | 0.5000% | 0.5000% |
| Php 5,000,000 and above | 0.5000% | 0.6250% | 0.6250% | 0.7500% | 0.7500% |
As one can see, the maximum interest one can earn from this time deposit product is 0.75%, available only through a 1-year maturity period on a Php 5,000,000 balance. This is not a small chunk of change, especially with Philippine wages. According to the PSA, the average wage in 2022 was P18,423. Forget saving — to even earn P5m on that kind of wage, one needs to work for 22.6 years.
Meanwhile, Maya’s Time Deposit Plus product offers 5.5%, 6%, and 5.75% interest rate based on maturity periods of 3/6/12 months, with a deposit amount of P5,000 — P1,000,000. Additionally, one can open 5 Time Deposit Plus accounts on a single Maya account to effectively earn 6% interest on a maximum of Php 5,000,000. This is a much more flexible product than BPI’s, and it offers massively higher returns.
Maya Time Deposit Plus technicality
Technically, the base interest rate on Time Deposit Plus accounts is 3.5%. The 6% comes from adding the base interest rate and a "boosted interest rate", the latter only being activated when the balance in a Time Deposit Plus account reaches an arbitrary "target amount" set by the user on the creation of the account. This is a bit weird to me, as the target amount can extremely low given that Maya still allows you to deposit past your target amount and earn interest the boosted interest. I assume it's part of their "Personal Goals" feature in the Maya app. Of course, these companies want you to feel as though you are making responsible financial decisions by labelling all their products as such and making it part of their brand. Nevertheless, it doesn't take away functionality and freedom, so it can simply be ignored.Other banks also offer time deposit products, but they’re similar enough to BPI’s and Maya’s products that they’re not worth covering. BDO offers up to 0.25% for everything below P1m. MetroBank has an “Online Time Deposit” that says to offer up to 4.5%.
Another product is the Modified Pag-IBIG II Savings (MP2) account. They label it as a savings account, but it has a 5-year maturity period. 70% of Pag-IBIG’s annual net income goes towards Pag-IBIG Savings account holders as dividends, proportioned on contribution. Of course, this means the “interest rate” isn’t fixed, but rather, derived from the performance of the Pag-IBIG Fund. Since its inception in 2011, the MP2 product has returned anywhere from 4.58% in 2013 to its high of 8.11% in 2017. 2023’s return was 7.05%. Being dependent on the annual earnings of the Pag-IBIG Fund, returns are not fixed and hold within them a certain amount of risk. The product can outperform Maya Time Deposit Plus rates one year, and also barely protect you from inflation the next.
Retail Treasury Bonds 30 (RTB30), on the other hand, is a fixed-income security based on treasury bonds. They have a 5-year maturity period and offer a fixed rate of 6.25% annual return. You deposit the principal once, and interest is credited to you quarterly until the bond matures.
RTB30s have the advantage of being fixed-rate and essentially zero-risk — after all, they quite literally represent debt the government owes you. If the Republic of the Philippines is unable to pay off its debt to you, well, the Republic has fallen, and there is no use dabbling and worrying about fancy financial instruments when your country has already collapsed.
A fixed return of 6.25% offers a clearer picture of the gains one can make, as opposed to a product like MP2. It is important to note however that MP2, being backed by Pag-IBIG, is still relatively low-risk and less volatile than commodities and stocks.
That’s all the information I had to talk about. Everything here I’ve discussed was a result of a weeks’ worth of messy Google searches, Reddit post readings from obscure subreddits, and rewatchings of The Big Short. Honestly, it’s been extremely entertaining. I’m excited to learn more about how the money system works and how best I can take advantage of it.