Tuesday, July 22, 2014

Reader Question from Derya

Derya wrote:

"I have been following you for over a year now and you have been a huge inspiration. I wont say we live totally frugally (hubby myself and 5 year old son) but I have certainly refrained from spending and have managed to save a large portion of our earnings. We managed to buy an apartment with a 5 year mortgage plan. I won't have a lot of cash left over but am definitely interested in any tips you have to grow money in TL. I'm also wondering if you think it's better to pay off the loan early or to save and invest the cash? Best wishes. Derya"

I think they did a great job by buying an apartment at a 5 year mortgage rate. As for paying the loan off early, as far as I know in Turkey there is a penalty for doing that. Derya should check her mortgage paperwork and/or talk to her mortgage lender. So, paying early may be a bad idea.

Before starting investments, I have some questions:

1. Does Derya have an Emergency Fund?  If yes, how many months of living expenses does that cover?
2. When she mentions investments, how far in future she is thinking? Is she thinking retirement?
3. Are there any major expenditure in the near future, say 1-2 years?

I am assuming she and her husband both work so, can they survive on one salary in case one of them loses a job? If yes, probably an Emergency Fund of three months worth of living expenses may be sufficient. If not I would opt for 6 months and may be even more. Now this money will be sitting in a low interest earning savings account earmarked only for emergencies.

I admit this is painful to set aside so much money to earn very little interest but when an emergency strikes, this provides an amazing level of peace of mind.

After doing this, I can start investing for the future. The key word is future here. We are talking about a long time so any vacation expenditures or new car funds should be saved elsewhere, probably at low-interest savings accounts. So, investing for the future and saving for upcoming expenses are totally different.

For investing for the future, Derya and her husband can do two things here in Turkey: They can both establish a BES account (sort of like a Roth IRA) that they should not touch before the age of 56, or they can invest in individual stocks.

I have a very small individual stock portfolio. I mainly invest in BIST 30 companies. I put very small amounts of money and totally ignore the ups and downs of the stock market. This is highly risky and I do not intend to touch that money in the next ten years or so. This type of investment is always very very risky and I would hesitate recommending it. Besides people get caught up in tips and dreams of high returns in a short time and turn this into a dangerous form of gamble. Buying and selling frequently is a definite no-no!

As BES is a fairly new system, people are skeptical about this. I am past 10 years in this system and I am 9 years away from my BES retirement. So, I maintain a medium-high risk portfolio. The government matches my contribution by 25% up to a certain level. The government match will not be forever so, I take advantage of this as much as I can. This also is affected a lot by the stock volatility but in the long run, I am sure one will get ahead. The trick here is to select medium-high risk funds when you are farther away from retirement and gradually move into lower risk funds as you approach your retirement date. What people do not understand is that the amount you save in this account is the amount you will be paid. There is no guarantee of money for a life time. Also, people would like to put in 100 TL every month and receive 1000 TL when retired. That is an illusion and it will not happen. Before stepping into a BES account, I would read everything about it and be realistic about my expectations.

Gold and USD investments are also popular in Turkey but gold is very unpredictable. USD accounts generate very little return but, on the long run, that may be an idea.

So you see there is not one single good investment idea. That is why I have a BES account, a small stock account, some gold (very little) and some USD besides a hefty EF.




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