Financial Management,
July 25, 2020

What is a Savings Plan or a Capitalization Plan?

Gregory Weiss
What is a Savings Plan or a Capitalization Plan?

Today I am going to talk about a financial product that I love, it is even one of my favorites because of the importance and impact it can have on our lives and the lives of our families! Today we are going to talk about savings plans or long term capitalization plans.

Savings plans are capitalization plans (this means that the money is saved and re-invested continuously) where I have a defined period of time and a defined monthly savings amount.

What is a Savings Plan?

It is a plan through which through the generation of a contribution of money you generate an amount of capital that will serve as income for a specific objective in the future in the medium or long term.

And why are savings plans important in our personal finances?

Any objective that you want to reach in life is achieved by setting a goal, defining where you want to go! And that north is not built overnight, it takes time. So, depending on what you want to achieve, it's important to define what the objective is and to put together a plan to carry it out in the most efficient way.

Who can apply for a savings plan?

All those people with income and monthly savings capacity.

What % of the income should be saved to know that I am able to request a product of this type?

You should at least be sure that you can save 10% of your income! And at the same time that 10% should include the share of the plan for long-term savings and another amount for short-term savings such as holidays.

Example If you have an income of $50,000 and you have saved at least 10% of your income ($5,000) every month for several years then the amount of money you save monthly should be divided between the savings plan for your long-term goals and your short-term savings. It could be $2500 and $2500.

How long do the plans last?

It depends on people's goals. A minimum of 10 years is recommended. The terms are personalized and are recommended for medium and long term objectives.

What if I have a problem and I can't keep paying for it?

If people's finances are in order, it shouldn't be a problem. This works similarly to a commitment to take out a mortgage. You tidy up your whole economy so you can afford the loan for a certain number of years. The savings plan should work in a similar way and if you respect that it represents 10% of your income, you should be able to face the repayment without problems over the agreed term.

This type of products also have options to stop the contribution for a defined number of months in the event of a contingency but that period should not be longer than 3 or 6 months.

In case you are not sure about your income, this product would not be appropriate, as you could commit to contribute a sum of money that would not be sustainable in time! And the product only makes sense if the capital contribution is met within the agreed period. Because if you stop contributing during the term or you need to withdraw the money before the end of the term, you will receive less money than you would at the end of the term.

If you have doubts about your ability to pay for the product in time, then it is not a product for your economy!

What if you need to withdraw the money before the agreed deadline?

It's the same as when you don't meet your goals! You're halfway there and logically you're not going to get the same benefit as if you did. In this particular case, the yield (the profit) generated by the plan will not be the same as that estimated for the whole term. Since these plans work with the compound interest system, through which the longer you have your investment, the greater the return you will be able to obtain. If that time is modified, naturally the yield will also change.

What are the advantages of a long-term savings plan?

It is part of the budget in the first world and for a reason they arrive with a better quality of life at retirement age.

Having a long-term savings plan managed by professionals is part of the ideal strategy that is recommended for good management of money in people's lives.

Faced with a crisis, you will always have better opportunities if you did something, than if you do nothing. For example, many people who save in dollars with this type of product, when the crisis of 2001 came with the devaluation managed to buy their first apartment or pay off the debts they had in their mortgage credit with the money from the plan.

In addition, savings plans have a tax advantage. They don't pay financial rent when premiums are paid.

These products make it possible to invest the savings in mutual funds according to the investor profile of the client and add protection benefits appropriate for the stage of the person's life. For example, when you have children it is extremely important to incorporate into these plans a life insurance that protects the income needed by children up to 18 years of age in the event of the death of one of the parents who generates the family income.

If you opt for a life insurance with capitalization, you can deduct it from earnings. Today for life insurance you can deduct up to 35% of $12,000 annually.

The money you are saving and investing is managed by professionals who dedicate their 8 working hours to analyze and make the best decisions for your money.

It is a product that is regulated by the Superintendence of Insurance of the Nation, which gives it a backing in terms of money security.

What are the minimum amounts to join a savings plan?

For young people under 40, you can join with a monthly fee of 100 USD.

And for people over 40, the minimum fee is 125 USD per month.

How can I access this type of financial products?

The request is made to a person representing one of the companies that provide this type of service and together with the advisor, the ideal plan is defined according to your savings objectives. In my case I have a Zurich plan for 15 years and at the time I got it thinking about my retirement.

It is debited every month from your credit card according to the dollar rate, so that your money besides being invested in mutual funds managed by experts does not lose value over time.

What happens when the plan ends?

  1. You can withdraw all the money contributed + the interest generated!
  2. You can leave the money to continue investing.
  3. You can withdraw one part and leave another.

Why should I have a long-term savings plan?

Within the personal finances we have 3 aspects on which we have to work. Below I will mention each one of those points and where savings plans are important:

  1. The first step to have the Finances in Order is to know your current situation: this implies having the finances in order, having a personal financial budget, knowing where the money comes from to your economy and how it comes out of it. What is your new savings and debt at the moment and how much money you need to live today based on your lifestyle.
  2. The second step is to understand your financial habits: that means how you handle money, when you get into debt, when you save, how you spend, what you did with your money in the past and what healthy financial habits you have to develop to get your finances in order.
  3. And the third point has to do with your short, medium and long term objectives. Here we have to be honest about what we would like to do in the future that requires money and for which we have to organize. In other words, the first step is to define objectives! And once those objectives are defined we will put together a plan of action to reach them in the most efficient way! And here is the challenge ! because it is difficult to know what we are going to want or need in 15 or 20 years, but what we surely know is that for whatever we want to achieve we are going to need money. For example, did you ever think about what your retirement would be like? What lifestyle would you like to have? Have you ever thought about buying a home without using a mortgage? Or leave some property to your children, help your family? Make a dream family trip? Or to have the possibility of paying for your children's studies abroad? Any objective is valid but it has to be an objective for your future YO + 20 years ! And this is where the long-term savings plan makes sense, because if you start saving with small amounts of money from today, you will be able to generate capital that will be important and will make a difference when that time comes!

This topic seems very important to me because we are not used to thinking long term, but it is time to learn and start doing it. Take the decision to make one of these plans or not, take this week a moment to think about where you would like to be and how you would like to live in 20 years. And then start putting together a plan to achieve that goal!

Next week we are going to upload another post with more information about this product and stay tuned for those who are interested because in June will be next our first Investment Workshop where we will talk in depth about these issues with an expert in the field!

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