How to make the most of Pag-ibig MP2 earnings

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I’m a big fan of Pag-ibig MP2 or Modified Pag-ibig Savings Program 2. It’s one of the few passive income in the market that’s open to almost anybody to invest. The way it earns is not hard to understand.

Also, it has historically been beating savings account, time deposit and the best part is that it is guaranteed by the Philippine government. If you haven’t already, you can read all about Pag-ibig MP2 savings program and then you can get back here.

First, is MP2 right for you?

Surprisingly, MP2 may appeal most to conservative investors because of little risk of capital loss. It is considered relatively safe and it’s been posting tax-free dividends. The earliest I can find is the data from 2010.

YearMP2 dividend rate
20187.41%
20178.11%
20167.43%
20155.33%
20144.68%
20134.59%
20124.67%
20114.63%
20105.50%

At the same time, there is a lock-in period of 5 years. While you can withdraw any time, you can get back the savings but the dividends that would be issued to your account may not be the full rate.

But how can you make the most out of MP2?

Nonetheless, it’s a great savings vehicle that is an alternative to your bank account.

In this article, I am going to try to answer three things.

  • Do you get bigger returns when saving monthly or annually?
  • Should you invest one-time or regularly?
  • Would it make sense to get the dividends every year or at the end of lock-in period?

MP2: monthly versus annually

Does it make sense to save every month or just once at the start of the year? To answer this question, let’s look at the math.

The minimum amount to begin saving is ‎₱500 so let’s assume that you’re going to contribute either ‎₱500 monthly or ‎₱6,000 every year.

Next, use the average dividend rate for the past 5 years. This is appropriate to be used and not the recent one as the forecast is going to be 5 years into the future, which also corresponds to MP2’s lock-in period.

Besides, it also captures the highs and lows of the rate through the years. Again, past rate does not guarantee future returns.

YearSavingMonthlyAnnually
16,000.006,218.556,395.40
212,000.0012,859.5013,212.26
318,000.0019,951.5620,478.34
424,000.0027,525.3728,223.27
530,000.0035,613.6436,478.58

As you can see, saving annually gives you better gains than saving monthly in the long run. Even when in both situations, your total saving is technically the same (‎₱30,000).

By saying that, this does not mean that you should set aside ‎₱500 in a piggy bank each month and make a contribution after it reaches ‎₱6,000. Why? Because your piggy bank makes your money sit idle, and it wouldn’t earn anything extra that it could’ve earned had it been invested elsewhere while it’s accumulating.

If it is within your means to save ‎₱500 every month, then the better strategy is to put it in MP2 rather than in a piggy bank.

All in all, annual contribution is ideal for people who can expect windfall each year like 13th month bonus, incentives, or Christmas gifts from godparents. Instead of spending your extra cash, you can contribute them to your MP2.

MP2: Investing regularly versus investing one-time big time

The second question is about choosing between periodic and one-time investments in Pag-ibig MP2. Which strategy gives you the most bang for your buck?

Again to answer this question, math is going to be used.

For regular investing, let’s say that you’re contributing ‎₱500 monthly. Since the lock-in period is 5 years, the one-time big time contribution is set at ‎₱30,000. That’s ‎₱500 x 12 months x 5 years.

Just like the previous example, the same average dividend rate is used to make projection for the next five years.

Year500/moTotalOne-timeTotal
16,000.006,218.5530,000.0031,977.00
212,000.0012,859.5034,084.28
318,000.0019,951.5636,330.44
424,000.0027,525.3738,724.61
530,000.0035,613.6441,276.57

From the table, it is clear.

Investing one-time big time gives superior return on investment (ROI) than regular monthly contribution. At the end of 5 years there’s a potential to earn ‎₱41,276.57 versus ‎₱35,613.64 from the monthly saving.

How about annual contribution versus one-time? The story is the same. The one-time strategy has the edge. From the previous example, the total amount for annual strategy at the end of the lock-in period is ‎₱36,478.58, which is still lower than what you could expect from the one-time strategy.

What does this all mean?

If you have the money that you can afford to set aside for the next half a decade, then putting it into MP2 one-time makes sense. So if you’ve been given an inheritance, made a huge commission or got a windfall, this strategy can be a way to grow your money.

However if you can only do regular saving, then that’s fine too. Don’t feel bad. It’s also worth repeating that you’re better off putting in a small amount monthly than saving in a piggy-bank and only invest when it reaches ‎₱30,000. You’re going to miss so much opportunity for passive income.

MP2: Annual or compounded dividend?

As you may already know, after reading the guide on Pag-ibig MP2, you are given two choices on how to receive your dividends. You can either get it straight to your bank account every year or wait until the end of the lock-in period of 5 years.

Math is once again our friendly guide to answer this question. Just like the two previous examples, the projection is going to be based on the minimum monthly contribution and the average dividend rate from 2014 to 2018.

Year500/moCompoundedAnnually
1 6,000.00 6,218.55 6,218.55
2 12,000.00 12,859.50 12,832.49
3 18,000.00 19,951.56 19,841.84
4 24,000.00 27,525.37 27,246.59
5 30,000.00 35,613.64 35,046.74

The table shows the difference in total amount between compounded and annually for regular ‎₱500 monthly contributions. It shows that waiting within the lock-in period is rewarded. The compounded amount is ‎₱566.90 higher than when you get the dividends at the end of each year.

The verdict? Patience indeed is a virtue, and it’s a virtue that gets rewarded in the end. If you can, wait until the lock-in period lapses. However, if you think that you would benefit greatly that you’re receiving the dividend each year, then go right ahead.

Conclusion

Now, I’m not saying all of us should be doing lump sum investment. (In fact, I’m not saying that you should go with MP2 right this minute. Instead, check your financial circumstances, come up with a financial goal, seek more information about passive income like mutual funds, exchange traded fund, UITF, PERA or VUL, and then compare.)

It is worth repeating that the goal of this article is to review these strategies by using math to forecast future MP2’s savings growth. Again, past performance does not guarantee future dividends. Actual dividend would vary.

What I can do is to show how these strategies would pan out in the long run. So don’t feel bad if you don’t earn and save much. Not all of us have a huge capital to invest one-time big-time or even yearly.

Setting aside a little amount regularly to Pag-ibig MP2 or other investment options if you have a five-year financial goal could still be better than letting your money in a piggy bank.

At the end of the day, how you save and invest your money and where you put it to give you the most return is a decision only you can make. What I can do is to help show you the consequences of such decision.

To wrap up this article, here are the strategies to make the most out of your MP2 savings account.

  • Piggy bank versus MP2? MP2 wins. So, don’t let whatever you can set aside stay in a piggy bank and then only contribute in Pag-ibig once it reached a certain amount. You’re missing the chance to earn a little while you’re building up your savings.
  • When money is tight, there’s no shame to contribute at least the minimum amount each month. Regular saving is better than none at all.
  • If you have an annual windfall like bonuses or Christmas gifts, putting it one-time is a better strategy than spreading it throughout the year .
  • MP2 is also great for one-time big time saving, which can give higher return than spreading it throughout 5 years.