When you were a child did your thoughtful parents give you a ‘piggy-bank’ to encourage you to save? Its origins go back some 600 years, and while there are a number of theories as to its actual origin there is a strong indication that it originated in Java in the 14th century. They were made out of terracotta and were actually modelled on the wild boar, some of which still roam free in Java and parts of Bali.

Today they are generally made out of ceramic material but their purpose remains the same after all these years, basically to encourage the saving of money for a rainy day. With the low value of coins today they are of little interest to adults but they remain an important learning tool for small children. They don’t take long to learn the relationship between money and material things. Give a small child a few coins and it will happily exchange them for candies or ice cream. Without guidance, money would never stay long in their hands. But if they are encouraged to save by means of a piggy bank they will learn that with patience they will soon have enough coins to buy a small toy. That’s an early lesson they will learn.

Instant or limited access?

In the old days the ‘pigs’ were clearly of substantial size and had very small slots to insert coins. To access the savings the ‘pig’ had to be smashed. Evidence of that has been found in ancient excavations. Today’s piggy banks have two fundamental differences. Some are like the ancient ones and make it hard to access the coins without breaking the pig. Others on the other hand have a hole and a rubber plug on the underside so that coins can be easily removed. This is not a good choice for the child as it will quickly learn how to remove the plug and get immediate access to the coins. The equivalent comparison in adult terms would be the difference between an instant access bank account and a term deposit. Yes, you can break a term deposit but you would pay a penalty. The equivalent to breaking the piggy-bank in child terms.

Easy to get in; harder to get out

There is a half-way house and that would be a piggy-bank with no plug but with a more generous-sized slot. A quick-learning child will soon find ways to shake the pig around until coins fall out one by one. It will then advance to a higher level of technology when it discovers how a flat implement can tease the coins out faster.

The lesson is still a valuable one for later years as they will learn that it is always easier to put money in than get it out. Anyone who has gone through the process of cashing in a life company investment will relate to that! One such company based in Guernsey imposes an over-the-top compliance and security process when the time comes to cash in. This despite the fact that you may have the same bank account and have been making regular contributions to your plan for many years. An experienced financial adviser will steer you from such firms which should be banished to the history books.

The pension piggy-bank that broke

If you enter employment in the West you may be obliged to join a pension scheme. Now that is a really hard piggy-bank to break until you reach retirement age at which point you can ease money gradually from your retirement pot for the remainder of your life. That is the basic idea, yet in 2016 the UK government (the same one that started the Brexit chaos) decided people should have the freedom to manage their own money. This meant that people were no longer locked into low-return annuity type company pensions but could now invest as they pleased. There was a catch; those that cashed in all their pension money right away had to pay around 30% in tax. Some invested their money sensibly but others switched to private pension plans which allowed money to be diverted into speculative investments with heavy losses. Those with the least ability to plan for the future paid their tax bill then treated the balance as a windfall to be blown on luxury cars, expensive holidays and such like. The net outcome for these cases will be a sea of impoverished pensioners in years to come.

This pension-liberating action on the part of the British government was tantamount to giving a child a hammer to smash its own piggy-bank. A pension piggy-bank should be unbreakable but the slot should be just big enough to allow gradual withdrawals to ensure an income for life.

But where do expats fit into this?

When we talk about pensions we are usually referring to westerners as developing countries are way behind in the field of pensions. Expats generally earn more than their counterparts at home but if they don’t embrace the piggy-bank concept they risk a much bleaker retirement than had they remained in ‘cradle-to-grave’ economies.

Many of course have built up wealth to the point that they do not need conventional pensions as they can draw income from their assets as they please. The assets may include rental income from properties or the drawing down of a large portfolio. They have a ‘plug’ that can be opened to release money by simply selling some or all of the assets. But sometimes the plug can become ‘stuck’. For example if you are relying on an investment property for income and you find the rental market has dried up you may be forced to sell, only to find there are no buyers around and you end up, for the time being anyway, with a liability rather than as asset.

The same goes for a financial investment. A number of funds have failed and lost all their value in recent years while others have had liquidity issues and gone into forced suspension, often for months or years. A recent example is the multi-billion pound Woodford Equity Income Fund in the UK that was forced to suspend redemptions in June following huge losses in some of its more speculative and illiquid shares.

One piggy-bank is not enough!

In both the above cases, this is the equivalent of having your piggy-bank taken away and hidden from you as you cannot break it even if you want to! Or the aviation equivalent of having all your planes grounded.

The solution is not to rely on one asset. In property investment having two or three smaller properties in different locations is safer than having one large one. In the financial investment world your portfolio needs to be diverse with a mixture of low-return / easy access liquid assets together with longer-term, potentially higher-return assets. In other words, a mixture of cash or near-cash, bonds, stocks and commodities with further diversification within those asset classes.

Clearly one piggy-bank is not going to address all your life-long financial planning needs but it’s a great way to get the little ones started on the long road to financial independence!

Colin Bloodworth, Chartered Member of the Chartered Institute for Securities and Investment (UK), has spent over 20 years in Indonesia. He is based in Jakarta but visits Bali regularly. If you have any questions on this article or related topics you can contact at : colin.bloodworth@ppi-advisory.com or +62 21 2598 5087.

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Copyright © 2019 Colin Bloodworth