A Financial Literacy Toolkit

Cecil Sylvester
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MONEY-WISE

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MONEY-WISE
A FINANCIAL LITERACY TOOLKIT

Cecil Sylvester

This publication is intended to provide information concerning the subject

matter covered, for the enrichment and enjoyment of readers. It is published with
the understanding that neither the publisher nor the author is engaged in
rendering investment, financial or legal advice or other professional service. If
expert professional advice is required, the services of a competent professional
person should be sought.

Trinity Consulting Group

Copyright © 2007 by Cecil Sylvester

All rights reserved. This book or parts thereof, may not be reproduced or distributed in any form
or by any means, or stored in a database or retrieval system, without permission.

Trinity Consulting Group

E-Mail: talktrinity@yahoo.com

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This book is dedicated to my wife Marva,

who even today, teaches me much about how to be
Money-Wise.

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CONTENTS
Page

Preface 6

Chapter 1 - Fundamentals 7

Chapter 2 – Setting Goals 17

Chapter 3 – Personal Financial Statements 23

Chapter 4 – Insurance 37

Chapter 5 – Consumer Credit 49

Chapter 6 – Saving and Investing 65

Chapter 7 – Home Ownership and Financing 99

Chapter 8 – Retirement Planning 107

Meet the Author 122

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PREFACE
Over the past decade, I‘ve had the pleasure of teaching courses on personal
financial planning to people of varying ages and from all walks of life. One thing
that always amazes me is how otherwise, bright and sophisticated human beings
plead ignorance, when it comes to matters of finance.

Many people confess that they are anxious and stressed about finances. They don’t
know how to save, which accounts to choose, what kind if insurance they need,
how much to borrow, how to invest and how much they should be putting aside for
retirement. I myself have struggled with money issues and therefore can write from
experience.

Money-Wise is a different kind of book. It is written mostly in the second person

and speaks directly to the reader. The material is presented in an easy
conversational style that de-mystifies many complex financial topics and principles
and breaks them down, so that the average reader can grasp them.

Use money-Wise over and over again. You’ll only get better. Involve the entire
family. Above all, have fun.

Cecil Sylvester,
Diego Martin, Trinidad
March, 2007

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Chapter 1
The Fundamentals
Learning Objectives
After reading this chapter, you will be able to:

1. State the key trends that affect personal finances.

2. Explain the need for a National Financial Literacy Programme.

3. List the various groups who would benefit from a course in financial
literacy.

4. Describe how to use this toolkit course.

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INTRODUCTION
Many individuals are severely challenged, when it comes to matters of finance.
Most of us do not possess the knowledge or skills to properly manage our finances.
There are several reasons why we are experiencing problems in this important area
of our lives. The rapid growth in our economy and our new-found prosperity has
sparked an unprecedented wave of consumerism. Everyone now wants an
automobile, designer clothes, cell phones, computers, high entertainment, casino
memberships and fast foods. All of this comes at a price.

Our economic growth has resulted in a marked decline in unemployment from

12.1% in 2001 to less than 6% by December, 2006. (See Chart 1-1).

UNEMPLOYMENT

12
10
Rates (%)

8
6
4
2
0
2001 2002 2003 2004 2005 2006
Dates

Chart 1-1

This is good. However, the increasing demands of all these working individuals
have caused the price of everything to escalate. For example, the rate of inflation in
Trinidad and Tobago has climbed from 3.5% in 2000 to 9.8 % as at December,

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2006. Price increases of food in particular, have spiraled to as high as 20-25 % at

the end of 2006. (Refer to Chart 1-2).

INFLATION RATE

12.00%
Rates (%)

10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
.
2001 2002 2003 2004 2005 2006
Dates

Chart 1-2

Many families, especially single-parent households and persons on fixed

incomes, are finding it difficult to make ends meet.

The fact that we are spending increasingly large portions of our incomes on
consumerables means that we are not saving enough. The national savings rate
does not inspire pride. It should not come as a surprise then, that we put aside little
for emergencies, have difficulty acquiring a home and fail to provide adequately
for retirement. We are not only saving less but we are becoming increasingly
burdened by debt. The average household debt continues to rise, while the overall
cost of borrowing has been increasing steadily over the last couple of years.

We have been experiencing a rapid per capita growth in the ranks of individuals
aged 60 and over. At the same time, we are seeing steady declines in the current

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birth rates. As these trends converge, we are likely to experience a crisis in our
National Insurance pension programme, because there are less young people per
capita, working to contribute to the scheme. All of us will have to contribute more
now, if we expect the National Insurance system to support us in the future.
Because many retirees are living longer into retirement, they are realizing that
they are running out of money to sustain their desired lifestyles during retirement.
Furthermore, retirees are shocked to discover, that their employer-sponsored
pension is never sufficient to allow them to maintain their pre-retirement lifestyles.

During recent times, the financial services marketplace has become increasingly
complex. There has been a virtual explosion in the number of financial service
providers, offering a host of traditional and new products and services. It is
therefore understandable why so many individuals experience anxiety and
confusion, when selecting investments from among the wide range of options,
including:
Money market accounts
Mutual funds with various objectives
Stocks- both common and preferred.
Annuities
Life, term, investment-linked insurance policies
Bonds and bond strips
Real estate investments
Foreign currency accounts
Credit cards
Loans of every description, including reverse mortgages
The vast majority of investors who bought stocks and invested indirectly
through mutual funds, suffered significant losses to their portfolios over the past

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year. This was due to major declines in the value of most stocks, traded on the
Trinidad and Tobago stock exchange. Many were taken by surprise, because they
were clueless about the inherent risks associated with investing in equities. Losses
were doubly severe, as investors’ pension funds also declined.

Recent changes in the tax laws have simplified the process and raised the
income requirement for filing an individual tax return. This has removed a
significant number of taxpayers from the tax net. Yet, not all individuals who
continue to pay taxes are aware of all of the tax benefits that are available to them.
Because taxation hits lower and middle-income individuals disproportionately
harder, knowledge of the tax provisions will provide more benefits to less affluent
people. Unfortunately, many “ordinary” people are clueless about how to reap
maximum benefit from changes in tax laws.

If we become Money-Wise©, we will be able to take control of our finances.

Why Financial Literacy?

Financial literacy is necessary for everyone. It provides us with the knowledge,
skills, tools and information to make better financial decisions. When we are
financially literate, we are more likely to achieve our life’s goals by properly
managing risk, creating wealth, managing debt, minimizing taxes, planning for
retirement and passing-on wealth to others, when we die.

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The Call
The Prime Minister of Trinidad and Tobago (Minister of Finance) has called
for a National Financial Literacy Programme.

“Mr. Speaker, rapidly changing lifestyles have forced the bulk of the population
to open bank accounts, to use ATM’s, to own credit and debit cards and
generally to participate actively in the formal financial system.

The average customer is now required to make complex financial decisions such
as contracting mortgage and installment loans, choosing from a range of
checking accounts and selecting savings instruments.

In too many cases, we make decisions based on insufficient knowledge and

appreciation of the financial implications. This has been accompanied by a
sharp increase in private consumption and rising consumer debt. Personal
savings have in fact declined and with life expectancy increasing significantly,
many workers are ill- prepared for emergencies and retirement.

Mr. Speaker, This is not only so in Trinidad and Tobago but is in fact a
worldwide problem. Accordingly, Governments in both developed and developing
countries are recognizing the need to promote financial literacy programmes to
educate individuals to make better financial decisions.”

Hon. Patrick Manning

Prime Minister & Minister of Finance
Republic of Trinidad and Tobago
Budget Speech (2006/2007)

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Who Should Use This Toolkit?

Money-Wise© is a basic financial literacy resource. This toolkit is for everyone.
If you can read a newspaper, you use the material. Everyone can benefit something
from Money-Wise© but it is most relevant to:

Secondary School Students

We do not teach our young people to set financial goals, about the value of money
and the importance of saving. These topics generally do not form part of the school
curriculum. By secondary school age, students should already have been
introduced to the formal financial system. Money-Wise© is a valuable learning
resource for the young.

University Students
University students demand huge sums of money to finance everything from
tuition, to books, to accommodation and meals. They have little idea where the
money comes from. They just want it. However, some university students work at
least part-time to help fund their education. They need to understand how to handle
their money. Soon, all these students will be gainfully employed or will own
businesses. They should never be allowed to enter the world of work without
getting a sound grounding in financial literacy through Money-Wise©.

Career Starters
Large numbers of young people start out in a career and soon fall into the
dangerous habit of consumerism. They are influenced by popular culture, friends
and the media and become easy prey for those seeking to take away their hard

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earned money. Money-Wise© will help them to start early, to build a wonderful
future.
The Un-banked
Even today, there are persons who do not participate in any meaningful way in the
formal financial system. Many of them simply cash their pay cheques and spend
the money. Money-Wise© will teach them how to benefit from financial markets
and institutions.

Newlyweds
Marriage is a serious undertaking, with major financial implications. These
include, meeting the everyday needs of a growing family, financing children’s
education, owning a home and planning early for retirement. These issues can be
major sources of stress in marriages. Money-Wise© will help couples to talk
about money in an organized and non-threatening way, that will lead to happier,
more fulfilled families.

Single Heads of Household

Today, many families are led by a single parent. These families are more
vulnerable than most, as any disruption in the income of the sole bread-winner,
could spell disaster. Single parents can benefit much from Money-Wise©.

Maturing Families
The finances of maturing families, especially those with teenaged children, are
usually stretched to the limit. Teenagers eat you out of house and home and their
education is most expensive during these years. Family debt is at its peak. This is
when parents realize, that while they have worked hard to meet everyday family

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needs, they have neglected to save enough for retirement. Money-Wise© will
show you how to have it all.

Divorced Individuals
When marriages dissolve, the financial stress could be as great as the emotional
turmoil. Divorced individuals often must start all over again to plan for financial
well-being. Only now, there is no joint family income to rely on. Money-Wise©
can put you back on track and help you to regain control of your financial affairs.

Families with Special Needs

Some families have members who are physically or mentally challenged. Caring
for these individuals, usually over a lifetime, requires a commitment of significant
resources. Planning for “special” family members could be challenging, even for
families who are well-endowed. Money-Wise© is for you.

Retired Persons
Increasing life expectancy and rising inflation are causing retirees to experience
financial hardship. Properly estimating your retirement income needs and starting
to save early are the keys to enjoying financial freedom during the later years.
Money-Wise© shows you how to plan for retirement.

How to Use this Toolkit

Money-Wise© can be used as a self-study course in the privacy of your home.
Read it together with your spouse/partner. Get the children involved. This can be a
fun, learning activity for the entire family.

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Money-Wise© can also be used as the primary teaching/learning resource for an

instructor-led course for members of larger audiences, including:

Secondary Schools
Universities
Financial Institutions
Community-based Organizations
Government Agencies
Faith-based Organizations
Credit Unions
Employers
Trade Unions
Trade Associations

It is best to start at the beginning of the book and work your way through to the
end. If, however, you are very interested in a particular chapter, go directly to it.
You can always return to other chapters later. Make sure to complete all the
activities in the “Take Action Now” section at the end of each chapter. They will
make the information come alive, as you apply it to your own circumstances.

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Chapter 2
Setting Goals
Learning Objectives
After reading this chapter, you will be able to:

1. Define a goal.

2. State the characteristics of a good goal.

3. Distinguish among short-term, medium-term and long-term goals.

4. Discuss strategies to aid in goal achievement.

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What do you want? Most people don’t really know what they want. If you don’t
know what you want, or how you are going to achieve it, then you will have to take
whatever you get. It is a sad thing to stumble through life, just accepting what it
serves-up. Instead, you should have some say in what you get out of life. One way
to gain control over your life and finances is to set goals. A goal is a statement
about some expected future state or outcome. Consider the following statements:

a. I want to be wealthy.
b. I wish I didn’t have to pay so much in taxes.
c. If only I didn’t owe so much money.
d. I really want a new car.
e. We need to have our own home.
f. If I die young, I would like my children to be OK.
g. I would like to live well in retirement.

These statements are more like wishes, dreams or desires. They are not goal
statements. A goal must possess the following characteristics:

Specific
You must be very clear about what you want. Your goal needs to be measurable in
money terms. If you cannot measure the outcome, then how will you know when
you have achieved it? How much do you need to save for that new car?

Time Sensitive
You need to be very precise about when you want to achieve whatever you plan.
There is a huge difference between wanting that new car in two years time and

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getting it in ten. Knowing when you want something helps you to confidently
pursue it. When you set time limits, you know when time is running out and you
know how hard or fast you have to work in order to achieve your goal.

Realistic
Get real. It is unlikely that you will be a millionaire by 40, when at age 35, you
have no money saved, and you’re deep in debt and are in a dead-end job.

Challenging
Yes, you should be realistic, but your goals must also cause you to reach high and
sweat a bit. Wanting to save $100 each month from your salary might be realistic
but if you sacrificed a little more, you could end up saving $200 instead. Let us
then re-state the above statements:

a. I would like to have a net worth of $400,000 by 2012.

b. I want to reduce my taxes by $300 per month starting January,
2008.
c. I plan to pay-off my credit card balance of $8,000 in two years
time.
d. I want to save $20,000 by August 2008 as down-payment on a new
car.
e. I want to save $30,000 in five years time to pay-down on a home
costing $350,000.
g. I plan to retire at age 60, with a retirement income of $4,000 each
month.

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Goals can be short-term, medium term or long-term. Short-term goals are those
that you plan to achieve within one or two years. E.g. I want to immediately own a
life insurance policy with a face value of $300,000.

Medium-term goals are attainable between three to five years. E.g. I want to
save $30,000 in five years time to pay-down on a home costing $350,000. Long-
term goals are planned to be achieved beyond five years. E.g. I plan to retire at age
60, with a retirement income of $4,000 each month.

Once each year, sit down and set goals for various areas of your life. It is a good
idea to review your goals at least quarterly, to see whether you are on track. If you
are off-course, you’ll need to devise strategies to get back on track. It is also
important that you write down your goals and look at them regularly. That way,
you will keep them uppermost in your mind and you will be more likely to achieve
them. Share your goals with people you trust and who care about you. Ask them to
support you in your efforts and motivate you when you fall behind.

Start now to work on all your goals simultaneously. This means that you must
be saving for that new car, the new house, as well as for retirement and other goals.
Even if your current income is small, still put something aside, however little,
towards achieving each goal. As you focus intently on your goals, you will find it
easier to commit resources to fund them.

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TAKE ACTION NOW

On the following page, write two goals for each of the stated areas of your life:
Asset acquisition
Tax reduction
Debt reduction
Savings and investment
Insurance
Home ownership
Children’s education
Your own education
Retirement

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GOAL-SETTING EXERCISE:
Asset acquisition
1. _______________________________________________________________

2. _______________________________________________________________

Tax reduction
1. _______________________________________________________________

2. _______________________________________________________________

Debt reduction
1. _______________________________________________________________

2. _______________________________________________________________

Savings and investment

1. _______________________________________________________________

2. _______________________________________________________________

Insurance
1. _______________________________________________________________

2. _______________________________________________________________

Home ownership
1. _______________________________________________________________

2. _______________________________________________________________

Children’s education
1. _______________________________________________________________

2. _______________________________________________________________
Your own education

1. _______________________________________________________________

2. _______________________________________________________________

Retirement
1. _______________________________________________________________

2. _______________________________________________________________

Now take action to make them happen!

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Chapter 3
Personal Financial Statements
Learning Objectives
After reading this chapter, you will be able to:
1. State the two main personal financial statements.

2. Describe and give examples of financial assets, personal-use assets and

luxury assets.

3. Describe and give examples of short-term and long-term liabilities.

4. Calculate net worth.

5. Critique a balance sheet.

6. Describe a cash flow statement.

7. Prepare a budget.

8. Exercise budgetary control.

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Understanding financial statements is critical to any study of financial literacy.

The two main personal financial statements are the personal balance sheet and
the cash flow statement. The balance sheet shows an individual’s financial
position as at a particular point in time. On the other hand, the cash flow
statement shows all the cash received and paid out by the individual during a
period of time.

BALANCE SHEET
Broadly speaking, the personal balance sheet is made up of assets and
liabilities.
Assets
Assets are resources that are owned by an individual, while liabilities are debts
owed. Assets can be further broken down into sub-categories of:
- Financial assets
- Personal-use assets and
- Luxury assets
Financial assets are assets that are intended to earn some kind of return such as
interest, dividend or capital appreciation. Examples of financial assets include:
- Cash and Balances in Current and Savings Accounts
- Money Market Deposit Accounts
- Money Market Mutual Funds
- Cash Surrender Value of Life Insurance Policies
- Fixed Deposits
- Growth and Income Mutual Funds
- Equity Mutual Funds
- Specialty Mutual Funds (e.g. Energy and real estate mutual funds)
- Tax-deferred Annuities

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- Pension Plans
- Stocks
- Bonds
- Rental Property
- Direct Investment in Business
Personal-use assets are used in everyday life. They are intended solely for the
benefit and enjoyment of the owner. Personal-use assets do not generate any
income and with the exception of the principal residence, will normally lose
rather than gain value over time. These will include assets such as:
- Principal Residence
- Motor Vehicles
- Furniture
- Household Appliances
- Other Household Items
- Clothing

Finally, luxury assets are also personal-use assets but these are not necessarily
essential to everyday life. They are nice to have. Luxury assets are usually of
high value. Some luxury assets are:
- Jewellery
- Antiques
- Vacation Properties or Time Shares
- Collectibles (Art, Stamps, Coins etc.)
Your goal must be to build up financial assets rather than personal-use and
luxury assets. Financial assets work for the owner, by generating income and
creating more wealth.

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Liabilities
Liabilities are debts that are owed by the individual. Liabilities can either be
short-term or long-term. Short-term liabilities are repayable within one year,
while long-term liabilities are due beyond one year. Examples of short-term
liabilities are:
Bank overdrafts (Payable on demand)
Credit card debt
Short-term consumer loans (Due within one year)
Income tax liability
Outstanding bills
Long-term liabilities include:
Installment payment loans
Personal loans
Hire-purchase agreements
Life insurance policy loans
Car loans
Investment loans
Mortgage loans
Second Mortgages

Net Worth
If you subtract your total liabilities from your total assets, the result is your net
worth. (Assets - Liabilities = Net Worth)
Most people have no idea of the value of their net worth. Many are surprised
how low it is when they do calculate it. So how much is your net worth? How
much do you want it to be next year, in three years time or in five years? You
must develop a goal for your net worth in the future. If you want your net worth

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to increase, you must accumulate assets faster than you incur debts. Amazingly,
some people have a negative net worth. Their liabilities exceed their assets. If
this applies to you, one of your major goals must be for debt
reduction/elimination.

Balance Sheet Analysis

Let’s take a look at Wilton Bobb’s personal balance sheet on the next page.
Notice that Wilton’s cash resources and investment assets are relatively small.
They represent only 8.6 percent of his total assets. Unfortunately, Wilton has
allocated significant resources to personal-use assets that are not working for
him. Wilton might wish to consider selling-off some of his music collection and
jewellery and investing the proceeds.

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Table 3-1 Wilton Bobb

PERSONAL BALANCE SHEET
As At December 15, 2006

ASSETS LIABILITIES
$ $
Financial Assets: Current Liabilities

Cash on hand 650 Bank overdraft 6,782

Passbook savings account 3,200 Visa card balance 8,578
Money market account 4, 872 Tax liability 2,250
C.S.V. - Life insurance 3,855 Personal loan 5,000
Tax-deferred annuity 14,000 Hire-purchase account 8,840
Credit union shares 24,710 Policy loan 2,500

Total Financial Assets 51,287 Total Current Liabilities 33,950

Personal-use Assets: Long-term Liabilities:

Car loan 28,820

Residence 400,000 Credit union loan 38,363
Furniture& Appliances 44,600 Mortgage loan 235,698
Motor vehicle 42,800
Clothing 7,000

Total Personal-use Assets 494,400 Total Long-term Liabilities 302,881

Luxury Assets
Jewellery 18,000
Music collection 17,000
Jet-Ski 12,000 Total Liabilities 336,831

Total Luxury Assets 47,000 Net Worth 255,856

Total Assets 592,687 Total Liabilities & Net Worth 592,687

Total Liabilities

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The other alarming fact about Wilton’s balance sheet is his heavy debt load.
Wilton needs to commit a significant portion of his income to service these
loans.

Perhaps, one of the reasons why Wilton has been unable to build financial
assets is the high principal and interest payments he has to make on his loans.
Wilton does not have sufficient cash and other highly liquid resources to repay
his current liabilities if it became necessary for him to do so. He also does not
have enough cash and near-cash resources to withstand a serious emergency.
What would happen to Wilton if he were to lose his job or became seriously ill?

Wilton’s net worth of $255,856 is mainly due to the value of his residence. If
real estate values were to fall, (as they have done in the past) the net worth
figure could decline significantly.

CASH FLOW STATEMENT

The cash flow statement shows the income the individual collects from all
sources and all the expenditures paid out, for a particular period of time. E.g.
monthly, quarterly or annually.

Cash Inflows (Income)

Cash inflows can come from many sources including:
Net Salary (After deductions)
Net Income from Trade or Business
Income Tax Refunds
Net Rental Income
Alimony or Child Maintenance

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Pensions
Interest
Dividends
These cash inflows should actually have been received. For example, if you
have earned interest on a fixed deposit but the money won’t be paid to you until
sometime next quarter, then, this income item should not be included in this
quarter’s cash flow statement.

Cash Outflows (Expenditures)

We spend to pay for several categories of family expenditure, viz.
Housing Costs
Transportation Expenditure
Living Expenses
Discretionary Expenditure

Expenditure Examples
Housing Costs Mortgage payment, rent, electricity, water, telephone,
home insurance, maintenance, rates and taxes,
Transportation Car loan payments, gasoline, oil, licenses fee,
Expenditure insurance, maintenance, parking, car rental, taxi/bus
fares,
Living Expenses Food (home), clothing, (including laundromats & dry
cleaning), personal hygiene products, medical services,
school fees, daycare.
Discretionary Alcohol & tobacco, vacations, movies, DVD rental
Expenditure cable fees, dining out, carnival costumes, cultural
shows, books, music CD’s, sporting events, gym and
other memberships, children’s allowances and toys.

Table 3-2

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When you subtract cash outflows from cash inflows, you end up with your net cash
flow. Net cash flow is the cash balance you’re left with after consumption, for
additional saving and investment. If you find that you don’t have enough money left
each month to save and invest, you’re spending too much.

Take Control of Your Spending

Here is a good way to figure out how you are spending your money. Purchase a
small notebook. Each day for an entire month, write down how much you spend on
every purchase, whether you pay by cheque, by card or in cash. Record the cost of
everything, including that $3 candy bar, your taxi fare, the new pair of shoes, your
rent, the insurance premium, your child’s allowance, the DVD rental, phone card,
groceries, lunch, everything. Categorize your expenditures as either essential or
non-essential. This part might be a little tricky. It’s easy to see that rent, groceries
and transportation are essentials but some people will have difficulty deciding
whether they could live without a new weave or another bottle of rum. At the end
of the month, you will have a pretty good idea where you spend your money.

To gain control of your spending, start cutting back on non-essentials. When

you have cut all that you can, start to cut essentials. Yes, there are some areas of
essentials that are not really essential. For example, look closely at your grocery
bill. You are sure to find certain items that you could eliminate without suffering
major decline in your standard of living and comfort. As you cut expenses, you’ll
begin to free up some cash to finance important goals such as home ownership,
retirement, debt reduction and education.

Try this other interesting experiment. Live frugally for one month. During that
month, totally eliminate all non-essential expenses. You would be amazed how

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much extra money you would save. When the experiment is over, repeat it for
another month, just for fun. You’ll be surprised what you can live without,
permanently.

BUDGET
A budget is simply a projection of cash inflows, cash outflows and net cash flow
for a future period of time. While a cash flow statement shows actual inflows and
outflows, the budget states what these items should be in the future. The main
reason for using a budget is to help control your cash flows and free up money to
save and invest. For each period, compare every budget item to the actual amount
spent. Show any differences. As you budget, you will begin to identify areas where
you are overspending and will be able to take corrective action.

For the budgeting exercise to be successful, each member of the family must
play his/her part. Fathers must avoid the urge to spend as if his income belonged to
him alone. Wives, realize that impulse shopping only serves to sabotage family
goals. Children, you too have an important role to play in ensuring success of the
family’ spending plan.

The budget in table 3-3 below shows a deficit of $750 for the month. It is therefore
surprising that Wilton has accumulated a bank overdraft of $6,782 and a credit
card balance of 8,578. (See personal balance sheet on page 28). If Wilton simply
postponed his vacation and cut down on entertainment spending, he could balance
his budget. Interestingly, Wilton’s budget does not make any provision for savings.
This is a huge mistake. In fact, Wilton should save first, that proceed to take care
of all his other expenses.

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Wilton Bobb
Budget
Cash Inflows:

Nat Salary $6,800

Net Rental Income 800
Interest Income & Dividends 400

TOTAL CASH INFLOWS $8,000

Cash Outflows:

Housing Costs:
- Mortgage $1,800
- Electricity 200
- Water Rates 200
- Telephone 300
- Insurance 200
- Taxes 50
$2,750

Transportation Expenditure:
- Car Loan Payment $1,200
- Gasoline/Oil 500
- Insurance 300
- Maintenance 200
$2,200

Living Expenses:
- Food $ 2,000
- Clothing 400
- Medical 300
- Personal Hygiene 200
$2,900
Discretionary Expenses:
- Entertainment $ 400
- Vacation 500
$ 900
TOTAL CASH OUTFLOWS $8,750

NET CASH SURPLUS/(DEFICIT) (750)

Table 3-3

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TAKE ACTION NOW

1. Using the template on the next page, prepare your own personal balance
sheet.
2. Using the template on page 36, prepare a budget for the next month.

3. For an entire month, keep a detailed record of all the money you receive
and spend. Pay particular attention to the spending part. Record
everything. At the end of the experiment, ask yourself these questions
and take appropriate action:

Which area of my life absorbs most of my cash?

What can I do about it?
How can I change my lifestyle in order to increase cash flow?
Could I have survived without spending on this or that item?
Where did I waste money?
Am I saving enough money?
Am I willing to choose current consumption over achieving future goals
such as home ownership or retirement?
How can I earn more income?
What personal-use or luxury asset can I sell in order to generate cash to
invest?
Are my financial assets working hard enough for me?

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YOUR PERSONAL BALANCE SHEET

As At ________________________

ASSETS LIABILITIES
$ $
Financial Assets: Current Liabilities

Cash on hand _______ Bank overdraft _______

Passbook savings account _______ Visa card balance _______
Money market account _______ Tax liability _______
C.S.V. - Life insurance _______ Personal loan _______
Tax-deferred annuity _______ Hire-purchase account _______
Credit union shares _______ Policy loan _______
Other _______ Other _______
_______ _______
_______ _______

Total Financial Assets _______ Total Current Liabilities _______

Personal-use Assets:
Long-term Liabilities
Residence _______
Furniture& Appliances _______ Car loan _______
Motor vehicle _______ Credit union loan _______
Clothing _______ Mortgage loan _______
Other _______ Other _______
_______ _______
_______ _______

Total Personal-use Assets _______ Total Long-term Liabilities

Luxury Assets
Jewellery _______
Music collection _______
Jet-Ski _______ Total Liabilities _______

Total Luxury Assets _______ Net Worth _______

Total Assets ______ Total Liabilities & Net Worth _______

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YOUR BUDGET
Cash Inflows:

Nat Salary $
Net Rental Income
Interest Income & Dividends
_____________________
_____________________

TOTAL CASH INFLOWS $

Cash Outflows:

Housing Costs:
- Mortgage $
- Electricity
- Water Rates
- Telephone
- Insurance
- Taxes
____________________
____________________
$

Transportation Expenditure:
- Car Loan Payment $
- Gasoline/Oil
- Insurance
- Maintenance
____________________
____________________
$
Living Expenses:
- Food $
- Clothing
- Medical
- Personal Hygiene
$
Discretionary Expenses:
- Entertainment $
- Vacation
____________________
$
TOTAL CASH OUTFLOWS $

NET CASH SURPLUS/(DEFICIT) $

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Chapter 4
Insurance
Learning Objectives
After reading this chapter, you will be able to:

1. State the purpose of insurance.

2. Explain why we take out insurance.

3. Describe the categories of persons who need insurance.

4. Calculate how much life insurance to buy.

5. List and describe the various types of insurance.

6. Describe the benefits provided by the National Insurance Scheme.

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What Is Insurance?
An insurance policy is a contract between an insurance company and an insured.
The insured agrees to make regular (monthly, quarterly, semi-annually or annual)
premium payments to the company, and in exchange, the insurance company
promises pay a future lump-sum benefit upon occurrence of an event that causes
loss.

Why Take Out Insurance?

Unfortunate and unexpected events happen all the time. People get sick, they are
hospitalized, some become disabled, and others die young. We have accidents,
natural disasters occur and we incur losses for whatever reason. Insurance protects
us against financial loss from such risks.

We take out insurance for the peace of mind that it gives us. You are
comfortable, knowing that if you were to die unexpectedly, your life insurance
policy would provide for your loved ones. Dependents will have the money to live
comfortably and pursue planned goals.

Most of us get value for money when we buy insurance. The relatively tiny
premium we pay for insurance is small, compared to the large benefit settlement
received. Consider the value you will receive, if after paying just a few premiums
on your car insurance, you had a major accident and the insurance company paid
for most of the repair costs.

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LIFE INSURANCE
What is Life Insurance?
A life insurance policy pays a specified amount (sum assured/face value) to a
beneficiary, upon the death of an insured person. In exchange, the insured makes
regular premium payments.

Who Needs Life Insurance?

If anyone depends on you for financial support, you need life insurance. What
would happen to your spouse, dependent children or dependent parents if you died
suddenly? How would they survive? Where would they live? What would happen
to your children’s education? What would become of your elderly aging parents?
Insurance is for you. The purpose of life insurance is to replace your income for
the benefit of your dependents who survive you.

Life Insurance and the Single, Young Adult

But what if you are young, single and have no dependents? Do you need life
insurance? Probably not. There is no one relying on you for financial support.
However, it is quite likely that your situation could change rather quickly. You
could meet the person of your dreams and get married, or have a child. In such
circumstances you will definitely need life insurance. Although you might not need
life insurance now, it would be a good idea to buy it while you are in relatively
good health. Premiums are lower, the younger you are. It is very likely that you
will need it later.

Life Insurance and Children

Never take out life insurance on the lives of your children. They have no income to
protect. Of course, the loss of a child is an emotionally traumatic event. However,

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with the exception of burial costs, this loss does not result in financial burden to
the family. Many people take out life insurance on their children, when they the
parents, are not adequately insured. It is indeed the loss of a parent and his/her
income that could spell financial ruin for the rest of family. You can always cover
a child’s potential burial expenses with another cheaper option such as a family
burial plan. But never buy life insurance on a child’s life.

Despite your insurance agent’s protests, insuring the lives of children is a waste
of money. The likelihood of your child dying is quite low and the premium could
instead be allocated to saving for the child’s education instead. If you are
determined to take out life insurance on a child, wait until she is a teenager. Start
them off with a small policy. The premiums will still be relatively low. Let him/
her take over the premium payments once he/she begins to work. This could be a
valuable life lesson that will serve him/her well in the future.

Single Parents
As a single parent, you have one of the greatest needs for life insurance. In two-
parent households, at least the surviving spouse/partner could still work to support
the family. In the case of death the single parent, the surviving child/children will
lose their only source of financial support. This can be devastating, as children now
have to be cared for by relatives who don’t have the means or worse, become
wards of the state.

Life Insurance and the Elderly

Generally, by the time you reach retirement age; say 60, your children if any
should be grown and supporting themselves. By then, you should have saved
enough for retirement income. If this is not the case, it is a bit late to be thinking

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about life insurance. You probably won’t qualify because of your age and health
status. Even if you are in relatively good health, the premiums will be too high,
considering your limited retirement income. That is why it is important to buy life
insurance early in life.

How Much Life Insurance Do You Need?

Chances are, you do not have enough life insurance. Consider what it would cost to
provide for following, if you died and left a family behind:
Settlement of your personal debts.
Burial expenses.
Family income.
A debt-free home for the family.
Education of your children.
Retirement income support for surviving spouse/partner.
At today’s prices, these costs could run into the hundreds of thousands of dollars or
even millions, depending on the family’s current lifestyle.

There are several very complex methods of estimating life insurance needs. Let
us leave those for the experts and professionals. Instead, a very simple way to
ensure you have enough life insurance is to buy between eight to ten times your
annual net annual salary. If you take home $3,000 per month, that’s $36,000 each
year. You will need to purchase between $288,000 ($36,000 x 8) and $360,000
($36,000 x 10). This method is only a rough rule of thumb. Of course, you may
want to leave much more for your family so they could enjoy a more comfortable
living.

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Another rule of thumb method of estimating life insurance needs is to buy

$100,000 worth of insurance for every $500 of net monthly income. Suppose your
net monthly income was $3000. That would be six units of $500 each. You will
need $600,000 ($100,000 x 6) worth of life insurance. Don’t become too tied to
any method. In the end, it is up to you. No expert could tell you what you want for
your family.

Families with Special Needs

Extra care should be taken when determining the life insurance requirement of
families with special needs. Such families include dependents who are physically,
mentally of emotionally challenged. These individuals may need special care,
attention and support, usually at astronomical costs, for their entire lives. If the
main breadwinner dies, life insurance policies must provide enough money to
adequately care for dependents who are severely challenged.

Types of Life Insurance

There are many varieties of life insurance policies. Let us look at some of the
major types.

Whole Life
Whole life insurance pays a benefit (sum assured/face value) to a beneficiary or
estate, upon
the death of the insured. In exchange, the insured pays a flat premium, either
monthly, quarterly, semi-annually, or annually. The insurance company uses part
of the premium to re-insure your life with a larger insurance carrier. The rest of the
premium is invested to generate cash value for you in the future. During the first
few years of the life of the policy, not much cash value is accumulated. This is

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because a large part of your premium goes to paying agents’ commissions and
administrative costs.

The name whole life insurance is not necessarily accurate. One gets the
impression that it covers you for your entire life. However, most whole life policies
only provide coverage until a certain age; say to age 75 or 80. If you lived to that
age, the contract ends and you receive the cash value of the policy.

You can get cash out of a whole life policy by taking a policy loan. This loan
does not normally have to be repaid, as earnings on your cash value are normally
sufficient, at least to pay the interest on the loan. Sometimes however, if earnings
on your cash value happen to be lower than your policy loan interest rate, the
company will deduct interest from your existing cash value. When you die, any
unpaid policy loan is deducted from the sum assured and the balance is paid to
your beneficiary. If your goal is to accumulate money for the future, there are more
efficient investments to do so, than whole life insurance.

Universal Life
Universal life is similar to whole life, in that there is a death benefit portion and an
investment part. The main difference is that while the whole life premium is fixed
and regular, the universal life premium may vary and can be paid out of funds from
its investment portion.

Term
A term insurance policy is only for a specific period of time. E.g. 1 year, 5 years,
10 years or 20 years. A fixed premium is paid monthly, quarterly, semi-annually or

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annually to secure payment of the death benefit. At the end of the term, the
contract expires. This type of term insurance is referred to as level term.

Sometimes the policy can be renewed for another term. This type is called
renewable term. Renewable term insurance costs more that level term because
when the contract is renewed; the insured is older and possibly less healthy than
before. Because there is no investment associated with term insurance, the insured
receives no money when the policy expires. The policy only pays a benefit if the
insured dies. Pure term insurance is less expensive than whole life and universal
life.

Credit Life
Credit life insurance is a type of decreasing term coverage, which starts at a certain
value and decreases over time, until the value is zero. Decreasing term insurance is
used primarily for mortgage protection purposes but it is also used to secure other
loans. It provides protection to the lender by paying-off the loan, in the event of the
borrower’s death. In such a case, the borrower’s dependents do not have to worry
about repaying the loan. In the case of a mortgage loan, the home passes debt-free
to the deceased’s family. Although credit life insurance is a good thing, it is
expensive, especially when the lender arranges it and passes the charges on to the
borrower. This cost increases the APR (Annual percentage rate) on your loan.

Group Life
A large number of employers provide their employees with group life insurance as
a fully or partially- paid benefit. This type of insurance coverage is inexpensive
and most individuals normally sign-up for the maximum group life insurance

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coverage. Unfortunately, when the employee leaves the job, his coverage is
cancelled.

HEALTH INSURANCE

Ordinary Health Insurance

The cost of health care has skyrocketed in recent years. Everything from a visit to
the doctor or dentist to medications, diagnostic tests and hospital stays have
become increasingly expensive. Health insurance is essential. If you do not have
health insurance, you may be forced to contend with the public health facilities.
You deserve the best medical treatment that you can afford.

For a small premium, most insurance companies will reimburse the majority of
your normal medical bills, related to vision care, dental work, routine medical
check-ups and treatment of minor medical problems.

Major Medical Coverage

But your medical problem might be major and life threatening. It might require
you to be hospitalized, submit to a battery of tests, undergo surgery and seek on-
going therapy. In such
circumstances, you’ll need major medical coverage. Major medical insurance will
pay for most of these costs. Without it, you could deplete all of your financial
resources or run-up staggering debt.

Disability Insurance
What if you became disabled and could not work for several weeks or months?
Worse yet, suppose you became permanently disabled? Disability insurance will

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replace at least part of your income if you become temporarily or permanently

disabled due to accident, injury or illness and are unable to work.
Many employers provide free health insurance as part of the compensation
package, while others require you to contribute part of the premium. In any event,
you should take full advantage of employer-sponsored health plans. Ensure you
cover the entire family where the plan allows it.

Long-term Care Insurance

If you are between the ages of 50 and 55, you should seriously be thinking about
buying long-term care insurance. Why? At some time after you retire, you will
more than likely need help performing daily routines such as eating, bathing and
moving around. Maybe you’ll have to move into an assisted living community or
stay in a nursing home, because you had a stroke or are suffering with Alzheimer’s
disease. Long-term care insurance will help you to afford these facilities.

Most pensioners cannot afford this quality of care and service on their fixed
pensions. Your regular health plan does not normally cover these services. Long-
term care insurance will pay a daily benefit, depending on your premium. Most
policies waive your premium while you are receiving benefits.

Without long-term care insurance, your retired spouse and other family
members could suffer because most of the family income will go to pay for your
long-term care needs. You cannot rely on children to do for you what you should
have taken care of a long time ago. Apart from saving for retirement, getting good
long-term care insurance is the most important thing you can do to provide for
your happiness during retirement.

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You can purchase long-term care insurance today, to cover any number of years
during retirement. Alternatively, you can purchase a plan that covers you for the
rest of your retired life. Do not wait until you are already retired to get long-term
care insurance. You may not be accepted then, as there are qualifying health
criteria. Furthermore, you might not be able to afford the premiums on your limited
retirement pension.
Long-term care insurance is not for everyone. It is expensive. If your income is
low or you have limited assets, this type of insurance is probably not for you.

PROPERTY INSURANCE
You have worked hard to save money or borrowed at great cost, to acquire
personal property. Your property includes your car, household items, jewellery,
real estate and other valuable assets. It is important that you adequately insure
them against unexpected loss due to accidental damage, theft, fire and other such
perils.
NATIONAL INSURANCE
The National Insurance System provides insurance coverage for employees in the
event of loss of earnings due to the following:
Sickness
Maternity
Invalidity
Injury on the job
Retirement
Death (Survivor’s Benefits)
For comprehensive information on National Insurance contributions and benefits,
visit their website: www.nib@nibtt.co.tt.

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TAKE ACTION NOW

1. Use the rules of thumb methods mentioned in this chapter to estimate

your life insurance needs.
2. Read all your insurance policies.
3. Call a family meeting to discuss insurance.
4. Make an appointment with your insurance to review your insurance
position and needs.

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Chapter 5
Consumer Credit
Learning Objectives
After reading this chapter, you will be able to:

1. Explain why people borrow money.

2. Describe the signs of debt trouble.

3. Describe how we should be borrowing in the various stages in the family

life-cycle.

4. Calculate how much debt you can afford.

5. Describe the criteria that determine your credit score.

6. Describe the main types of credit.

7. Describe strategies to ease the burden of credit card debt.

8. Distinguish between the quoted rate and the APR.

9. Describe strategies to re-build your credit rating.

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The vast majority of working adults owe money. We fuel, our consumerism and
need for instant gratification with debt. Most people will never be able to buy
major appliances, purchase a car or a home with their own cash resources. It
will take a long time to save-up enough money to acquire these items.

Debt therefore, is not inherently bad. It is the amount of credit we take and
how we manage it that gets us in over our heads. The situation is made worse,
as financial institutions aggressively compete and market a wide range of loan
products, in order to increase profits.

10 Signs of Trouble
You know you’re in trouble with debt, when:
1. You are borrowing to repay debt.
2. You routinely make minimum payments on your credit card.
3. You make frequent requests for extensions and waiver of payments.
4. You are getting telephone calls and letters from creditors.
5. Your credit applications are being turned down.
6. You hide debt from your spouse.
7. You approach your “friendly” money lender.
8. You start borrowing from friends and family.
9. Your salary is being garnished.
10. You are considering filing bankruptcy.

You will not have much success in achieving financial independence, if you do not
seize control of your debts.

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When to Borrow
Debt is necessary at certain times in our lives.
The Young
Financial institutions target young persons, recent entrants to the job market, with
“generous” offers of credit. The logic behind this strategy is: “Hook them while
they’re young and you got them for life”. Even university students, who have no
income, are offered small loans and credit cards to pay for supplies, entertainment
and living expenses while staying on campus. It is expected that parents will
service this debt. Borrowing money for consumption, when you’re young, can be
dangerous. You could permanently damage your credit rating and disqualify
yourself from obtaining credit when you really need it in the future.

It is a good idea however, for young persons to establish a good credit rating by
selectively taking small loans, typically for investment purposes and repaying them
early. Not only will your credit rating be well-established, but you will also have
some financial assets to show.

Young Families
Young families should borrow only for essentials. They must avoid being too
burdened by debt at this stage, as soon, they will be seeking a mortgage loan. If
family debt is too high, it could jeopardize the chances of qualifying for a
mortgage. Young families should not be taking loans to finance things like
vacations, Christmas expenses and other non-essential consumerables. These items
will normally reduce your net worth. Rather than spending to repay non-essential
debt, young families should be focusing on taking adequate insurance, saving for
children’s education and building their retirement funds.

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Maturing Families
Your family is maturing when you are approaching mid-life and the children are in
their teens. Debt burden peaks at this stage of the family life-cycle. Maturing
families will typically be servicing a mortgage, sometimes a second mortgage,
repaying loans for children’s education, paying-down credit card debt and probably
operating an overdraft.

Often, debt repayment puts tremendous pressure on family income, at the expense
of saving adequately for retirement. Do not make this mistake. While it is good to
give our children the little extra comforts of life, it is foolish to deny ourselves a
comfortable lifestyle during retirement. These days, you cannot rely on your
children to take care of you when you retire.

Retirees
At this stage of your life, you should have repaid all of your debt. Your home
should be debt-free. Your car and household appliances should have been paid for.
There should be no need for credit card debt or overdraft financing. This is the
time to truly enjoy what’s left of your life. You should not be worried about
repaying debt. In fact, if you’re indebted at this point, chances are that you have
not saved enough for retirement. The irony is that your retirement income will be
insufficient to service your debts anyway.

How Much Debt is too Much?

The key ratio that lenders use to determine a borrower’s capacity for consumer
credit is the Gross Debt Service ratio. The Gross Debt Service ratio (GDS ratio)
compares the loan payment to the gross family income.

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GDS Ratio = Monthly Loan Payment

Gross Monthly Family Income

Many financial institutions set a maximum Gross Debt Service ratio of 35 percent.
This means that your repayment on all loans should not exceed 35 percent of the
family income. Suppose your bank has established a Gross Debt Service ratio of 35
percent for all borrowers. Your Gross monthly income is $4,000. Then your loan
payments must not exceed $1,400 ($4000. x 0.35).

Another important tool used by lenders to aid in the credit decision is your
credit score. Although different financial institutions use unique electronic and
other systems for calculating credit scores, the basic idea is to apply a weighting or
score to certain borrower criteria and then add-up the points earned by each
borrower. Your score is then matched to some pre-determined passing score and a
decision is made whether to approve or decline your loan application.
How Here is a list of the criteria that determine your credit score:

Age
If you are too young, you might be considered irresponsible. Too old and you’re
seen as “washed- up” and a bad credit risk.

Marital Status
Single individuals score lower on most credit scoring systems because they are
viewed as less responsible. Married persons score higher because they are more
likely to seriously attend to family commitments. Divorced and separated persons
usually score the same or lower as singles. This is so because besides being now
single, they would typically have serious commitments to caring for children.

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Stability of Residence
Lenders prefer to see that you have been living in the same place for at least three
years. This is a sign of stability and also suggests that your financier could find you
in the event of default.

Home Ownership
Owning a home positively affects your credit score. If you own your home, it is
less likely that you might skip-out on your creditors. They know where to find you.
Also, financial institutions are more likely to lend you money if you demonstrate
that you have been able to save the down payment for a home and qualified for the
mortgage.

Stability of Employment
Creditors like to lend to borrowers who are permanently employed, more so with
the same organization for at least three years. The longer you’re permanently
employed, the more likely you will continue to be employed in the future, thus
ensuring repayment.

Income
The higher your income the higher you will score. High income gives you more
capacity to repay your debts.

Payment History
Electronic credit scoring systems pick-up the number of times you have paid late
or missed payments with any of your creditors. These creditors include banks,
finance companies, Hire-purchase firms, credit unions, utility companies and any

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other institution that is part of the credit reporting system. You score less and less
for each missed or late payment.

Legal Action
Demands for payment, judgments lodged, levies, foreclosures and bankruptcy
filings all appear on your credit report and have serious implications for your credit
score.

Frequent Applications and Credit Requests

The credit scoring system identifies when you apply frequently to multiple lenders.
It also recognizes when other creditors are enquiring about you. In either case, your
credit score is negatively affected.

Relationship
The more related accounts and transactions including savings and investment you
have with a particular lender will positively affect your credit score.

Types of Credit
Consumer credit comes in all varieties. Consumer credit can be either credit card
debt, charge cards, bank overdraft, installment loans, hire-purchase agreements or
“other”.

Credit Cards
Nowadays, almost everybody has at least one credit card. Credit cards are a
convenient way to pay for purchases when we don’t have the cash to pay at once.
“Plastic” is accepted everywhere. You probably couldn’t book a hotel room, rent a
car or purchase something on-line, without a using a credit card. You can even use

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credit cards to get cash advances at most automatic teller machines (ATM’s). Yet,
they represent the most dangerous and potentially harmful kind of consumer debt
that exists today.

The bad thing about credit card debt is the high interest rate. You could end-up
paying as much as 24 percent annually on your credit card balance. A monthly
interest rate of 1.8 percent per month might not seem like much but that works out
to be 23.87 percent annually. This does not include the fees and other charges that
are incurred each year.

Here’s how you should handle a credit card. You use your card to make
purchases during the month, within the approved limit. When you receive your
statement at the end of each month, you’re given a grace period of approximately
30 days to settle your account, interest-free. Unfortunately, the vast majority of
individuals do not settle monthly.

Most of us run-up credit card debt and allow the unpaid balance to be carried
forward to the future. What happens next is that the bank charges high interest on
the unpaid balance. Worse yet, banks don’t mind if we make the minimum
payment on our credit card. The minimum payment is small and normally only
sufficient to cover the interest and reduce the principal slightly. At that rate, it
could take many years to finally liquidate this debt. But it gets even worse.
Occasionally, banks will automatically increase your credit card limit and notify
you by mail. It is difficult for many to refuse such offers of “easy money”, so we
slide deeper and deeper into the debt trap.

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Often, Credit card companies offer very low introductory rates to encourage
you to open an account. These “teaser” rates are only for a short period of time,
after which, your interest is increased to the going rate.

It makes sense to use savings to pay down credit card debt. Assume that you are
currently earning 6 percent on a money market account but are paying 20 percent
on your credit card debt. Using your savings to pay-off your credit card results in a
handsome 14 percent return (20% - 6%).

Explain how credit cards work to your children. Some children think that
because you have a “card” you have money. Explain to them that this is a loan that
must be repaid. Let them know that a decision to purchase now using the card
affects the family’s cash flow and has serious implications for the future.

Need Help?
Here are 10 things you can do to ease the burden of credit card debt:
1. Maintain only one credit card. If there are others, cut them-up.

2. Write to your credit card company and cancel the limits on all cards
except one.

3. Refuse any un-solicited offers to increase your credit limit.

4. If you have any un-encumbered savings, use it to at least reduce your

debt. You’ll save on interest costs.

5. Discuss credit card debt with the family.

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6. Adjust your budget and increase the monthly payment on your credit
cards.

7. Take out a lower-interest loan and use the proceeds to pay-off credit card
debt.

8. Apply any raises, bonuses etc. to reduce credit card debt.

9. Save loose change and put it towards credit card debt.

10. Get help.

Charge Cards
Department stores and other merchants issue charge cards for purchase of items
such as clothing, household items and gasoline. They allow you to charge
merchandise and pay later. These merchants are really running financial
institutions on the side. They make profit twice. Once on the sale of merchandise
and again on the interest they charge on unpaid balances. Interest on charge cards
is usually high and matches credit card interest. Unless you are prepared to settle
your charge cards in full each month, you’re better-off staying far away from them.

Bank Overdraft
If you operate a chequeing account, your bank may allow you to write cheques in
excess of the funds you have in your account, up to an approved limit. This facility
is called an overdraft. Bank overdraft is intended to fluctuate widely. This means
that you may borrow the entire overdraft limit during any month but it should be
repaid (covered) by the end of that month from your income. You are only charged

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interest on the amount of money you use and interest is calculated on the average
daily balance for each month. If you do not settle your overdraft during any month,
the balance goes forward to the following month and interest is charged again,
until it is repaid. When you use-up your overdraft limit and do not repay it over
several months, the unpaid balance is referred to as hardcore. This situation is
unsatisfactory to the bank and should be to you. When hardcore develops in an
overdraft, the best thing to do is to cancel the limit and begin to repay the balance
in monthly installments.

Installment Loans
The most popular type of loan used by individuals is the installment payment loan.
It is taken for all types of purposes, and for periods of up to five years. Despite the
popularity of installment credit, it is very costly and should only be taken to
finance essentials. The majority of borrowers are not aware just how much interest
they are paying on installment loans.

The confusion lies in the way interest is advertised and calculated. Interest on
installment loans is charged on an add-on basis. This means that the interest for the
entire life of the loan is added up-front to the principal amount borrowed and the
total amount is repaid in equal monthly installments. The APR (Annual percentage
rate) represents the rate the lender is really making each year. The APR increases,
when you factor in loan fees and service charges. Banks are now obliged to
disclose the true cost of borrowing. Be sure to ask.

If you make extra payments to your installment payment loan, you will receive
no immediate benefit, except that the loan will be repaid before its scheduled date.

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It is only upon full settlement that that the bank will give you a partial rebate of the
interest charged.

The Credit Union Difference

The APR on Credit Union loans is closer to their quoted rate. The reason for this is
that credit unions charge interest on a reducing balance basis. As your principal
balance reduces, you pay less and less interest each month. Any extra payment
made is applied to reduce the principal balance so your interest cost reduces even
further.
It is a fact. Credit unions are operated in the interest of their owners/members.
Their loan interest and charges are generally lower than other financial institutions.
However, many credit union members have abused their rights and privileges of
ownership and membership and have accumulated huge amounts in debt; way in
excess of their shares. Much of this debt is for consumption or to purchase assets
that depreciate and reduce net worth.

Hire Purchase Agreements

If you have never purchased an item on hire purchase, you’re wise. Don’t start
now. Hire purchase is just about the most expensive source of credit we could find.
Often, persons who cannot qualify for cheaper sources of finance wind-up paying
through their noses with hire-purchase. Some of the very reasons why we should
avoid hire-purchase are precisely the features that attract many un-informed
borrowers.

No Down-payment - This is a bad idea. You should always pay down as much
as possible and borrow as little as possible. That way, you will pay less interest and
repay the debt faster.

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Extended Term – Hire-purchase companies offer to stretch-out the term of the

contract, so your installment would be small and manageable. Don’t be fooled. The
longer the term, the more interest you will pay.

Pay Nothing for 90 Days – Delaying commencement of payment on any

loan will only cost you more in interest and keep you “tied-up” for longer.

Take More – Before your current hire-purchase agreement is repaid, you will
usually get a mail or telephone solicitation, offering more credit. This is a ploy to
ensure that you are constantly indebted to the company that seeks to profit at your
expense. Respectfully decline all such offers. If you’re such a valued and great
paying customer, maybe a less-expensive credit provider might be interested in
you.

Other
It is not uncommon to see small classified advertisements offering unsecured loans
from non-bank loan companies. Be warned. Apart from “loan sharks” and money-
lenders, this type of loan is the most expensive and dangerous. These loan
companies prey on the vulnerable and desperate, who have nowhere else to turn for
credit. Interest can run as high as 24 percent annually. An unbelievable feature of
this kind of loan is that the company also lends you enough to pay the interest,
which is collected up-front. You actually pay interest on interest. Interestingly,
these loan companies have expert legal departments to enforce their rights of
collection. Stay away!

Money lenders have become permanent fixtures at most industrial plants and on
job sites. They make small loans to workers, who repay by pay-day. The only

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problem is that money lenders’ charges could be ridiculously high. Imagine

borrowing $100 on Monday and having to repay $125 by Friday. You might think
that is only 25 percent interest. In fact if this rate works out to be a whopping 1,300
percent per annum. You must be crazy to borrow at this rate.

Pawnbrokers make small short-term loans against your valuable items, which
are held. E.g. jewellery. Pawnbrokers normally advance less than 50 percent of the
item’s value and interest can run as high as 24 percent annually. If the loan is not
repaid by a particular time, the pawnbroker sells the collateral to recover the
money. Once you have reached the stage of having to pawn your valuables, you
know that you are in trouble with debt and on a deeper level; you have lost control
of your finances.

How to Re-build Your Credit Rating

So your credit rating is poor. Maybe you went through a messy divorce and
couldn’t keep up with your loan payments. A period of prolonged illness could
easily set you back and cause you to fall into arrears. It could be that you were not
very responsible and had abused credit in the past. Whatever the reason, it is
important that you re-establish a good credit rating. Unfortunately, the slate cannot
simply be wiped clean. It took time for you to get into this mess and it will take
time to get out. Here are some things that you can do:

Don’t Run - It is best to face your creditors. Lenders are more willing to work
with you when they realize that you acknowledge the debt and demonstrate a
willingness to pay. Visit each creditor and explain your current situation. Lay our
cards on the table. Be honest. Disclose all your other debts and income from all
sources. Tell them how much you can realistically afford to pay.

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Request that payments be applied to reduce principal first. That way, interest
will not accrue as fast. If you have money saved, offer to make a lump-sum
payment in exchange for a write-off of part of the outstanding interest. If you’re
unable to meet the negotiated payment terms, let the creditor know early. Do not
let them have to contact you.

Consolidate – You probably owe several creditors. Each requires a separate

installment every month. It would make sense to try to get one lower-cost creditor
to take over the other loans. That way, you will pay only one loan installment and
you’ll save on the interest. But be warned, if you are deeply indebt, you might
experience difficulty finding a lender who is willing to consolidate your debts for
you.

Get Secured Credit – Deposit a sum of money into an interest-bearing

account at a bank. Then apply for a loan of equal or lesser amount for investment
purposes. Make sure that you can afford the payments. Repay the loan as agreed or
earlier if possible. Repeat the process. Your credit rating will improve and so will
your investments.

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TAKE ACTION NOW

1. Using the formula from this chapter, calculate your own gross debt
service ratio.
2. List all your debts, showing balances, interest rates and installments.
Consider consolidating the higher cost debts with a low-cost lender.
3. If you’re in credit card trouble, go back to page 56 and see what you can do.

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Chapter 6
Saving and Investing
Learning Objectives
After reading this chapter, you will be able to:

1. Define savings.

2. Give the reasons why people save.

3. Describe the features of various savings options.

4. Explain the criteria used in selecting savings and current accounts.

5. Explain the difference between simple and compound interest and explain
the “magic” of compound interest.

6. Use time value of money tables to calculate the future value of single sums
and annuities.

7. Discuss strategies to “find” money.

8. Define investments.

9. Describe the pre-conditions to investment.

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10. State and describe different investment objectives.

11. Describe the main financial markets.

12. List and describe various investment options.

13. Illustrate the relationship between investment risk and returns.

14. Describe various sources of risk.

15. Define asset allocation.

16. Describe the main asset allocation strategies.

17. Define a mutual fund.

18. Describe the various types of mutual funds.

19. Explain why individuals invest in mutual funds.

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SAVINGS
The part of our income that we do not spend is called savings.
Why Do People Save?
People save for several reasons:
Liquidity
Some people save (do not spend) so they could have access to money for future
consumption. They also want to be in a position to take advantage of opportunities
that may arise from time to time.
Emergency Fund
Everyone needs to save in order to build-up an emergency fund. You could lose
your job, become seriously ill or suffer a catastrophic loss of property. The
emergency fund will help you to recover. Most experts recommend that you save
between four to six months worth of living expenses in an interest-bearing account,
in case of emergency. Without an emergency account, your family is likely to
suffer severe hardship when the unexpected happens.
Purchase Assets
We save to purchase assets like a car or a home in the future. Generally, these
assets are too expensive to be purchased with current income, so people save-up
the down-payment and borrow the difference.
Education
Parents prefer to have choices when it comes to providing primary, secondary and
tertiary education opportunities for their children. They save to ensure that they
could give their children a better education. Also, adults save to finance their own
education, in order to improve their income-earning potential.

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Retirement
Increasing life expectancy and spiraling inflation require individuals to start saving
early to finance retirement expenses.

Savings Options
There are so many different types of savings accounts out there, it is no wonder we
are confused. When choosing a savings account, there are some important features
to look for. Firstly, you should be able to open the account with minimal funds and
you should not be penalized if your account balance ever falls below some
minimum level. Secondly, you must have easy access to the money in the account,
especially for emergencies.

Thirdly, the interest rate on your savings account should be close to the rate of
inflation. That way, your money won’t lose its real purchasing power when prices
rise.

Fourthly, your money should be relatively safe. The ideal situation is for it to be
guaranteed by either a government or quasi-government agency. If that is not
possible, then you should ensure safety by saving your money in a strong, highly
reputable financial institution. Finally, you need to consider the tax implications of
your chosen savings account. The following checklist can be useful when selecting
a savings account:

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Table 6-1 SAVINGS ACCOUNT SELECTION CHECKLIST

Savings Options
Criteria Passbook Fixed Money Money
Savings Deposit Market Market
A/C A/C Mutual Fund
Minimum Initial Amount Very low or Could be Very low. Greater than
none. quite high. $100.

Minimum Balance Very low or N/A. Very low Greater than

none. or none. $100.

Easy Access to Money Yes. Yes, but Yes. Yes.

high
penalties.
Reasonable Interest Rate No, very Yes Yes. Yes
low
Safety Depends Depends Depends Depends

Income Taxable? Tax-free in Tax-free in Tax-free Tax-free in

Trinidad & Trinidad & in Trinidad &
Tobago Tobago Trinidad Tobago
& Tobago

Although some chequeing accounts pay minimum interest, they are normally not
good savings vehicles. A chequeing account is used primarily to facilitate payment
by cheque. When selecting a chequeing account, you must consider issues of
convenience, service and cost. The following checklist can help you select which
current account is right for you:

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Table 6-2 CHEQUEING ACCOUNT SELECTION CHECKLIST

Criteria People’s Bank Bank of Tech. Bank
Money
Location Convenient Too Far Virtual (24/7)
10 Branches
Deposit Insurance Yes Yes Yes
Minimum Initial Deposit $1,000 $100 $1
Minimum Balance $500 $100 $1
Required
Interest Rate 1.5% annually None 1.2% annually on
on avg. monthly avg. daily balance.
balance
Monthly Service Charges $75 $80 $50

Transaction Fee $0.35 $0.50 $0.25

ATM Charges $2.00 Home $2.00 Home $2.00 Home branch
branch branch $3.00 Other
$3.00 Other $3.00 Other
Stop Payment Fee $10 $15 $8
Overdrawn Account Fee $20 + 20% $25 + 18% $15 + 22% interest
interest interest
Overdraft Protection No Yes No

Note: The above figures are for illustrative purposes only.

HOW MONEY GROWS
Simple Interest Formula: i = p x r x t
Where: i = Interest Earned
p=Principal Invested
r= Rate of Interest
t=Time Invested

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Example: Suppose you invested $10,000 for one year in an account that paid
10 percent per annum. How much would you have altogether after
one year?

Solution: i = $10,000 x .10 x 1

i = $1,000
Simple interest applies only when the investment period is 1 year or less.

The Magic of Compound Interest

Compound interest is interest that is earned on a deposit that becomes part of the
principal at the end of a specified period of time. Interest is earned on interest.

Another Example:
If you placed $100 in a savings account that paid 7 percent interest compounded
annually, at the end of one year you would have $107 in the account as follows:

Solutions: $100 x .07 x 1

= $7.00
$100 + $7.00
= $107

Now, what if you invested the amount above for two/three years?

2 Years $107 x .07x1

= $ 7.49
$107 + 7.49
= $114.49

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3 Years $114.49 x .07 x 1

= $8.50
$114.49 + $8.50
= $122.50

Rather than calculating simple interest each year and adding the answer to the
previous balance (could be tedious), a simpler method would be to use future value
tables.

Example:
Rishi has just received back-pay of $12,000 and wants to save it towards a down-
payment on a home he intends to purchase in 10 years time. He invests the money
in a growth and income mutual fund that is expected to pay an average return of 12
% annually. How much will Rishi have in all at the end of 10 years?
Using the future value of a single sum table 6-3 below, find the factor that
corresponds to 12 % and 10 years. The factor is 3.1058. Now multiply the sum
invested by the factor ($12,000 x 3.1058) Rishi would have saved $37,269.60.

Another Example:
What if Rishi saves the $12,000 for 30 years in a retirement account that pays an
average annual rate of 15% annually? How much will his retirement fund be worth
at the end of 30 years?

Again, using the future value of a single sum table 6-3 below, find the factor that
corresponds to 15 % and 30 years. The factor is 66.2118. Now multiply the sum
invested by the factor ($12,000 x 66.2118) Amazingly, Rishi would have saved
$794,541.60. Magic!

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The magic works even better, when you save similar amounts each year. Christine
plans to purchase a new car in 5 years time. She saves $6,000 each year towards
her down-payment, in a high-yielding savings account that pays 8% per annum.
How much will Christine’s account be worth at the end of 5 years?

Using the future value of an annual sum table 6-4 below, find the factor that
corresponds to 8% and 5 years. The factor is 5.8666. Now multiply the annual sum
invested by the factor ($6,000 x 5.8666) Christine would have saved $37,269.60.

Another Example:
Now let’s assume that Christine saves $2,400 each year, for 15 years, in an
education savings plan for her 3 year-old son’s education. The savings plan pays
an average annual interest rate of 9%. How much will the plan be worth in 15 years
time?
Again, using the future value of an annual sum table 6-4 below; find the factor that
corresponds to 9% and 15 years. The factor is 29.3609. Now multiply the annual
sum invested by the factor ($2,400 x 29.3609) Christine would have saved
$70,446.16.

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Table 6-3
Calculate the Future Value of a Single Sum Invested at a Certain Rate, for a Number of Years

Multiply Single Sum Invested by Appropriate Factor Below

Rate
Years 5% 6% 7% 8% 9% 10% 12% 14% 15%
1 1.0500 1.0600 1.0700 1.0800 1.0900 1.1000 1.1200 1.1400 1.1500
2 1.1025 1.1236 1.1449 1.1664 1.1881 1.2100 1.2544 1.2996 1.3225
3 1.1576 1.1910 1.2250 1.2597 1.2950 1.3310 1.4093 1.4815 1.5209
4 1.2155 1.2625 1.3108 1.3605 1.4116 1.4641 1.5735 1.6890 1.7490
5 1.2763 1.3382 1.4025 1.4693 1.5386 1.6105 1.7623 1.9254 2.0114
10 1.6289 1.7908 1.9671 2.1589 2.3674 2.5937 3.1058 3.7072 4.0456
15 2.0789 2.3966 2.7290 3.1722 3.6425 4.1772 5.4736 7.1379 8.1371
20 2.6533 3.2071 3.8697 4.6610 5.6044 6.7275 9.6463 13.7435 16.3665
25 3.3864 4.2919 5.4274 6.8485 8.6231 10.8347 17.0000 26.4619 32.9189
30 4.3219 5.7435 7.6122 10.0627 13.2677 17.4494 29.9599 50.9502 66.2118

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Table 6-4
Calculate the Future Value of an Annual Sum Invested at a Certain Rate, for a Number of Years

Multiply Annual Investment by Appropriate Factor Below

Rate
Years
5% 6% 7% 8% 9% 10% 12% 14% 15%

2 2.0500 2.0600 2.0700 2.0800 2.0900 2.1000 2.1200 2.1400 2.1500

3 3.1525 3.1836 3.2149 3.2464 3.2781 3.3100 3.3744 3.4396 3.4725

4 4.3101 4.3746 4.4400 4.5061 4.5731 4.6410 4.7793 4.9211 4.9934

5 5.5256 5.6371 5.7507 5.8666 5.9847 6.1051 6.3528 6.6101 6.7424

10 12.5779 13.1808 13.8164 14.4866 15.1929 15.9374 17.5487 19.3373 20.3037

15 21.5786 23.2760 25.1290 27.1521 29.3609 31.7725 37.2797 43.8424 47.5804

20 33.0659 36.7856 40.9955 45.7620 51.1601 57.2750 72.0524 91.0249 102.4436

25 47.7271 54.8645 63.3290 73.1059 84.7009 98.3471 133.3339 181.8708 212.7930

30 66.4388 79.0582 94.4608 113.2832 136.3075 164.4940 241.3327 356.7868 434.7451

35 90.3203 111.4348 138.2369 172.3168 215.7107 271.0244 431.6635 693.5727 881.1702

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10 Ways to “Find” Money

1. Make a Budget and Stick to It

As we have learnt earlier, if you make a budget and stick to it, you will be
able to create extra savings to invest.

2. Take a Pay-Cut
In the past, workers have agreed to pay-cuts, as an alternative to outright job
loss. Sometimes the cut in pay is imposed by the employer. Workers
simply had to adjust their lifestyles and live on less money. In order to save
more, some individuals take a self-imposed pay-cut of say 10 percent.
They pretend that their salary was cut by this amount. They then turn around
and save the entire amount of the pay-cut. Try this for six months. You
might be surprised how much money you have been wasting in the past.

3. Save Raises, Bonuses etc.

Raises and bonuses did not exist before we got them. In fact, we didn’t have
to get them. Why then treat them as entitlements? Some people spend their
raise or bonus even before it is received. From now on, whenever you
receive a raise or a bonus, save all of it. You survived without it before and
you certainly can live without it now.

4. Avoid Paying Rent

If you can help it at all, avoid paying rent. Rent is a cash outlay that earns
you nothing. Some people do the “unthinkable” and live with relatives, until
they can save enough to pay-down on their own home. Renting a house,
with an option to purchase later, is a better idea.

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5. Save Loose Change

Children have known this for years. What child has not searched between
sofa cushions, swept the floors or kept an eye on the street, looking for
loose change to put in the piggy- bank. You can do even better. At the end
of each day, put all your lose change into a jar or other container. Every 90
days, separate them and put them into coin bags can obtain from your bank.
Deposit the coins saved in an interest bearing money market account. Most
people have no idea how lose change can add-up. Suppose you saved only
$400 each year for the next 10 years, your account will be worth $5,272.32.
After 20 years, you would have saved $14,714.24. Not bad for lose change!

6. Stop Smoking
All the reports are clear. Smoking will kill you! But smoking will also kill
your finances. At $12 a pack, a 20-your smoking habit can cost you almost
$80,000. If this money were invested instead, it could have grown to be a
handsome addition to your retirement fund.

7. Stop Buying Sodas

Apart from the fact that commercial soft drinks are loaded with sugar and
other harmful substances, they are extremely expensive. You can pay
anywhere from $4 to $10 for your favorite beverage. Suppose you spend $20
each week ($1,040) annually on sodas. Over the next ten years, you will
spend $10,400. However if you save that $1,040 in a money market account
that pays an average of 5 percent annually, you will have $13, 080 at the end
of ten years. If you wished you had $13,080 now, then you can do without
buying sodas.

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8. Limit Eating-out
Eating-out is an occasional pleasure to be enjoyed by all. Today, however,
many individuals, especially young single persons, eat-out daily. An average
take-out lunch can easily cost $20. Image spending $5,000 each year on
food that is both expensive and unhealthy. If instead, you invested $5,000
each year in a retirement fund that earned an average return of 12 percent;
your retirement fund would grow to be a whopping $3,835,457.10 after 40
years.

9. Postpone Your Vacation

We all need rest and relaxation and a vacation as a great way to re-charge
our batteries. Annual trips abroad are a luxury that most of us just cannot
afford. If you have to borrow money to go on vacation, you cannot afford
a vacation. If you have not yet accumulated your emergency fund, then that
vacation will have to wait. If you’re playing catch-up with your retirement
savings, a vacation at home might be best.

10. Hold a Garage Sale

We have accumulated so much “stuff” over the years, much of which we no
longer use. We spent valuable income to acquire these assets and might even
have purchased some using credit. You can convert these assets into cash, by
holding a garage sale. You will have fun, while salvaging some extra dollars
for investment.

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INVESTMENTS
Investment is different from savings. Investment is the long-term commitment of
savings dollars, with the intention of achieving income or growth or both. Before
you rush into investment, there are some important pre-conditions that must be
met. These include:

Minimize Taxes
Make sure that you take all allowable tax deductions and tax credits. That way, you
will pay less tax and will be able to use tax savings to invest.

Emergency Fund
It is important to save for the emergency fund before you start any investment
program. Your emergency fund should be readily available when needed. Because
investment is for the long-term, the emergency fund should be saved first.

Adequate Insurance
One of your top priorities is to protect yourself against the risk of sudden death,
major illness, disability or loss or damage to property. It makes little sense
investing unless these risks are covered first.

Debt Management
If you are heavily burdened by debt, chances are you do not have much money for
investment. Reducing or eliminating debt could free-up much of your income that
you could then allocate for investment purposes.

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Investment Objectives
Every investor should know what he wants to achieve by investing. This is called
the investment objective. Following are some of the more popular investment
objectives:

Safety of Principal
Investors who have this objective do not wish to suffer any loss to their capital.
They are not prepared to take risk in exchange for the opportunity to earn higher
returns. Typically, retired persons fall into this category.

Income
These investors are interested in obtaining a steady flow of income over time.
Again, retired persons commonly have this objective. However, other investors
might seek opportunities for earning regular income also have this objective.

Growth or Capital Appreciation

If you are interested in your investment growing at a reasonable rate over the
medium to long-term, then your objective should be growth of capital appreciation.
Typically, these investors are not as concerned with safety of principal or income
as those described above. You must however be willing to incur some loss to your
principal in the short-term if you desire long-term growth.

Income and Growth

These investors want to receive some combination of regular income and capital
appreciation, over the medium to long-term.

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Aggressive Growth
Investors with this objective want growth and they want it quickly. They don’t
mind suffering significant losses to capital in the quest for gain.

Investment Options
Investors can invest directly in the money market or the capital market.

Money Market
The money market is the market for short-term securities. Because money market
investments are short-term in nature, they are usually highly liquid. This means
that they can be cashed-in or liquidated relatively quickly. Money market
investments are generally low-risk. For these reasons, they are attractive to persons
whose investment objective is safety of principal. There are several types of money
market investments; however the following three are of particular relevance to
individual investors.
Treasury bills
Money Market Deposit Accounts
Money Market Mutual Funds

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Table 6-5 FEATURES OF SOME MONEY MARKET

INVESTMENTS
Criteria Treasury Bills Money Market Money Market
A/C Mutual Fund
Initial Investment $1,000 and Very low. Greater than $100.
subsequent
increments of
$1,000

Maturity Typically 90 or No fixed term. No fixed term.

180 days.

Liquidity Can be sold to Can withdraw at Can withdraw at

money market any time. any time but value
broker prior to can fall.
maturity.
Interest Rate Low. Fixed for Relatively low. Relatively low.
maturity period. Subject to change Subject to change
at anytime. at anytime.
Risk Low. Mostly Relatively low Relatively low but
interest rate risk. but depends on depends on strength
Issued by Central strength of the of the financial
Bank and backed financial institution. Exposed
by Government. institution. to interest rate risk
Exposed to
interest rate risk

It is interesting to note that savings instruments and money market investments

appear to be identical. This is because of the low-risk, low return nature of both.

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Capital Market
The capital market is the market for long-term investments. It can be sub-divided
into the fixed-income market and the equity market.
Fixed-income Investments
Fixed-income investments generally pay a fixed rate of return over relatively long
periods; although sometimes, the rate can vary over time (floating rate). The most
common type of fixed-income security is a bond. A bond is issued by the
government or a corporation in order to raise large sums of money. Below are
some key characteristics of bonds:

Table 6-6 FEATURES OF BONDS

Criteria Features
Issuer Issued by government or a corporation.
Tenor Commonly matures in 5,7,10,15,20,25 or even 30 years.
Issue Amounts Usually in increments of $1,000.
Interest Rate depends on market conditions. Normally a fixed
(coupon) rate of interest. Sometimes rate can floating,
depending on movements of other market rates.
Interest Payment Normally interest (coupon) is calculated based on the face
value and paid semi-annually.
Principal Face value is repaid upon maturity.
Repayment

Of course, any other investment that promises to pay a steady flow of interest over
time, and matures at a specific future date, qualifies as a fixed-income investment.

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Equity Investments
Equity investments represent ownership interests in a company. The two main
types of equities are preferred stock and common stock (shares).

Preferred Stock
Although preferred stock is a form of equity, it is more a fixed-income investment
because it pays a fixed dividend each year. Preferred stock gets its name from the
fact that dividends are paid first to owners this class of stock before any others.
Usually, if a company is unable to make a dividend payment to its preferred
shareholders, the unpaid dividend accumulates and is paid in a following year.

Common Stock
The most popular class of equity is the common stock. Common stocks give their
owners a residual claim on the assets and income of a business. This also means
that all the earnings and assets of the company, after the preferred shareholder’s
claims have been paid, belong to common or ordinary shareholders. Some
companies pay out a large portion of each year’s profits as dividends to common
shareholders, while others retain most of their income. Table 6-7 below outlines
the features of preferred and stock.

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Table 6-7 FEATURES OF PREFERRED AND COMMON STOCK

Criteria Preferred Stock Common Stock
Maturity Infinite life but some may be Infinite life. Owners must
converted to common stock or sell stock in order to get
called-in early. Owners must sell back their money.
stock in order to get back their
money.
Issued at Issued at par value. Issued at par value,
commonly $1. Could also
be no-par stock.
How to Buy Buy through stock broker. Buy through stock broker.

Market Price Determined by demand and Determined by demand

supply. and supply. Price may
fluctuate widely.
Dividends Fixed dividend based on a Based on a percentage of
percentage of par value. Usually company’s earnings.
paid annually. Normally paid quarterly
or annually. Dividend is
not guaranteed.
Voting Rights Usually none Holders usually can vote
on major decisions at
company’s annual general
meeting. One share one
vote.
Other Rights Right to receive dividend before Owners have a residual
other classes of shareholders. claim on the assets and
May have the right to convert to income of a business after
another class of stock. all other claims have been
satisfied.

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Returns from Investing

Investors must make an important trade-off of return for risk. If you do not wish to
take high risk, you must be willing to accept a low return. Conversely, if you seek
high returns, you will have to take greater risk. In other words, the greater the risk,
the greater the return. You cannot want to get high returns but are unwilling to
take the required level of risk.

Risks from Investing

When we invest, any number of things could go wrong and cause us to lose money.

1. Interest rates could rise after you have invested money at a fixed rate for a
long time. In this case, you would lose-out on the opportunity to earn the
higher rate. On the other hand, if you are currently earning a decent interest
rate but when your renewal date comes around, rates fall; you will have to
reinvest at a lower rate than before. (Interest rate risk)
2. An investor could lose if the price of her investment falls and she has to
liquidate the investment at that time. (Market risk)
3. All investors lose when inflation increases. When prices rise, everything
becomes more expensive. Your investment dollars effectively are worth less.
(Inflation risk)

4. When your money is invested in a currency other than your own, there is
always a chance that exchange rate movements could result in your losing
money. (Exchange rate risk)

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5. You could have a real problem if you are ready to sell an investment, but
there are no buyers or no one is willing to pay your asking price. (Liquidity
risk)

6. Sometimes invest (lend money) and the entity whom you lent, failed to
repay principal or interest or both. You will certainly lose in such a case.
(Default risk)

7. If you purchase any investment that is issued in another country, there is the
possibility that economic or political instability in that country could result
in loss to you. (Country or Political or Sovereign risk)

Your risk tolerance is your capacity to withstand losses to your investment, without
changing your investment programme.

ASSET ALLOCATION
One important decision an investor must make, is how much money out of his total
portfolio, to put into each category of investments. This is referred to as the asset
allocation. The asset allocation will depend on the investor’s objective; which is
informed by several factors, including; age, the amount of risk you are willing to
take and the amount of money you have saved so far. Each investor is unique;
therefore, there are limitless options as far as asset allocations go. Here are typical
asset allocations for the different investment objectives.

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Safety of Principal

Fixed-
Income
20%

Money
Market
80%

Investors who cannot tolerate risk and need quick access to their money, (safety
of principal) might be interested in the above asset allocation. Notice that most of
their money is invested in the money market, where risk is relatively low and
liquidity is high. The fixed-income portion provides a little higher return than the
money market investments; maintains relative safety and pays regular income. This
asset allocation is popular among retirees.

Income

Money
Equity Market
30% 10%

Fixed-income
60%

Individuals who need regular income (income) might opt for this asset allocation.
Persons whose earnings are low might need to hold a significant portion of their

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portfolio in fixed-income investments, in order to benefit from the additional cash

flow. Notice that these persons still need to have some equities to keep pace with
inflation and achieve a little growth.

Growth

Money
Market 5%
Fixed
Income
25%
Equity 70%

Many investors seek growth as an objective. Included in this group are young
persons, families, both young and mature and persons over 40, who are behind on
their retirement savings. The large portion of equity investments provides
opportunities for growth. Although equity investments are riskier, their returns
have consistently out-performed other investment alternatives over the long-term.

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Income & Growth

Money
Market
5%

Equity
Fixed-
40%
income
55%

Some investors prefer a more balanced approach. They desire both income and
growth. They choose different combinations of fixed-income, equity and money
market investments.

Aggressive Growth

Money Fixed-income
20%
Market 5%

Equity
75%

Investors who seek maximum capital appreciation quickly (aggressive growth)

will place the vast majority of their money in the highest-risk equity investments.
This asset allocation is not for the faint-hearted. Investors with this investment
objective are willing to take significant risk. Usually, these individuals have high
income, have money put aside for emergencies and are relative young.

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Note: These asset allocations are provided for illustration purposes only and are
not intended as investment advice. You should contact an approved
investment advisor to design a suitable asset allocation for you.

Indirect Investing
So far, most of our discussions have centered on direct investing. Individuals can
also invest indirectly in mutual funds and pension funds.

Mutual Funds
A mutual fund, also known as a unit trust is an investment company that sells and
re-purchases units that represent an undivided share in the assets owned by the
fund. Mutual funds are classified as either open-ended or closed-ended. An open-
ended mutual fund continuously offers new units for sale and re-purchases units
from unit holders. There is no limit to the number of units that this type of mutual
fund can issue.

Fees
Close-ended mutual funds on the other hand, issue a fixed number of units at the
inception. No further units are issued thereafter. Holders of closed-ended mutual
funds are not allowed to redeem their units. After the initial issue, this type of
mutual fund is usually bought and sold on the stock exchange.

Some mutual funds may carry a sales load. A sales load is a fee that the investor
pays out of each sum invested. The sales load is used to pay commissions to those
who sell the fund. The sales may be charged at the time the investment is made, in
which case it is referred to as a front-end load. A back-end sales load id deducted
at the time the mutual fund re-purchases the units. No-load mutual funds charge
neither a front-end or back-end sales load.

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Apart from sales loads, mutual fund companies deduct the annual cost of
administering the fund from the fund’s value.

Why Invest in Mutual Funds?

There are several reasons why people invest in mutual funds:

Small Investment Required

The relatively small-required investment, allows investors to gain access to major
financial markets. For example, an individual who invests $100 in a mutual fund
might otherwise not meet the minimum threshold required to invest in treasury
bills, certificates of deposit, bonds and stocks.

Professional Management
Mutual funds are managed by professional investment managers, who must be
registered with the Trinidad and Tobago Securities and Exchange Commission.
Most individual investors rarely possess such expertise.

Liquidity
Most mutual funds will re-purchase your units if you need to liquidate them.
Diversification
Because mutual funds invest in a wide range of underlying assets, risk in the
portfolio is reduced. If some assets in the portfolio suffer losses, others will realize
gains. In the end, you could still earn a reasonable return overall.

Major Disadvantage
Despite the above-mentioned advantages, there is one major disadvantages of
investing in mutual funds. Unlike bank deposits, mutual funds are not insured by

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any deposit insurance plan. Mutual funds are investments and investors should be
aware of potential risks. Mutual funds can be affected by several of the risks
described previously. Some mutual funds however, may provide a guarantee
feature on principal, providing that investments are not withdrawn within a
specified period of time.

When investing in mutual funds, investors should match their own investment
objective to the investment objective of the mutual fund they are considering. Take
a look at the investment objectives and underlying investments of the following
popular types of mutual funds in table 6-8:

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Table 6-8

TYPE OF FUND INVESTMENT INVESTMENTS

OBJECTIVE
Money Market Fund Preservation of capital and Treasury bills, certificates of
reasonable income deposit, other money market
mutual funds and other money
market investments.
Income Fund Regular high level of income, Corporate and government bonds
with minimum fluctuation in and derivatives of bonds.
principal value.
Growth or Equity Long-term capital Common stocks of well-
Fund appreciation established companies with
growth trends in earnings and
share price.
Income & Growth A combination of regular A combination of corporate and
Fund high income and long-term government bonds and their
capital appreciation derivatives, together with
common stocks of well
established companies with
growth trends in earnings and
share price.

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TYPE OF FUND INVESTMENT INVESTMENTS

OBJECTIVE
Aggressive Growth Maximum capital Common stocks of rapidly
appreciation growing companies in established
or emerging markets, derivatives
of common stocks and
international stocks.
Energy Fund Above-average capital Common stock of energy and
appreciation energy-related companies.
Mortgage Fund High income and safety of Mortgage-backed securities.
principal

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TAKE ACTION NOW

1. Use the following savings account selection checklist to evaluate various

savings account options.

SAVINGS ACCOUNT SELECTION CHECKLIST

Savings Options
Criteria Account #1 Account #2 Account #3

Minimum Initial Amount

Minimum Balance

Easy Access to Money

Reasonable Interest Rate

Safety

Income Taxable?

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2. Use the following chequeing account selection checklist to evaluate various

chequeing account options.

CHEQUEING ACCOUNT SELECTION CHECKLIST

Criteria Institution #1 Institution #2 Institution #3

Location

Deposit Insurance

Minimum Initial Deposit

Minimum Balance Required

Interest Rate

Monthly Service Charges

Transaction Fee

ATM Charges

Stop Payment Fee

Overdrawn Account Fee

Overdraft Protection

3. Make a list of 10 other creative ways you can “find” money.

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4. Sit with your broker or investment advisor and design an appropriate asset
allocation for you. Talk to your investment professional about the various
investment options that might work for you.

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Chapter 7
Home Ownership and Financing
Learning Objectives
After reading this chapter, you will be able to:
1. State the factors that work against home ownership.
2. Differentiate between fixed-rate, adjustable-rate and two-step mortgages.
3. Calculate how much mortgage you can afford.

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OWNING A HOME
Your home is undoubtedly the single most valuable asset you’ll probably purchase
during your lifetime. Almost everyone dreams or has dreamt of owning a home.
However, home ownership carries with it, huge responsibilities and might not be
suited to everyone. Consider the following factors that could work against home
ownership:

Transient
If you do not plan to stay in any one location for very long, you might be better-off
renting.

No Firm Plans for Family

If you are young and have no immediate plans for a family, owning a home could
be more of a burden than a benefit. Your romantic status could however change
suddenly and you could be in the market for a home.

Job Stability
If your employment status is unstable, you may have to postpone home ownership
for a while.

Credit Problems
One of the main problems that people encounter when purchasing a home with
mortgage financing is that their outstanding debts are too high. If you are burdened
by debt or your credit history is unsatisfactory, you will have to pay-off some of
your debts (especially credit card debt) and/or re-establish a good credit before
attempting to buy a home.

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No Tax advantage
If you cannot benefit from the related tax deductions, owning a home might not
make financial sense. Recently there have been changes to the tax laws that
removed the deduction for mortgage interest and instead increased the personal
allowance.

Little Financial Resources

If you don’t have sufficient financial resources to meet the down-payment and
other related costs of owning and maintaining a home, you might be creating
problems for yourself. For example, do you have money for the down-payment?
Most lenders will require you to pay-down anywhere between 5%-20% of the
purchase price of the home. Also you need to have money for legal fees, closing
costs, property taxes, insurance and maintenance.

No Down-payment?
Suppose you can afford all the other costs and expanses of owning a home but you
do not have enough for the down-payment. You may consider tapping into your
tax-deferred annuity pension scheme. You will be allowed to cancel or withdraw
from the plan without penalty, for the first-time purchase/construction of a home.
You will however, still have to pay the taxes on the proceeds. This is a dangerous
course of action, as you will significantly run-down your retirement nest egg.

MORTGAGE FINANCE
Because of their significant prices, most home purchases must be financed by long-
term mortgages. Basically, there are two main types of mortgages - Fixed-rate
mortgages and adjustable-rate mortgages.

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Fixed-rate Mortgages
Fixed-rate mortgages carry a flat rate of interest for the entire life of the loan. This
kind of mortgage is typically granted for twenty or twenty-five years. You will
benefit from fixed-rate mortgages, when you expect interest rates to rise and
remain high over long periods of time. That way, you lock-in lower rates.
However, if interest rates were to fall instead, you’ll end up paying higher interest
than others.

Adjustable-rate Mortgages
Also called variable-rate mortgages, adjustable-rate mortgages start at a low
interest rate, called a teaser rate that increases later. The low introductory rate helps
lower-income applicants qualify for the mortgage. The adjustable rate is usually
tied to some other rate, such as the prime lending rate or the REPO rate. When
these rates move up and down, your mortgage rate will follow.

There are annual and lifetime limits as to how much your variable rate can
move. For example, a mortgage with an annual adjustment limit of 2 percent and a
lifetime limit of 6 percent; means that your interest cannot rise of fall by more that
2 percent each year and cannot increase or decrease by more than 6 percent over
the entire life of the loan.

Adjustable-rate mortgages make sense when inflation is low and interest rates
are falling. Adjustable-rate mortgages are dangerous though, because the
introductory teaser rate could later increase and hike up the installment, beyond the
reach of the borrower.

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Convertible Adjustable-rate Mortgages

A convertible adjustable-rate mortgage allows you to convert your adjustable-rate
mortgage to a fixed-rate mortgage, usually during the first five years of the life of
the loan. If you have an adjustable-rate mortgage and you expect interest rates to
increase, you might consider converting to a fixed-rate type and lock-in the current
rate. The conversation option comes at a price, as this type of mortgage carries a
higher interest rate and higher fees than traditional mortgages.

Two-step Mortgages
A relatively new innovation, the two-step mortgage is a blend between the fixed-
rate and adjustable mortgages. The interest rate on this type of mortgage is
adjusted only once, typically after five or ten years and remains fixed for the
remainder of the life of the loan.

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MORTGAGE AFFORDABILITY CALCULATOR

Gross family income $10,000

Multiply by:
Lender’s debt service ratio 30% (Example)
Equal:
Maximum monthly payment
(Including rates, taxes and insurance) $3,000
Minus:
Estimated monthly rates, taxes & insurance $200 *
Equal:
Maximum monthly payment $2,800
Multiply by:
Factor from table 7-1
(8% for 20 years =119.5543)
Equal:
Maximum Mortgage $334,752
Divide by:
Maximum loan-to-value 90%
Equal:
Maximum purchase price $371,947

* (Divide annual costs by 12)

N.B. The loan-to-value is the percentage of the property’s value hat the mortgage lender will
lend.

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Table
7-1 FACTORS
Mortgage 15 Years 20 years 25 years 30 Years
Rate
(%)
5 126.4552 151.5253 171.0601 186.2116
5.5 122.3865 145.3726 162.8432 176.1218
6 118.5035 139.5408 155.2069 166.7916
6.5 114.7964 134.1250 148.1027 158.2108
7 111.2560 128.9825 141.4896 150.3076
7.5 107.8734 124.1321 135.3196 143.0176
8 104.6406 119.5543 125.5645 136.2835
8.5 101.5497 115.2308 124.1886 130.0536
9 98.5934 111.1449 119.1616 124.2819
9.5 95.7648 107.2810 114.4562 118.9267
10 93.0574 103.6246 110.0472 113.9508

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TAKE ACTION NOW

Use the following mortgage affordability calculator to estimate how much

mortgage you can afford.

MORTGAGE AFFORDABILITY CALCULATOR

Your Figures
Gross family income $__________
Multiply by:
Lender’s debt service ratio ______%
Equal:
Maximum monthly payment
(Including rates, taxes and insurance) $__________
Minus:
Estimated monthly rates, taxes & insurance $__________ *
Equal:
Maximum monthly payment $__________
Multiply by:
Factor from table 7-1
( % for years = )
Equal:
Maximum Mortgage $__________
Divide by:
Maximum loan-to-value ______%
Equal:
Maximum purchase price $ __________
* (Divide annual costs by 12)

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Chapter 8
Retirement Planning
Learning Objectives
After reading this chapter, you will be able to:
1. Describe the main challenge to retirement.
2. State popular myths about retirement.
3. Identify the main sources of retirement income.
4. List and explain the factors that determine the level of retirement income.
5. Calculate how much your retirement fund should be.
6. Calculate how much you have to save now to achieve your retirement
fund.
7. Identify the need to continue investing during retirement.

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RETIREMENT
Retirement is a relatively new concept that was only developed within the last
century. Before that, people didn’t retire. Many died young. Those who survived
just kept working until they died. Today we are living longer. The average 60-year
old could reasonably expect to live to age 80 or even longer. If you’re in your
forty’s, you’ll probably live well into your nineties.

That means that most of us will need to fund between 20-30 years of retirement
living expenses. The younger you are today, the more years of retirement income
you will have to provide for. Unfortunately, most individuals spend the majority of
their income on current consumption and pay little attention to building a
retirement fund. As a result, retirement turns out to be an unhappy time for many.

Myths about Retirement.

Your expenses will go down during retirement.

Some work-related expenses may go down after retirement but others such as
travel, entrainment, health-care, and telephone will go up.

You’ll die before your retirement savings run out.

Most people don’t save enough to fund their retirement needs. Also, at current
rates of inflation, it is more likely that your retirement savings will run out before
your die.

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Your children will take care of you during retirement.

Don’t count on it. Children have their own lives and responsibilities to worry
about. Even if your children are willing to take care of you, do you really want to a
burden to them?

You can wait until mid-life to start saving for retirement.

Too late! The best time to start saving for retirement is as soon as you start to
work. That way, you have the benefit of time on your side and the magic of
compounding works best. If you start early, you won’t have to save as much as if
you started later.

Your company pension plan will be enough.

Most employer-sponsored pension plans pay only a percentage of your pre-
retirement income. This amount is usually never sufficient to support a high-
quality retirement life-style.

Major Sources of Retirement Income

Part-time or Consulting Employment Income
Employer-sponsored Pension
Tax-deferred Annuity Income
Non-registered Annuity Income
National Insurance Pension or Senior Citizens’ Grant

Part-time or Consulting Employment Income

A large number of retired decide to continue working after retirement, even if it
might be for a few hours or days each week. Some consult part-time for their
former employers. Continuing work during retirement can help to keep you

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stimulated and provide vital social contacts. The main reason most retirees
continue working is because their retirement nest egg is too small and frankly, they
need the income.

Employer-sponsored Pension
Larger employers still offer company pension plans. These plans may be fully
funded by the employer (non-contributory) or the employee may be required to
make a contribution from salary (contributory). In any event, always sign-up for
the maximum allowable under the plan. For many individuals, the employer-
sponsored pension provides the bulk of their retirement income.

Tax-deferred Annuity Income

The Board of Inland Revenue allows individuals to contribute up to $12,000
annually (Including NIS contributions) to an approved tax-deferred annuity
scheme. Contributors are able to shelter their contributions from taxes, until such
time, as annuity pension income is received during retirement. Unfortunately, too
many individuals miss-out on this significant opportunity to utilize tax savings to
fund their retirement nest eggs.

At retirement, the pensioner receives a tax-free payment of 25 percent of all the

contributions made plus all the interest earned. The remaining 75 percent is used to
purchase an immediate annuity to provide a monthly retirement income.

Non-registered Annuity Income

There are other types of individual retirement accounts that do not provide tax-
deferral benefits. These non-registered retirement savings can also be an important
source of retirement income.

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National Insurance Pension or Senior Citizens’ Grant

The National Insurance Board pays pension benefits to former employees who
have contributed to the scheme during their working years. The NIB website
provides full information about contributions and benefits. Individuals who do not
qualify for National Insurance benefits receive a Senior Citizens’ Grant. Currently
(2007), the maximum grant is $1,250 per month. Where the senior citizen earns
other income in excess of $1,000 per month, the grant is reduced proportionately.

How Much Retirement Savings?

There are several key factors that determine how much you need to save for
retirement. They include:

Your Current Age

Young individuals can actually contribute less towards retirement because they
have more time to save. The older you start, the more you will have to contribute.
A good rule of thumb is for young persons to save 10 percent of their income
towards retirement. If you are over 40, a good measure would be to save 20 percent
of your income.

Your Current Income

The more you earn the more you can contribute to retirement savings. However,
even those with relatively small incomes should make a serious commitment to
saving for retirement.

Your Desired Retirement Income

The more retirement income you desire, the more you’ll have to save. Most retirees
need retirement income that is equal to or greater than their pre-retirement income.

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Other Retirement Income

Government-sponsored programmes like the National Insurance Scheme can
provide a source of retirement income. The level of retirement benefit you qualify
for, will determine how much you will have to provide for yourself.

The Current Tax Rate

Investing in Tax-deferred retirement plans can provide important tax advantages.

Rate of Inflation
High inflation will eat into your retirement savings. When inflation is high, you’ll
have to save even more, in order to preserve the purchasing power of your dollar
and maintain your standard of living during retirement.

Expected Return on Your Retirement Savings

The higher the return on your retirement savings, the faster it grows. But
remember, high returns call for greater risk.

How Much Retirement Savings?

It is not unusual per persons to worry whether their nest egg will last throughout
retirement or if they will run out of money before they die. The retirement fund
calculator in table 8-4 below can help you to estimate how much money you need
to have by the time you retire.
Consider the case of Suzie a 35-year old, who wants to retire by age 60 and plans
to enjoy 20 years in retirement. She desires an annual (after-tax) retirement income
of $60,000. Suzie’s retirement calculator indicates that she will need to save
$664,294 by the time she retires. Based on Suzie’s current retirement savings of
$20,000 and her present annual retirement savings of $2,400, she only needs to

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save an additional $3,407 in order to fully fund her retirement nest egg. (See
retirement fund and retirement savings calculators below).

Now compare Suzie’s situation to Ken’s. Ken also plans to retire by age 60, and
plans to enjoy the same number of years in retirement (20). Ken also has $20,000
already saved for retirement. The only difference between Suzie and Ken is that
Ken is 10 years older. Ken’s age, results in his having to save an additional
$17,744 in order to achieve his retirement fund goal while Suzie only has to save
$3,407. The lesson to be learnt here is the younger you start saving for retirement,
the easier it will be.

Table 8-1 Calculate the Size of Your Retirement

Fund
Multiply Desired Retirement Income by Appropriate
Factor Below

Years in Retirement
Real
Rate 5 Years 10 Years 15 Years 20 Years 25 Years 30 Years
3% 4.5797 8.5302 11.9379 14.8775 17.4131 19.6004
4% 4.4518 8.1109 11.1183 13.5903 15.6221 17.2920
5% 4.3295 7.7217 10.3796 12.4622 14.0939 15.3724
6% 4.2124 7.3601 9.7122 11.4699 12.7834 13.7648
7% 4.1002 7.0236 9.1079 10.5940 11.6536 12.4090
8% 3.9927 6.7101 8.5595 9.8181 10.6748 11.2578
9% 3.8896 6.4177 8.0607 9.1285 9.8226 10.2736
10% 3.7908 6.1446 7.6061 8.5136 9.0770 9.4269

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Table
8-2 Calculate Annual Savings Required to Achieve Your
Retirement Fund
Divide Retirement Fund by Appropriate Factor Below

Real Rate
Years 5% 6% 7% 8% 9% 10% 12% 14%
5 5.5256 5.3709 5.7507 5.8666 5.9847 6.1051 6.3528 6.6101
10 12.5778 13.1808 13.8164 14.4866 15.1929 15.9374 17.5487 19.3373
15 21.5786 23.2760 25.1290 27.1521 29.3609 31.7725 37.2797 43.8424
20 33.0660 36.7856 40.9955 45.7620 51.1601 57.2750 72.0524 91.0249
25 47.7271 54.8645 63.2490 73.1059 84.7009 98.3471 133.3339 181.8708
30 66.4388 79.0582 94.4608 113.2832 136.3075 164.4940 241.3327 356.7868
35 90.3203 111.4348 138.2369 172.3168 215.7108 271.0244 431.6635 693.5727
40 120.7997 154.7620 199.6351 259.0565 337.8824 442.2926 767.0914 1342.0251

Table 8-3
Calculate the Future Value of a Single Sum Invested at a Certain Rate, for a Number of Years

Multiply Single Sum Invested by Appropriate Factor Below

Rate
Years 5% 6% 7% 8% 9% 10% 12% 14% 15%
1 1.0500 1.0600 1.0700 1.0800 1.0900 1.1000 1.1200 1.1400 1.1500
2 1.1025 1.1236 1.1449 1.1664 1.1881 1.2100 1.2544 1.2996 1.3225
3 1.1576 1.1910 1.2250 1.2597 1.2950 1.3310 1.4093 1.4815 1.5209
4 1.2155 1.2625 1.3108 1.3605 1.4116 1.4641 1.5735 1.6890 1.7490
5 1.2763 1.3382 1.4025 1.4693 1.5386 1.6105 1.7623 1.9254 2.0114
10 1.6289 1.7908 1.9671 2.1589 2.3674 2.5937 3.1058 3.7072 4.0456
15 2.0789 2.3966 2.7290 3.1722 3.6425 4.1772 5.4736 7.1379 8.1371
20 2.6533 3.2071 3.8697 4.6610 5.6044 6.7275 9.6463 13.7435 16.3665
25 3.3864 4.2919 5.4274 6.8485 8.6231 10.8347 17.0000 26.4619 32.9189
30 4.3219 5.7435 7.6122 10.0627 13.2677 17.4494 29.9599 50.9502 66.2118

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Table 8-4 RETIREMENT FUND CALCULATOR

Line Suzie Ken Instructions
1 Current age 35 45
2 Expected retirement age 60 60
3 Expected years in retirement 15 15

4 Desired annual after-tax $60,000 $60,000 Do not underestimate.

retirement income Should be =/> pre-
retirement income.
5 Current tax rate 25% 25%
6 Estimated annual NIS or $12,000 $12,000 Check NIB/ Ministry of
Senior Citizens’ Grant Social Development for
estimates.
7 Estimated other annual $0 $0
pension benefits
8 You need to fund this $48,000 $48,000 Line 4- lines 6&7.
amount annually (after tax)
9 You need to fund this $64,000 $64,000 Line 8 divided by line 5
amount annually (before tax)
10 Expected real rate or return 5% 5% After Inflation
on savings after retirement
11 This should be the size of $664,294 $664,294 Line 9 times appropriate
your retirement fund factor from table 8-1
(based on lines 3 and 10).

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RETIREMENT SAVINGS CALCULATOR

Table 8-5
Line Suzie Ken Instruction
1 Retirement fund from $664,294 $664,294 Line 11 from Table 8-3
calculator above
2 Average expected real rate of 9% 9% Expected rate minus
return between now and inflation.
retirement.
3 Current retirement savings $20,000 $20,000

4 Value of current retirement $172,462 $72,850 $20,000 x appropriate

savings at retirement. factor from table 6.3
($20,000 x 8.6231) and
($20,000 x 3.6425).
5 How much you still have to $491,832 591,444 Line 1 minus line 4
save between now and
retirement.
6 How much you still have to $5,807 $20,144
save annually between now Line 5 divided by the
appropriate factor from
and retirement.
table 8-2
7 Current annual retirement $2,400 $2,400
savings.
8 Additional annual retirement $3,407 $17,744 Line 6 minus line 7
savings required.

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Retirement and Women

Women should be especially careful when planning for retirement because they
generally outlive men. This means that women will have to provide for more years
in retirement than men do. Women will likely spend the latter part of their
retirement years without their spouses.

Investing During Retirement

Many retirees identify their investment objective as safety of principal, so they
naturally put their entire retirement nest egg in money market and safe fixed-
income investments. However, this strategy might be a mistake. Why? Inflation!
The truth is, inflation can easily wipe out a huge chunk of your retirement savings.

It might be a wise thing to keep a part of your retirement funds invested in some
of the more stable, less-risky equity investments that will grow at higher rates than
money market and fixed-income instruments. Mutual funds with income and
growth objectives might help you to keep pace with inflation.

Retired but No Money?

So what if you’re approaching retirement but you did not save enough during your
working years, to finance your expenses for the remainder of your life? What can
you do?

Postpone Retirement
You may be forced to continue working for a few more years, beyond your desired
retirement age. During this time, you should stash away huge portions of your
income, to top-up your retirement fund.

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Work Part-time or Consult

Working part-time or consulting during retirement can be a good way to
supplement retirement income. It will also do wonders for your self-esteem.

Sell-off Asset
If you retirement fund is small but you possess valuable assets like cars, jewellery,
antiques etc. you can sell them to bring much needed money.

Take a Reverse Mortgage

With an ordinary mortgage, you receive the loan proceeds up-front and you repay
the loan in equal monthly installments over a specific period of time. A reverse
mortgage works the opposite. A reverse mortgage pays you a lump-sum or equal
monthly income payments during retirement and the money is repaid with interest,
when you die, from sale your home. No principal or interest is paid during your
lifetime. If your relatives want to keep the property in the family, all they have to
do is repay the loan upon your death.

Sell Your Home

If the worst comes to the worst, you may have no choice but to sell your home.
This may sound drastic. However, if your retirement fund is in such poor shape,
you’ll probably not be able to afford keeping your home anyway. The cost of rates,
taxes, utilities, insurance, maintenance and possibly mortgage payment, will be too
much for your limited retirement income. In any event, many retirees find that they
don’t need such large living spaces and move to smaller, less-expensive
accommodation.

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Selling your home might be a blessing in disguise. The large sale proceeds from
your residence could provide a substantial boost to your retirement fund and
provide you with a decent income for a long time.

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TAKE ACTION NOW

1. Using the retirement fund calculator below, calculate what the size of your
retirement fund should be.

Table 8-6 RETIREMENT FUND CALCULATOR

Line Your Figures Instructions
1 Current age
2 Expected retirement age
3 Expected years in retirement

4 Desired annual after-tax Do not underestimate.

retirement income Should be =/> pre-
retirement income.
5 Current tax rate
6 Estimated annual NIS or Check NIB/ Ministry of
Senior Citizens’ Grant Social Development.
7 Estimated other annual
pension benefits
8 You need to fund this Line 4- lines 6&7.
amount annually (after tax)
9 You need to fund this Line 8 divided by line 5
amount annually (before tax)
10 Expected real rate or return After Inflation
on savings after retirement
11 This should be the size of Line 9 times appropriate
your retirement fund factor from table 8-1 (based
on lines 3 and 10).

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2. Using the retirement savings calculator below, calculate your annual

retirement savings required.

Table 8-7 RETIREMENT SAVINGS CALCULATOR

Line Your Instruction
Figures
1 Retirement fund from Line 11 from Table 8-6
calculator above
2 Average expected real rate of
return between now and
retirement.
3 Current retirement savings

4 Value of current retirement Current savings times

savings at retirement. appropriate factor from
table 6.3
5 How much you still have to Line 1 minus line 4
save between now and
retirement.
6 How much you still have to Line 5 divided by the
save annually between now appropriate factor from
and retirement. table 8-2
7 Current annual retirement
savings.
8 Additional annual retirement Line 6 minus line 7
savings required.





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Cecil Sylvester
Management Consultant, Lecturer, Seminar Leader, Author, Speaker,
Motivator, Knowledge Enhancer and Idea Guy.

Cecil is Available for Corporate Consulting and Training, Speaking

Engagements and Private Tutoring

E-mail: talktrinity@yahoo.com

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