Sunday 23rd January, 2005


Resist temptation to spend

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Money Matters
with Raziah Ahmed

Perhaps one of the most fascinating things about flying to London is the fact that you can fly into the sunrise. The sunrise actually takes a rather long time, during which light unfolds in profound spectacle. But equally fascinating is how as the plane hits the ground, you return to the mundane and match plans for the day, with money in your pocket.

Months ago, we embarked on a journey to put enough money in the pocket, following a pattern: Step 1, organising personal data.

Step 2, was goal setting. In Step 3, we identified issues and problems, followed by Step 4, where we recorded assumptions, about income, returns, taxation etc. We listed assets and liabilities in Step 5, and in Step 6, we looked at cash flows. Then in Step 7 we learnt about tax shelters, and National Insurance benefits, and in Step 8, we looked at risks and risk management.

Today, we move to Step 9, in the 14-step plan to financial independence. This is the development of a savings plan. Saving is that portion of income that is not used up in consumption. It includes, but is not limited to, instalments on vehicles, mortgage payments, insurance premiums, pension contributions, credit union shares, mutual fund units, bank saving, CDs, debt and equity instruments.

Many young people have a vague idea in their heads about becoming a multi-millionaire one day. The fastest way to realise such a dream is to write it down, and to conceptualise a plan of action, with contingency factors.

The common practice is to spend first, and save whatever is left over. But that is a poor prescription: the human disposition will buy everything we think we need. In fact, we buy stuff we don’t need, and quickly lose sight of the larger goal, which is financial independence.

A better starting point is to determine exactly what percentage of after-tax income we must save every month. We must determine exactly what we are saving for, since saving for savings sake is not a motivator.

Common savings objectives are: vehicle, house, education for self, marriage, children’s education, vacations, other property, and investments. Many objectives are a combination of these. Determine the sum and an estimated date for reaching the target.

Set intermediate targets so you can invest savings and make the money work for you as well. Consider what else you may need to have in order to achieve the goal.

If you want to purchase a car in two years, get married in four years, buy a house in six years, have you considered that with marriage may come more consumption, housekeeper expense and a two-income situation? With a car, will come repairs, and in order to get a mortgage loan you will need to pay life insurance premiums.

Put pencil to paper and joggle the figures, this is a fantastic way to jump-start the process of writing a plan.

Can you purchase a small starter home, and then move to a residential four-bedroom six years after? In addition, consider what kind of leverage your income may allow with respect to loan facilities.

Young single people, or empty-nest couples should save 20 per cent to 30 per cent of income; young couples may be able to save 15 per cent; with school children, maybe ten per cent. Then you can spend the rest on food, entertainment, vacations etc.

There is no easy way, but it is a disciplined journey. The fruit is enlightened financial security, and that’s the most comfortable pillow upon which to rest you head when the night falls, on a long flight to see the sunrise.

n Raziah Ahmed is a registered financial consultant

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