Sunday 12th June, 2005

 

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Money Matters
with Raziah Ahmed

A wise man was reported to have said: “Blessed is good wealth (earned honestly) in the hands of a righteous man” and “For you to leave rich those who inherit from you, is better than leaving them poor.”

It has always been said that there are two ways to make money: first, you can work for it, and second you can invest savings. The essence of accumulating good wealth must, therefore, be honest work and prudent investment.

The acute problem for persons most at risk of falling into poverty is the syndrome of “too much month for the money.” These are persons whose monthly income is consumed before month-end, and who live on credit facilities for the rest of the month. When the next pay cheque comes, it is used to pay off the debt, and the cycle is a vicious one.

Credit card debt is a typical example of this vicious cycle, and this is debt that incurs interest charges at rates of 18 per cent to 25 per cent in today’s market. In fact the raison d’être for the banking industry is not so much to keep your savings in a safe place, but, more to generate profits from lending your savings.

The common lending vehicles are credit cards, mortgages, renovation loans, business loans, overdraft facilities, and education loans.

For persons in the “too much month for the money” syndrome, short-term savings appear to be a prescription for failure. As soon as the quantum becomes attractive, it tends to be consumed in “things I’ve always wanted,” like a vacation, or a big screen TV. The problem is easy access to the money!

Hence the reason for medium-term and long-term savings structures; it is a psychological play. If we are unable to touch it, we will probably not want it, and it grows when we forget it!

You must look, therefore, for a savings programme that bears surrender fees or charges, if you break it. The fees must be very high in the early years, to avert any desire to consume it.

What kinds of savings for the medium-term carry charges? Trust funds are a good example, so are non-registered annuities. Trust funds carry trust fees, and charges that cover administration, and are commonly structured to pay out only after a certain period of time has expired.

Non-registered annuities are somewhat like individual pension plans, but they do not qualify for a tax shelter (like individual annuities) and you do not have to wait until the minimum age of 50 years to get the money in hand (like individual annuities).

Because the money stays in the account by force of the huge penalty for withdrawal, the returns tend to be higher that ordinary savings accounts and CDs (deposit accounts in banks).

For example, leading non-registered annuities require a minimum of eight or ten years during which you should leave the money (or incur huge charges if you don’t), but they pay in the vicinity of eight per cent return on small sums of money invested periodically. Such sums can be as little as $500 a month, or $5,000 a year.

You can also get plans in the market that do not impose a penalty if you cannot maintain the periodic investment sums. In fact, you must avoid those plans that will erode your savings if you are unable to keep up the payments. Wealth is a good thing for all of us.

Indeed, an ancient poet once said: “Save your money, for with wealth comes respect, and you can do without asking uncle or cousin.”

©2004-2005 Trinidad Publishing Company Limited

Designed by: Randall Rajkumar-Maharaj · Updated daily by: Sheahan Farrell