Sunday 19th June, 2005


Foolproof your assets

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Money Matters
with Raziah Ahmed

I heard a pop song on radio last week that goes: “If I was a rich girl, nan, anan, anan, anah, I’d have all the money in the world, if I was a wealthy girlrlrlrl” And Pop King, Michael Jackson was found not guilty on all ten counts of conspiracy and indecency toward a minor, despite media opinion of his guilt and imminent bankruptcy.

The debate today focuses on how accumulated wealth could be wasted. This does not implicate MJ in any way. The media hype is merely an indictor that things happen!

Wealth accumulation requires effort. This effort begins with a written plan, which translates dream into intention.

Conservation and preservation are terms in financial planning which involve strategic interventions in wealth management, that foolproof your assets.

Two examples may illustrate how these strategies work. If you take a mortgage loan to purchase your home, the lending institution will hold the property, until such time as you pay off the loan in entirety.

If you die before you have time to pay off the mortgage, the lender can evict your family if the survivors cannot pay up.

The money you would have paid, for whatever years you would have paid installments on the loan, would result in little or no immediate value to your family, since the lender will not prioritise your family above their bottom line.

Build cash values

The property may be seized, and put up for sale at market value. It is expected that when sold, the lender will satisfy itself with respect to the indebtedness, and you may be entitled to some refund.

However, because most mortgage loans are structured in such in way that you pay off the interest first, in the final years of the mortgage, should you default, you may very well be caught still owing, the larger part of the capital sum borrowed.

Techniques to preserve your estate, in such a case, involve transferring this risk to an insurer, who will pay off the mortgage loan if you die before it is paid off.

Your family will not be evicted and the benefit of all the money you have paid over the years will not be lost.

The second example to illustrate preservation and conservation is the strategy of building cash values on the life insurance policy used above.

As your property gets older, the cost of routine maintenance can escalate. This is the scenario with many retirees living on a fixed income.

The build up of cash values can be used to maintain and/or upgrade and thus conserve the property value.

Tax efficiencies are another method of conservation.

Take inflation, as an economic factor. The most recent quote on the inflation rate was in the vicinity of 6 per cent, and food prices rose by some 18 per cent over the previous 12-month period, as published by the Central Bank of Trinidad and Tobago.

In this economic environment the average discount rate on Treasury bills is 4.95 per cent. The T-bill rate is a fair average of the rates of return on secure savings. So if inflation in at 6 per cent, and investment return is at 5 per cent, where does the additional 1-2 per cent come from, just to make ends meet?

But we can always can turn on the radio, and sing along to the tune of a another pop song that goes: “all I can say, is my life is very plain, I like watching the puddles gather rain”.

Continued next week

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