Investing? Drop the chicken and chips

“Most people spend a total of $20 a day on lunch. That is madness. If you save that $20 for the next 40 years you will be a millionaire when you retire, and you are giving that up for a piece of chicken and some fries.”

Cecil Sylvester, a senior lecturer at Roytec, was giving free financial advice to business executives at the bank’s lunchtime sessions, which have been running for the past several months. People, he advised,  must try to control their spending patterns, habits and current consumption.  Most people are afraid to make investments, simply because they are afraid of taking risks, he says. Speaking on the topic, titled,  “Making Wise Investments,” Sylvester observed that most people are afraid of risk because they do not understand what risk is, far less its specific nature. Most people think ‘my God I am going to lose my money when I make an investment and there is risk involved’.” He said that is a measure of risk and the possibility also exists that the return expected on an investment might not be realised. However, he said risk does not always lean on the loss side and can sometimes lead to gains. “There is a possibility that it will fluctuate. Risk is up or down. Risk is not just minus.” However, he suggested that when making investments, investors should always carefully research and analyse the risks involved since it can come up in the strangest places. He noted that there were several different types of risks involved when making investments. The first, he said is interest rate risk, where interest rates can go up or down and determine how much return investors receive.

Secondly, he said there is inflation risk, where personal spending power is reduced. Sylvester said investors need to be fully aware of what is happening in terms of inflation and the economy. “When the economy is doing well everybody is making money, businesses are profitable, the economy itself is buoyant and returns on investments are great, but when the economy goes down, the opposite happens.” He suggested that investors “keep a watchful eye” on the economy and try to understand the risks involved in their investment portfolio.
“When international lending agencies are lending to countries, they will evaluate the country and analyse the potential risks involved. Investors should use these evaluations before making any investments.” “Many of us might consider taking a loan and invest it and there is nothing wrong with that, but  you cannot borrow to invest with the hope of getting high returns while at the same time taking high risks.” He also noted that there were certain prerequisites to consider before making investments. He said there is no way a person can have sufficient money to invest if they are paying high taxes. “The inland revenue tells us that we do not have to pay high taxes and there are different ways to minimize your taxes so that you get more money in your hand to invest. And yet still we ignore that.” He said once people are paying taxes and they want to invest they should take advantage of all the tax credits, allowances and reductions available right now. One way of reducing tax, he noted, is by investing in a pension plan and annuity. “If you are currently saving in a tax deferred pension or annuity scheme, you can shield up to $12,000 of your income from taxes.”

Eventually, when the investor retires he/she is going to have to pay those taxes though, since pensions are still taxable in TT. Sylvester said owning a home is another way of reducing taxes. He said everyone should move towards owning a home and taking out a mortgage. “Now I am not saying to get into debt, but getting into debt to own your own home is not necessarily bad, because your home will increase in value and you get a tax benefit of $18,000 on the interest you pay on the mortgage.” Sylvester said people can also claim up to $18,000 per head of household if they have tertiary education expenses. “If you are not doing some of these things then where are you going to get the money to invest. You need to minimise your taxes.” Additionally, he noted that people cannot start investing until they have put together an emergency fund, which amounts to about six months worth of their monthly salary. “This emergency fund is not to be used for normal living expenses under ordinary conditions. This money is for emergency and you do not touch it until and emergency happens.” Sylvester noted that everyone should also have adequate insurance coverage. “We all run from insurance sales people and that is such an unfortunate thing because it is only when we are no longer here or something happens that we realise the benefit and value of insurance.”