Working your way to wealth

Financial planning is a topic most people shy away from. Trying to find a way to save money, plan for their children’s education and still have enough for a pension and life insurance, consume the thoughts of many of us.

The good news is, planning for a financial future is not as daunting a task as most people think. According to Nigel Deosaran, a product specialist at RBTT Bank, financial planning can be a very simple process.  His philosophy is: you can find a solution to any financial problem, once you plan. The first step is to lay out your expenses, income, assets and liabilities in what Deosaran calls a “fact finding” processing. “This process allows us to see how much money you have available to invest in a financial plan,” said Deosaran. Even with a mere $100, you can start saving towards a financial goal. But to make this even simpler to understand, Deosaran used two life models and developed the best financial options for each.

OPTIONS FOR SINGLE MOTHER: 

The first model was a 25-year old single mother, Sharlene, who has a three-year-old son. She earns $4,000 a month gross income and her biggest expense is $900 in rent. Her goals are to save money for her son’s education, take out life insurance, buy a car and find a way to further her own education. After clearly listing out expenses (table 1)Sharlene found out her expenses equaled $3550. While this may seem daunting  at first, Deosaran said it is still impressive for a single mother. She is in a position to invest 10 per cent of her income. Ten per cent of your income is the recommended amount for investment. It means she has $450 to start working on achieving her financial goals. Since life insurance is always a top priority, Deosaran suggested she set up a Life Insurance Plan with a savings option, included. This way she can satisfy two goals with one plan for only $200 per month. By the time she retires at age 65, she will have approximately $1.3 million. This projection is done through a special system used by RBTT/ Guardian Life at 11.2% per anum. Other banking institutions will have specialised systems set up.

SPENDING MORE THAN YOU EARN?

A major deterrent to setting up a financial plan, can be the realisation that your net worth is negative, meaning you spend more than you make. But this is not a lost cause. Deosaran said, if your net worth turns out to be a deficit, you have two options. He said in cases like this, a financial planner will advise the person to re-evaluate their expenses and make some additional sacrifices like cutting down Internet bills and telephone bills or advise them to find an additional source of monthly income. “Never take for granted a talent you posses. If you can sew, then sew on weekends and bring up your net worth,” said Deosaran. But in Sharlene’s case, Deosaran said all she needs to do is prioritise. She had to make a choice between furthering her education and buying a car. He advised her to invest in her education. “By furthering your education you put yourself in a position to get a better job and with a better job your income increases and you can then think about buying a car,” Deosaran advised.

To achieve this goal, Sharlene would need to approach a bank for an education loan. By doing this she can accomplish two very significant things: she will get an education loan with a payment of about $150 per month, to go back to school and she will develop a credit rating with the bank. “Developing a good credit rating is a very important thing for a young person. Once a bank sees you can repay your debts, they will not hesitate to help you with bigger loans in the future,” said Deosaran. With the plan Deosaran set in place for Sharlene, she will be able to achieve all her goals and still have $100 left over to put into an emergency fund.

MARRIED COUPLE PLAN

Deosaran was also asked to come up with a financial plan for a married couple in their early 30’s (table 2). The couple, Mr and Mrs Mohammed, has a combined income of $15,000 and pays a rent of $3,000 per month. They also have two children, one age 7 and the other 3. Their goals are to invest in life insurance, start a retirement fund, buy a home and plan for both their children’s education. “I added another goal for them. They needed to have a critical illness fund to deal with any emergencies,” said Deosaran. Another important consideration for the Mohammeds is the amount of taxes they pay every month. Together, their total monthly tax on their salaries come up to $3,500. To help them achieve these goals, Deosaran set up a clear, concise plan for them to follow. “The first thing they need to do is set up an insurance and critical illness fund. This is a life insurance plan with $100,000 coverage and an extra $50,000 for the critical illness. They each will need to contribute about $250 a month,” said Deosaran.

The great thing about coverage like this, added Deosaran, is that it also includes long term savings and this will go towards their children’s education. The government gives tax allowances for a mortgage up to $18,000 and pension up to $12,000. By setting up a pension plan with a monthly contribution of $200 each they can save towards a retirement fund. The Mohammeds already started a mutual fund account two years ago, to which they contributed $500 per month. Deosaran said they would now be able to afford the down payment on a house, their next goal. This is a critical goal since they have kids. He advised that if you don’t have enough for a down payment, you can borrow this, along with the mortgage from the bank. “It is better to have the down payment though since banks usually ask for a 5 to 10 percent,” said Deosaran. Since the mortgage on a $250,000 will cost the Mohammeds $2,300 a month, they will be able to save money from the $3,000 they pay on rent, with the purchase of their home. And as a result, their taxes per month also declines.

“But this is not the end,” said Deosaran. “For the Mohammeds a little risk can go a long way.” He advised them to invest in an income and growth fund, starting small with $200 a month. “This is not a big risk. But as their situations improve, they can taker bigger risks if they feel comfortable.” Deosaran also stressed the importance of having coverage in pension and insurance for both spouses.  He said married couples tend to only cover the husband, forgetting that if the wife dies, the husband will need help to take care of the kids and himself. “Don’t be a hero, plan for yourself and your family.” He said people don’t give enough time and thought to planning their finances. Financial plans are not set in stone, they can be modified as your situation changes, said Deosaran. “It is one of the top three most important things in life. Right up there with health and peace of mind. If none of these things are working, the whole party can fall apart.” Gayle Daniel-Worrell, marketing manager for the Unit Trust Corporation (UTC) advised the use of similar financial instruments. However, instead of asking Sharlene to sacrifice the purchase of a car to further her education, Daniel-Worrell, advised her to open a money market account as a short term savings option. Also for both parties she suggested a term insurance instead  of life insurance with an investment option like Deosaran advised. “A person is better off purchasing term insurance at the lower price and investing the difference in a mutual fund account in which the savings and returns are accumulated immediately,” said Daniel-Worrell.