The Devil in the Dollars

But the big screen TV is calling out to you, the fridge that will match the counter top and that Miami shopping trip has your name on it. Then there is Carnival.

You might just want to slow down — and plan.

The Government’s ann-ouncement last September in its Budget for this year of an ease in personal income tax rates from 30 to 25 percent for all income levels and lifting the bar on personal allowance from $25,000 to $60,000 was welcome news for all workers.

With the extra dollars in hand, there will always be the temptation to spend a little more but financial experts are cautioning about excessive spending. Republic Bank in its 2005 December newsletter estimated that with these tax breaks, about $1.7B of disposable income will be put into the hands of consumers, raising some concerns of "further inflationary pressure."

Republic Bank Securities Managing Director Ian Narine said while income levels differ, the "real issue" relates to lifestyle.

Those who use their extra income paying off for Christmas, putting aside for Carnival, Easter and vacation could find their lifestyle adjusted by the time they take stock.

By this time you would be on the deep end. Narine said their "discretionary income" could be eroded and cutting back would be difficult.

"Regardless of your income level try and ensure with additional income your lifestyle is maintained," he said in an interview, "and channel the difference into something that can profit you down the road."

Narine said factors such as health status, stage in life, quantum of money will determine what people will do next. He said those without a savings account should open one. Emergency savings is also recommended. Those who have debts can attempt to clear them off and reduce the interest charges they are incurring, he suggested.

"So the amounts now paid on interest can be added to the pie," is how he put it.

Narine said people with greater levels of savings may be already into investing and could channel their money into longer term investments such as mutual funds. The more seasoned investor could try the stock market, he added.

In the current environment when the price of stocks are flat — not appreciating as rapidly as in the past — this is an opportunity month to month as money becomes available to place it on the market," he said.

He cautioned though that there were no safe investments and on the stock market risk was managed.

Investors, he said, should seek the advice of stock brokers and investment advisors. He said in TT there was a tendency to rely on "word of mouth" but an investment good for one person may not be suitable for another.

Narine underscored the importance of "doing something" with the money.

He said those who can afford to do more should do so, while those who cannot should get started.

"You just need to go back to UTC investing from ten years ago and see what it is worth today. You get an idea how accumulation, compounding and time allows you to create wealth. Having the patience and discipline to go through that is the issue."

Some people may think that they do not have much money and it would make little difference to try and save, Narine said: "It is your money and your lifestyle, and you have control over that so if you can maintain the discipline you can enjoy the benefits."

Ancil Joseph, managing partner Adapt Consulting and former general manager, RBTT, took a similar position.

"Investment is a destination and getting there requires you knowing where you want to go."

Planning is necessary. Joseph suggested that people pause and look ahead five, ten and 15 years projections and decide what they want to accomplish.

Ninety-nine out of 100 times they recognise that much of what they want to accomplish conflicts with or requires involvement by other key stakeholders — their spouse and children," he said. A financial plan cannot be for the individual alone without foresight for life’s changes — marriage, sickness, education expenses, children, caring for elderly members of family. He said people must look at all the roles they will play.

According to Joseph the "natural interdependence of life has to be factored into the financial plan. You really cannot separate the two." He said problems ensue when people attempt to do this.

The five, ten and 15 year plan will "set the stage" for how much funds are required at critical junctures in life — and determine what investment vehicles will be needed to get there.

"Depending on the size of those dreams some people will have to look at investment vehicles that are more risky because those are the ones with the potential for great returns. If someone was early in their planning cycle and mapped out their dependencies they may have the opportunity to keep their money in a savings account."

Joseph recommended the "rule of 72" to guide people in determining the time-line for investments or rate of return. He said someone with an investment of $10,000 which accrues interest at a rate of ten percent annually can use the rule to calculate how much they would have in 15 years. Joseph said dividing 72 by the ten percent equals 7.2 years. In the next 7 years the sum could double to $20,000 and so on. In 15 years the sum would be $40,000.

A 25-year-old professional getting between $1,500 and $3,000 return on their salary who fritters the money on clubbing, eating out and Carnival could lose in the long run.

Joseph said with the five, ten and 15 year plan, the first five years is a tremendous opportunity to put away. If the professional gets married at 30, by the age of 45 years-old he can have one or two children. By failing to recognise that the next five years could bring "significant cost" the same professional rapidly goes from a carefree jovial individual to "a cranky, bitter, mid career professional" overwhelmed with the responsibilities and expenses from the role of husband and father.

Joseph said, "If people do not pay attention early they will have to look critically at their expenditure and make painful cuts in the future. Growth and wealth are a factor of time."

Joseph suggested that a good reference book for people to read is The Automatic Millionaire by David Bach, US financial expert.

CEO, West Indies Stockbrokers Ltd (WISE), George Sheppard, said he could not say how people should use their money since "individual circumstances" vary.

However, he said those without an immediate need for cash, interested in long term investments can look at investing on the equity market since they "tend to outperform other types of market."

Sheppard said the longer the investment is, the greater probability the market would give greater returns. He said no one rule applies to everyone investing but as the saying goes people should not put all their eggs in one basket. He said people must consider a diversified portfolio.