Q&A with CMMB Securities

Q. I finally got approved for a credit card. So I’m going to treat the family to an overseas vacation. I plan to use the card to pay for airline tickets, hotel reservations and spending money. My father-in-law tells me I’m abusing my credit card. I don’t see it.
What’s wrong with my vacation plan?
 
Geoffrey, Barataria
 

A: If you are taking your family on a vacation only because you were just granted a credit card then your father-in-law could be right in that you may be engaging in consumerism. But, if you are using the credit card merely for transactional convenience i.e. not having to carry around large amounts of cash to pay expenses, then using a credit card can make sense. It’s very important to remember that a credit card attracts an extremely high rate of interest and so it is not a cost-effective way of long term financing. So you should only be going on a vacation if you have the cash ready to pay off whatever amount you use on the credit card. This cash could come from your own savings or from a vacation loan from the bank at a much lower rate of interest than exists on your credit card. In essence, the credit card should merely be an instrument of convenience and not a way of financing expenditure.

This is a grave misconception amongst consumers in Trinidad and Tobago and the world over. A lot of people chalk up huge balances on credit cards living beyond their means. When the balances cannot be easily paid off, the debt on the card attracts exorbitant interest payments, which may become extremely burdensome to pay. In fact, in the United States this problem has spawned a host of new businesses, which seek to help individuals free themselves of the burden of credit card debt. Beware of this trend and do not become captive to it.

Q. Your responses to readers seem to give the impression that investing money is the answer to almost everything. But what about the risks involved?
 
Nicole, Trincity

A: You are quite correct. One cannot speak about the return on an investment without considering the risks involved. Risk and return are two sides of the same coin. In fact, the higher the potential return on an investment, the higher the risk involved. We have in the past explored the possibility of putting money in the stock market rather than opening a new business. Of course, the stock market has a higher degree of risk than a fixed deposit or a money market account. However, despite the many downturns in the market during the course of history, stocks have always recovered. The market recovered after the Great Depression, the Asian Crisis, and 9-11. While the recovery took some time it eventually happened. The key is to have the time to wait for the market to experience an upturn. Therefore, you would not want to put money into the market that you would need at short notice.

If you have to liquidate a portfolio due to an emergency, it may be when the market has fallen causing a loss on your investment. Over the long term, the probability of a high return increases significantly. In fact financial theorists have coined a term referred  to as “Time Diversification of Risk” which means, in essence, that the risk of investing in the stock market decreases as the holding period of the investment increases, all things remaining constant. So examine your portfolio and decide, based on your budget, what part of your savings you can lock up in the stock market for a few years.  Then, talk to a few stockbrokers to get the best advice about building a portfolio of shares.

Disclaimer for Articles:

All information contained in this article has been obtained from sources that CMMB believes to be accurate and reliable. All opinions and estimates constitute the Author’s judgment as of the date of the article; however neither its accuracy and completeness nor the opinions based thereon are guaranteed. As such, no warranty, express or implied, as to the accuracy, timeliness or completeness of this article is given or made by CMMB in any form whatsoever.