Home' Trinidad and Tobago Guardian : October 12th 2014 Contents OCTOBER 12 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCIAL ROAD MAP | SBG7
enjamin left his parents’ home
18 months ago and moved into
a furnished studio apartment
to test the waters of living on
He enjoys the sweetness of bachelor life but
also acquired a bitter taste for hunting for his
meals every single day.
Since leaving home he noticed a visible
increase in the cuddly goodness around his
waist and is now 30 pounds heavier. Ben has
always been a fitness and health-food enthu-
siast but presently resorts to the convenience
of fast foods with the occasional gourmet or
organic meals to compensate for his guilt; he
spends an average $100 per day.
After rent and his burgeoning food bill Ben
hardly has much left over for savings and has
seen a significant deterioration in both his
physical and financial health. He wants to
arrest the problem and is seriously considering
cooking his own food.
Ben’s challenge is his refrigerator; it could
barely hold two-dozen beers and a rotisserie
chicken. He reckons if he swaps out the icebox
for a man-sized chiller he could stock up on
all the ingredients he needs to take him through
the month. His landlord even promised to
knock off $100 from the rent of $3,000 if he
gives back the fridge. Ben figures he could
satisfy most of his cravings if he spends about
$1,200 per month at the supermarket next
After shopping around he found an appliance
that ideally fits his space and storage needs—
price tag—$10,000! His money market fund
has a $1,500 balance and his bank has offered
him a credit card with a limit that could cover
The other option is a hire purchase (HP)
account with the furniture store. The HP terms
are: no money down and $110 per week for
three years with the chance of winning a
“Christmas in October” grocery hamper. Alter-
natively, the credit card comes with a whopping
27 per cent APR (annual percentage rate) and
a $650 annual membership fee deducted up
front each year.
After running all the possible scenarios in
his head, Ben now has brain freeze. He cannot
figure which financing option is better and if
the benefits outweigh the costs.
Nick assessment & advice
Of course Benjamin could quickly fix the
problem by calling it a day and return to the
less complicated life at home with Mama.
There would be no need to buy a fridge, no
financing cost and best of all no rent!
On the other hand if he wants to “man up”
and take on the challenge he has to stack up
the numbers instead of the beer cans.
Total cost of borrowing
To decide which financing option is better
or cheaper we have to compare both decisions
under the same terms—as a percentage (annual
percentage rate—APR) or an actual dollar
With the hire purchase account Benjamin
will pay back a total of $17,160 over the three-
year period ($110 x 52 weeks x 3 years). This
translates to an APR of about 39.8 per cent.
Using the same weekly payment method with
the credit card, he would have to make 156
payments (52 weeks x 3 years) of $94 each to
clear off the balance in three years.
If we factor in the additional cost of the
annual membership fee of $650 plus interest,
he would have to pay an extra $14 each week
($94 + $14 = $108). His total payback over
the period would be $16,848 ($108 x 52 weeks
x 3 years).
This combined effect of 27 per cent APR
plus the annual membership fees brings the
interest cost to about 38.3 per cent—slightly
lower than the hire purchase APR of 39.8 per
cent. If there is a 1.0 per cent cash back reward
when he swipes his card for $10,000 he could
probably receive a $100 one-time credit on
Referring to Table 1 we can compare the
impact of Benjamin’s monthly cash flows and
overall financial position with each option: no
fridge, HP purchase or credit card financing.
Bringing his weekly payments to a monthly
figure (Payment x 52 weeks divided by 12
months) it makes the comparison easier.
Further cost reductions
Despite the phenomenal cost of the fridge
at the end of the three-year period, Benjamin
can achieve substantial savings in his monthly
food bill and rent. These savings could be
directed back to his debts, which will shorten
his repayment time and reduce his overall
Ben can even negotiate with his bank to get
an unsecured installment loan at a substantially
lower interest rate than the credit card. He
can further reduce costs by applying the $1,500
money market savings as a down payment
and borrow less.
The final analysis
After considering the numbers in Ben’s case
we can safely say that the benefits outweigh
the costs with this decision.
• Improved cash flows especially when debts
• Eating healthier and losing weight
• Lower food and rent bill
• Ownership of an asset
• Increases in savings
• Financing interest and charges
• Time to shop and prepare meals
• Increased grocery bill
(Details were modified to protect client’s iden-
Nicholas Dean (Cer-Fa) is a financial coach
and mentor who is the managing director
of the Financial Coaching Centre. He can
be contacted at:
The cost of eating out
After rent and his burgeoning food bill Benjamin hardly has much left over for savings
and has seen a significant deterioration in both his physical and financial health.
Links Archive October 11th 2014 October 13th 2014 Navigation Previous Page Next Page