Home' Trinidad and Tobago Guardian : September 6th 2015 Contents SEPTEMBER 6 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCIAL ROAD MAP | SBG7
The case aj, a 45-year-old recruitment
officer, and his wife of four
years Cindy, 35, live with their
newborn daughter Aria in a
rented two-bedroom apart-
Cindy is a stay-at-home-mom because she
was retrenched a year ago. The couple has
been holding on to Cindy s severance money
of $150,000 with the hope of purchasing their
own home when she regains employment.
Raj has been paying all of the bills, however,
most months he has had to deal with a shortfall
of around $3,000. Their $50,000 credit card
facility was used to pick up the slack after
they depleted their emergency fund of $30,000.
The card balance now stands at $45,000. The
only other debt they have is a credit union
loan for $200,000 that is secured by $110,000
in savings and payments of $2,900 per month.
Raj has always had a penchant for investing
but has never had the opportunity to do so---
He and his friends have been meeting reg-
ularly to discuss and evaluate different invest-
ments; the most recent of which is a new
share about to hit the stock market. Coming
out of their exhaustive collaborative research,
they decided to invest $100,000 each holding
to the mantra: invest big, win big!
Raj s plan: get in, get out, make some money,
pay off some debt and pocket the difference!
The ink is still wet on the purchase order
and Cindy is already feeling uneasy.
She fears they could lose their downpayment
and is worried what would happen if an emer-
gency should arise especially with the baby.
Raj reassures that he did his homework and
he is still gainfully employed and, as a last
resort, he could approach the credit union or
sell off the shares if things get bad.
Nick's assessment and advice
It is a very interesting dynamic, in that, the
money used to purchase stocks was actually
Cindy s severance but Raj was the one who
took the decision. Though it might not be the
case, it is not unusual to find a sole breadwinner
exerting their influence over the other party
to gain support for a decision. In this case,
the collaboration for this investment did not
take place between Raj and his wife but,
instead, between his friends who may not have
had the complete picture.
Further, one factor in his decision could also
have been peer pressure to keep up when a
so-called consensus was arrived at.
This case also highlights a critical difference
between investing and financial planning.
Whilst making a certain investment is part
of the financial planning process, it is only
the execution stage of such plans. It is not
uncommon to individuals making such deci-
sions in a vacuum without reference to the
We are all familiar with individuals pur-
chasing financial products such as insurance
policies, annuities or systematic savings in
mutual funds, only to stop midway because
they omitted some very important financial
variable in the decision.
Raj may have fallen victim to this oversight
and focused only on the soundness or potential
of this investment rather than the effect it
would have on his family s finances, at least
in the short-term.
Now Raj s gamble could probably pay off
in the end but, the important question is:
where and when is this end?
In the past, we would have highlighted that
investments are a means to an end and not
an end in themselves. This end must be defined
in terms of dollar value and timeframe; the
very first step in the financial planning process.
Based on the information on hand, every-
thing the couple needs to achieve is in the
As such, this investment may have been a
mismatch from the outset. The worst-case
scenario is that the share price could fall and
they may be forced to either hold out longer
than planned or sell prematurely if an emer-
Notwithstanding the remaining $50,000
Raj s "Plan-B" involves incurring more debt
with the credit union or selling the shares.
This seems counter-intuitive because one
of his goals is to get out of debt. His action,
however, might actually dig him deeper in a
hole, because of his already negative cash flow.
Carrying a heavy credit card balance and the
credit union loan may preclude him from qual-
ifying for the home mortgage.
A more effective decision would have been
to simply use the severance money to eliminate
their total debt; which from an investing stand-
point is a guaranteed, higher rate of return
Assuming the interest rates on the credit
union loan and credit card are 12 per cent and
24 per cent (per year) respectively, Raj s share
investment would have to guarantee him a
return equal to or greater than these in the
first year to make any sense; whether or not
this is possible is anyone s guess.
Another notable point is the quantum of
Whilst Raj could have still satisfied his
appetite for risk by buying fewer shares, the
mantra, "invest big, win big" has forced him
to put out more than he could afford to, regard-
less if he has the actual cash on hand.
If he had used the $150,000 to pay off the
$45,000 credit card and the unsecured portion
of the credit union loan ($200,000 -- $110,000
= $90,000) offsetting the residual balance, he
would have $15,000 cash plus the open
$50,000 credit card facility for emergencies.
The monthly shortfall of $3,000 would have
been eliminated and replaced by positive cash
flow of $800 to rebuild savings ($3,000 --
($2,900 + $900) = $800) (credit card interest
$45,000 x 2% = $900). The only casualty
would have been the downpayment for the
house, which would have been under threat
if the shortfall were not addressed.
Post investment, Raj still has to deal with
the monthly shortfall, which will eventually
cut into the remaining $50,000 of Cindy s
severance. He might be inclined to completely
clear off the high interest credit card of $45,000
and put $5,000 towards his unsecured $90,000
credit union loan but his real debt would still
be $85,000. He could then approach the same
bank to take over this amount using the recent
shares purchased as collateral.
Unfortunately, when we used even the best
possible terms of seven years and nine per
cent APR, his monthly payments would come
down to $1,400, a significant reduction of
$2,400 ($2,900 + $900 - $1,400) but still
leaving him with a shortfall of $600. He can
probably try to trim off some of his living
expenses to balance his budget but the freshly
cleared credit card facility---which also doubles
as an emergency fund---will again be at risk
of creating new debt.
The final analysis
Raj may really have no other alternative but
to put the shares on the market to get out of
debt and free up his cash flow. However, if he
decides to hold out, he has to bear in mind
that with each passing month, his financial
position deteriorates by the extent of his
To compensate for this erosion, the price
of his shares needs to increase sufficiently to
justify staying in the game.
F C C
Investing vs financial planning
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