Home' Trinidad and Tobago Guardian : November 29th 2015 Contents NOVEMBER 29 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCIAL ROAD MAP | SBG7
ara, 29, has been working with
an energy-based company for
the past 23 months. Her basic
salary is $30,000 plus other
non-cash benefits. She is a
saver and has been aggressively
putting money into various accounts and
From her very first paycheck Zara set aside
$3,000 and $2,000 monthly towards a reg-
istered annuity, and an unregistered annuity
respectively. Her employer also deducts seven
per cent from her salary for the company s
pension plan, which they equally match plus
any voluntary contributions up to another
seven per cent. It has been a year since she
started saving in two mutual funds: a growth
and income fund and a money market mutual
fund, transferring $3,500 and $2,500 to each
(respectively) every month. She also purchased
shares in two companies on the stock market
with current valuations of $18,000 and $25,000
respectively. She plans to put an additional
$30,000 in a third and new IPO (initial public
offering) in the coming weeks.
Not having any insurances in place, her
agent suggested two possible options: a 20-
year term life plan for $1.2 million with a
critical illness plan for $200,000 costing $950
or $1 million critical illness plus $500,000 in
life with savings, costing $1,200 per month.
She wants to accomplish a few goals. The
first is to have her own home within a year.
Zara believes this will cost about $1.5 million.
Once she purchases the house, she estimates
that furnishings could come up to $150,000.
She will also need to change her car in three
years time but does not want to spend more
Whilst she would love to be married with
children in the not-too-distant future, she is
quite prepared to focus on her immediate goals
for now and make the necessary adjustments
when circumstances change.
She wants to know if she is being realistic
about her goals and how these goals might
impact her monthly budget moving forward.
Nick's assessment and advice
While Zara may have qualified in four out
of the five characteristics that make a SMART
(specific, measurable, achievable; realistic and
time bound) goal, she is correct in questioning
if her goals are realistic, especially based on
her current level of savings, income, targeted
goal values and time lines.
Short-term gap analysis
Focussing on her list, Zara has omitted the
most important of all goals: provision for
emergencies. Based on her earnings, she should
have at least three months salary ($90,000)
held in a fairly liquid asset.
Second is having enough money for a down-
payment and closing costs her home, which
we estimate to be about 17 per cent of the
price tag or $255,000. When we added up the
values of all short- to medium-term goals,
Zara needs to find $675,000 over the next
From this figure, she will need $495,000
in the next 12 months. Based on our estimates
she should have $161,000 saved up in her
short- to medium-term assets, which creates
a gap of $334,000. To fill this gap, in one year
she will need to save $27,833 per month, which
makes her short-term expectations a bit unre-
Impact on budget
Zara might have to make some adjustments
to align her goals with her earning and savings
capability. One very important variable is the
impact of the monthly mortgage payment on
Assuming the mortgage runs for 30 years
at a rate of six per cent per annum with 90
per cent financing, the installment would be
$8,094. Zara is currently setting aside $13,100
monthly to her various savings plans inclusive
of her company pension contributions of
$2,100 ($30,000 x 7%).
So when accounting for the mortgage and
pension she will have just $2,906 of discre-
tionary savings to achieve everything else; that
is if she wanted to maintain the $13,100
As it stands $13,100 is not exactly aligned
with the goals she wants to achieve in the
timelines given. So how much should she save
every month to be realistic?
After blocking out the $90,000 for emer-
gencies from short- and medium-term savings,
she is left with $71,000 ($161,000 - $90,000)
to cover the $255,000 needed for down pay-
ment and closing costs, which means she
needs an additional $184,000 ($255,000 -
$71,000) for this goal.
To fill this gap, in 12 months she has to save
After backing out the compulsory $2,100
pension figure from the current $13,100, she
will need to reallocate the remaining $11,000
to short-term savings plus an additional $4,333
($11,000 + $4,333 = $15,333) in order to hit
her target. Any money she currently saves in
medium and long-term discretionary sav-
ings---such as the annuities and stock mutual
funds---should be redirected to the money
market or bank account.
Once she has keys in hand she can now
focus on furnishing the house using the surplus
after her mortgage payment ($15,333 - $8,094
= $7,239). She can choose to save and then
purchase items, obtain loan financing or a
combination of these two strategies. If she is
using debt she will be limited by her debt
service ratio and collateral requirements.
Using a 40 per cent DSR figure (inclusive
of the mortgage payment) she might be able
to borrow $120,000, with payments of $4,000,
interest of 13 per cent and a payback period
of three years.
The car replacement is three years away
and, hopefully, when she is finished with fur-
nishings she can start saving towards this goal.
If she does have a vehicle, at present, this can
be sold and added to what she manages to
save then if there are any shortfalls she can
again approach her lender.
While Zara has put things in motion to fund
retirement, her plans may need a little tweak-
ing. She should take full advantage of the com-
pany s offer to match her voluntary contri-
butions, as this is free money on the table;
even though she might exceed the current
allowable annual tax-deductible limit of
$50,000 for registered plans. It is still worth
it. The downside is that the current registered
annuity would not offer any further tax benefits
and she may have to either leave the funds in
the account and, hopefully, it will grow or liq-
uidate to fund the other short-term goals.
She must, however, pay attention to any
surrender charges for early withdrawal and
bear in mind that the government would
reclaim the tax refunds of 25 per cent, which
she received over the life of the plan.
Zara also has to make a decision regarding
the proposals from the insurance agent. It
might be a requirement from her mortgage
company to have term life coverage for the
loan and, depending on this premium, she
should also consider having some critical illness
coverage depending on her cash flows.
Regarding the IPO, whilst it may be a good
medium to long-term investment, Zara may
not have the available capital as she initially
F C C
Being SMART about your goals
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