Home' Trinidad and Tobago Guardian : January 5th 2017 Contents BG16 | FINANCIAL ROAD MAP
BUSINESS GUARDIAN guardian.co.tt JANUARY 5 • 2017
Kevin turned 43 in December
and wants to start the New
Year on the right foot. He
could never seem to get a han-
dle on his finances especially
when dealing with annual ex-
penses. Kevin is often forced to drastically cut
back on the current month's budget in order
to meet one of these periodic expenses. Fed
up with the rollercoaster ride, Kevin wants a
system or approach that is more structured
Julie---a friend from the office---mentioned
that she uses envelopes to manage her expenses
and save for these annual bills. Kevin likes the
practical approach but has a concern when it
comes to dealing with big-ticket items.
Case in point, he plans to travel to Europe in
August and the trip might cost up to $30,000.
In that same month he has to pay his car in-
surance and the bill might be about $7,000.
At September's month-end, Kevin has house
insurance of about $2,000 and also wants to
start a professional course at a cost of $5,000.
Christmas set him back by $5,000, which he
put on his $30,000 credit card but cleared it
off on January 2 from what was left in his salary
account. He believes next Christmas shouldn't
be much different and prefers to have the funds
set aside in advance as Julie suggested.
Kevin also wants to save at least $3,000 by
November for his girlfriend Samantha's birth-
day and $2,000 for their anniversary coming up
in May. Whilst Kevin is not a Carnival person,
Samantha has inveigled him to go to at least
two all-inclusive fetes for which he might have
to shell out about $2,000.
The only cash Kevin has remaining after the
Christmas season is what he calls his "never
touch money" of $20,000 in a mutual fund
account that he holds for emergencies.
Regarding the annual expenses listed above,
Kevin cannot commit more than $3,500
monthly starting the end of January. He wants
to know if these numbers are realistic.
If not, what should he do to get on top of
things this year?
January always carries with it certain sig-
nificance as if beginning with a fresh sheet
of paper. Committing to save or setting aside
part of one's first paycheck for the year to-
wards goals or important annual bills gives
the sense of hitting the ground running. For
most people, the true test is sticking to the
plan throughout the year that is as long as it
is realistic and practical.
Plan: Realistic or not?
Kevin's annual bills total $56,000. However,
based on the $3,500 monthly or $42,000 for
the year, he will have a shortfall of $14,000.
Where is this money to come from?
He could incur a debt but that still means
putting out extra every month to cover prin-
cipal and interest.
Kevin can alternatively withdraw money
from his mutual fund, which has no effect on
his monthly cash flow but would weaken his
ability to handle emergencies and may lead
right back to debt.
Kevin may have to reduce, eliminate or defer
one or more of his discretionary expenses to
compensate for this shortfall. For our purposes
we have reduced everything except school fees,
car and house insurance (refer Table 1) in order
to arrive at $42,000.
Once he makes the necessary adjustments,
his next step is to start setting aside money in
envelopes as suggested by Julie.
Is the envelope system practical?
Before the age of the electronic payments
and mobile financial tracking apps, people used
envelopes to control spending and or save for
some particular expense.
To control monthly spending the individu-
al would draft up his or her monthly budget,
withdraw the cash for the total monthly figure,
divvy up and insert in the relevant envelopes.
Once all or a part of an expense comes up
he or she would go to that envelope and pay
the related bill until the funds are exhausted.
The element of control is that no more than
what is placed in the envelope can be spent.
This allows the individual to regulate their
spending behaviour in accordance with what
is in the envelope; pulling back if the next
month's salary far off or stepping up when it
This system can also serve as an indicator of
good or poor spending decisions. If by the time
the next salary rolls around, there is money
remaining in an envelope, the surplus could
then be sent off to long-term savings.
The envelope system can also be used to set
aside a monthly portion of a non-monthly bill
such as water or electricity and can be used
for annual items such as birthdays or anni-
The expense is divided by the number of
months during which it falls due and place the
monthly amount in the related envelope every
paycheck, when the bill is due, the cash is tak-
en out and the payment made. So, in the case
of Kevin's car insurance, he should be setting
aside $875 ($7,000 / 8 months) monthly from
January up until the end of August.
Whilst $875 is well within his $3,500 month-
ly limit, when we apply the same principle to
all of his planned expenses we would exceed
this figure by $3,992 ($7,492 - $3,500) at least
for the months of January and February.
This approach is not practical even after
a bill is paid and monthly allocations are no
A simpler solution
To fix this problem, Kevin could accumulate
$3,500 each month in a special bank account
(and not envelopes for security reasons because
of the amount) then make withdrawals when
each annual bill falls due.
By February's paycheck the account should
have $7,000 ($3,500 x 2) out of which the Car-
nival bill, which we reduced by 50% to $1,000,
would be withdrawn and the balance of $6,000
carried forward for subsequent bills.
The account would build up to $13,000 just
before Kevin and Samantha's anniversary,
which if were also reduced to $1,000, the bal-
ance carried forward would be then be $15,500
($13,000 + $3,500 = $16,500 - $1,000).
Continued on Page 17
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