Home' Trinidad and Tobago Guardian : February 23rd 2017 Contents BG16 | FINANCIAL ROAD MAP
BUSINESS GUARDIAN guardian.co.tt FEBRUARY 23 • 2017
= more cash in hand
Sonja, 47, is a single mom and lives
with her eight-year old son Lucas
in her own home. She has a $1.3
million mortgage with monthly
payments of $13,612 that is sup-
posed to end in 13 years' time.
Sonja has been working in the marketing and
corporate communications field for over 20
years and whilst financial commitments have
increased significantly, her earnings have not
kept up. This trend is expected to continue
until Lucas finishes university.
Whilst Sonja can cover most of her monthly
bills fairly comfortably, she has some difficulty
with some expenses that pop up periodically.
The situation has worsened since Lucas'
dad stopped his child support payments and
now she is left to pick up the entire tab for
everything concerning their son.
Each time one of these expenses comes up
she is forced to dip into her long-term savings.
Sonja estimates that at an average monthly
deficit of $1,800, her nest egg of $98,000 in
a money market account, would eventually
dwindle to nothing.
In light this, Sonja began exploring invest-
ment opportunities that might buffer her
periodic shortfalls. She recently attended a
free financial seminar that promoted a six-
month training course on trading in stocks,
derivatives and foreign exchange. The official
programme costs $18,000 and includes access
to a free online platform that tracks, evaluates
and manages investments.
The programme educators are seasoned ex-
perts who have all allegedly amassed millions
of dollars from investing in their system. Sonja
has been playing with the free demo software
for some weeks and is having fun with a virtual
investment portfolio. She wants to take the
next step and that is to sign up for the course
and start investing before he limited capital
Anxious for a quick fix, Sonja wants to know
if this is a good idea. If not, what else she could
do to become more sustainable.
Getting rich quick
Sonja is in need of a stable predictable source
of income to deal with a definite monthly fi-
nancial commitment. Whilst it is not impossi-
ble to consistently generate positive investment
returns in the financial markets, it is doubtful
that a novice investor with the capital that Son-
ja has could achieve such an objective without
suffering some losses.
Investing is never something that one should
approach in desperation especially when the
objective is to satisfy a pressing financial need.
This pressure to meet this objective could cloud
the investor's judgment forcing them to take
abnormally high risks with the hope of a big
payoff in a short timeframe. This type of in-
vestment posture is not much different to a
punter at a black jack table or roulette wheel
confident that they could beat the odds with
Whilst this analogy may be a bit exaggerated,
the fact remains that to successfully generate
consistent income streams from the online
investing environment requires years of ex-
perience, countless hours of research before
making any investment certain losses from
time to time because of poor choices. It is not
uncommon that someone in Sonja's position is
an easy target for get rich quick schemes even
if they are legitimate.
Sonja needs $1,800 per month or $21,600
annually (which will increase with inflation
Assuming she invests her entire nest egg of
$98,000 she has to consistently achieve an in-
vestment return of 22% ($21,600 / $98,000)
per annum. If she puts out the initial $18,000,
she now has less money to invest. As such
her very first objective would be to recoup this
loss -- using $80,000 ($98,000 - $18,000) she
has to achieve an initial capital gain of 22.5%
($18,000 / $80,000) before moving on to
income generation from investment profits.
Assuming she decided to only invest
$50,000, Sonja would have to earn an annu-
alised return of 43.2 % ($21,600 / $50,000).
As she employs less and less capital, with
the income objective remaining fixed, Sonja
would need to seek out more risk, which could
potentially wipe out her entire investment cap-
ital in a short period of time.
A point to note here is that the educators
of the programme have amassed millions by
investing in their system but we were not told
specifically if it was directly from investing in
the financial markets or if it was from tuition
fees. Common sense tells us that if 100 people
sign up for this course, the company would
earn $1.8 million ($18,000 x 100). That is a
very good investment!
Back to the basics
Sound financial planning recommends set-
ting aside some money for emergencies before
making any adventurous investment decisions.
The question in Sonja's case is how much?
With a rule of thumb of three months'
monthly income she should have about
$102,090. We arrived at this figure based on
the assumption that her monthly mortgage
payment of $13,612 represents 40% of her
This means that her salary before tax-
es should be about $34,030 ($13,612 / 40%
= $34,030 x 3 = $102,090). Whilst this is a
nice to have, even this goal is threatened by her
negative monthly cash flow of $1,800.
Sonja really has to bring this situation un-
der immediate control but taking on risky
unpredictable investments could put her in
an even worse position. She needs a stable and
Whilst we cannot say for certain what
monthly commitments she currently has, it
is not unreasonable to think that with a pre tax
income of $34,030 and a monthly mortgage of
$13,612 she could very well have some wiggle
room in her monthly budget that might absorb
the $1,800 shortfall.
Assuming she really cannot cut back on an-
ything she could possibly consider using her
training and experience in marketing and cor-
porate communications to earn that amount
with far less effort and risk than it would take
by retooling in the field of investment to ac-
complish the same objective.
Now if her corporate and parental respon-
sibilities simply do allow the extra time for
sideline work Sonja still has a relatively risk
free option that she has not yet considered.
Based on the remaining term on her mort-
gage of 13 years and monthly payment of
$13,612, Sonja is paying interest at a rate of
approximately 8.25 per cent. This is quite high
in light of prevailing interest rates on mort-
gages. If she were to approach her mortgage
company and negotiate better terms she could
lower her monthly payments and free up the
cash she needs. In her negotiations she could
do any of the following:
1. Make a lump sum payment and recalculate
2. Reduce mortgage interest rate
3. Extend the term beyond age 60
4. All of the above
Whilst she can make some form of lump sum
payment to reduce her debt she again must
consider her short-term cash needs before
committing any of her savings. Based on our
calculations, if she were to simply negotiate
a rate reduction to say 6.75 per cent per an-
num and extend the term to 172 months she
would see a reduction in monthly installments
of $1,801, leaving her cash reserves intact.
Nicholas Dean (CertFa) is a certified
independent financial adviser and is the
managing director of The Financial Coaching
Centre Ltd. If you have any questions or
need advice on today's subject please email:
firstname.lastname@example.org or visit website: www.
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