Carnival 2K11 has come and gone and we are told that it is "the best ever" and that it will generate returns of "over $1 billion." That may be great from a social and economic perspective, but what about the cost and returns at an individual level? The party may be something to behold today but what about the price from the perspective of tomorrow?
When you add up the cost of playing mas, fete tickets (especially the "all inclusive") and carnival shows they can add up to a tidy sum. If you include the Christmas and Old Years outlay many may now find they have to now play catch up with their finances.
As a large part of the population enters a period of reflection it may be easier to now take the time to review how you have managed your finances over the past couple of months and determine if there is room for improvement with the overall objective being increasing your wealth and improving your standard of living.
The premise is simple. You improve your standard of living either by being paid more for the work that you do or putting your earnings to work for you (investing). The ideal is to strive for a mixture of both. What this means is that you should work hard and strive for advancement in your career but having done so don't then throw it all away on frivolous revelry.
Hourly Rate of Spending
Take some time out and add up all the money that you spent over the Christmas into Carnival season. Now calculate your hourly rate of pay. Do the math to see how much hours you had to work in order to pay to attend that fete, buy that carnival costume, Old Year's party, fireworks and all those Christmas niceties.
Now that it is over and the tally is done and outstanding bills need to be paid, was it worth it? Could you have even afforded to spend what you spent? How many more hours do you have to work to pay off any debts incurred during the festive period? How much of your retirement savings was spent for today? The answer is based on individual choice and this article is not meant to pass judgement. The important part of this equation is to make sure you ask the question: financially was it worth it?
Resolve to ensure that you pay yourself as opposed to paying for everyone and everything else to entertain you. Pay yourself by saving and investing more so that in addition to your own labour, you can also put your money to work for you. Stick to that resolution and you will see that in just a few years your can greatly improve your financial situation.
Mind you, I am not suggesting that you become a miser. What I am suggesting is that you establish your priorities. Unless you are working for a very tidy sum it is difficult to play an active part in all of Carnival (which now includes a substantial outlay on sculpting the perfect body), Valentine's, Easter, Mother's Day, Father's Day, July/August vacation, Christmas and Old Year's. Then you have the Friday after work limes, movies, eating out, nightlife, sports, other hobbies and even vices.
Weigh up the lasting benefit from each or all of these activities. You are working hard but are you benefiting from your hard work or fritting away your hard earned money.
If things are currently out of control start with a budget. This does not necessarily mean recording every payment but it does mean understanding what you have available to spend and determining what you want to spend it on. Calculate your annual salary net of taxes. Recognise that with inflation prices are going up on a regular basis. Then establish the costs that are necessary for your existence (food, clothing, shelter and transport), mortgage payments, other loan payments, groceries, rent etc.
Decision Time
Now it's decision time. The amount left over after spending on necessities is your discretionary income and you now have to make a choice as to how much of this you intend to spend on some of the activities mentioned above.
My advice is to work from the bottom up. If your next priority after the necessities is to save then work out how much you would like to save in order to meet your long term goals and then see what's left over for leisure.
Apportion that balance to the events detailed above. This way you are not lured into following the crowd at each season. If you turn every spending decision into a value-based decision (ie how much am I spending in relation to my hourly rate of pay and is it worth it) it becomes much easier to save since you will automatically become more discerning.
So far you should be in a position to accomplish two things. Firstly be more discerning about your finances and secondly be in a position to save and invest.However you should not stop there. Just as you are now paying attention to what you spend you should also look carefully at the types of savings and investments that you undertake and the cost of those opportunities so presented.
Many in the financial services industry will encourage you to invest but often stop short of advising that different investments carry different costs and it is imperative that you maintain your guard and be sensitive to what you are paying for just as you would be at the grocery.
Seek out the opportunities that are right for you and only invest in products that fit your financial goals and objectives. In addition you also have to take into account the relationship between risk and return. If you are getting a return (regardless of how attractive) that does not compensate you for the risk that you are taking then you are not doing yourself any favours.
There are many investors who enter into a discussion about their finances and their first point is that they don't want to take on too much risk. That is fine and everyone is entitled to choose options that they are comfortable with. However what usually follows is a request to earn 10+ per cent returns. That is equivalent to having your cake and eating it too.
Unless you are lucky, in which case you managed to play the risk/return curve to perfection you will get what you pay for: low risk investments equates to low returns.
Relating this point to the earlier part of the discussion it should be apparent that the more conservative you are in your investment choices the more money you need to invest.
If you are only comfortable with investments with a guaranteed rate of return then at the present time you are looking at investments that offer around 2 per cent before factoring inflation. Those types of investments may allow you to sleep well at night since the risk of a variable outcome is reduced and your capital is more or less preserved.
However if you want to eat well, that is have the money available to you in a few years time to retire comfortably, to own you own home or satisfy any of your life's desires then you either have to find a way to put significantly more money into the low-risk investments or seek out higher risk opportunities such as stocks. The decision is yours to make but you can only make that decision if you understand the choice.
That is why the first step is to establish your budget and analyse your spending. Out of that exercise you may find that if you cut back on your spending you can set aside enough to invest that allows you to achieve your long term goals quite easily without engaging in higher risk investments.
Alternatively you may find that your life's goals and aspirations are not achievable unless your money can attract double digit returns on a consistent basis.
Clearly your desires are suggesting to you that you need to take the opportunities that are presented in the stock market (higher risk investments). Either that or you change around your plans to something more modest.Either way there is no free lunch, you get what you are prepared to pay for and, in the end, it's all about you cutting your cloth to fit.
Ian Narine, is registered as a stockbroker with the SEC ian.narine@gmail.com