As the Carnival season progresses, the Sunday BG brings readers the Business of Carnival series where business intersects with the law.
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Advice for young people from a financial planner: SAVE, then spend what’s left
Consider a tale of two 24 year olds from financial planner, Winston Williams. One has already been planning for the day he builds his home. “Every month, I buy some blocks,” Williams leaned across the table while telling the young man’s story. “He said, ‘Grandpa teach me that...buy some blocks, buy something. He said I am going to buy windows just now.’ He hasn’t dug the foundation yet, but he was buying the material and storing it.”
The other 24 year old? “He was telling me which party he was going to,” said Williams. Williams told the Sunday BG, in his 31 years of experience in the business, most young people fall into the second category.
He is the agency head at the Pan American Life branch located at Valpark Shopping Plaza. The Pan American Life Group or PALIG, bought the MetLife’s Caribbean assets, including Algico in August 2012. He is also the managing director of his own firm, Financial Advisory Services Ltd. He said the young have youth on their side, but not much else, when negotiating the sometimes murky waters of savings, budgeting, investing and other financial matters.
With this year’s crop of new entrants into the world of employment—whether from secondary school or university—thousands of young people will be earning their own money for the first time in their lives. And, according to Williams, few of them are ready. Spend...spend...spend. Conspicuous consumption is about to consume young people, said the financial planner.
Most of the entertainment popular among youth encourages materialism, using rapper 50 Cents, Get Rich or Die Trying motto. But Williams said this is only part of a wider societal pattern in T&T. Drawing Carnival as a reference, he said Trinbagonians strategised for the annual festival in a way they do for few other areas of their lives.
“This is a Carnival country. People can tell you very early before the Carnival season which band they will be playing in. They will also be able to tell you, with a great level of certainty, the all-inclusive fetes they will be going to.” Williams said while nothing was wrong with planning, Trinbagonians often devoted most of their attention and money to items that brought instant gratification. “They consume all they earn and this makes it very difficult for them to plan into the future.”
In this environment, preparing to achieve future financial goals was doubly hard for young people, who Williams said were enveloped in a fog of “confusion” when coming to financial matters. Peer pressure is sometimes at fault. “Imagine we all came out of UWI together. We all got jobs. I got a job at Atlantic LNG for $50,000 a month. You, because you didn’t do sciences, got a job paying $8,000. I buy a Corolla because I could afford it. How it will look? We lime together.”
The highly competitive atmosphere at university was also sometimes to blame, this according to Williams. “The time for liming is not there. When they get a job, they say, ‘I am my own man. I can do what I want!’ And most of the money for these young people in the first two years is spent on socialising.”
The consequence, said the financial planner, was that new graduates often saddled themselves with mid to long-term debt, not understanding that this affects their ability to acquire assets like a home, because their debt service ratio is too high. A debt service ratio is used by financial institutions to ascertain whether their current level of debt is too high before they give them more loans or extend more credit. It is found by determining their level of debt divided by their income.
The very financial institutions reaching out to young people were also their enemy sometimes, said Williams.
“Have you ever heard of a marketing concept called the total life-time value of a customer? I have hired many people from the banks, and they say, their ultimate goal as financial planners is to get you to take a new loan, consolidate your debt, get a new credit card, they had quotas. They had to sell a certain number of credit cards and they had to sell a certain number of loans. A number of times their final advice was consolidation with a new loan.”
To compound matters, little effort is made to educate young people about handling money, either at home or school. Reversing roles briefly, he asked the Sunday BG interviewer, “Were you ever taught financial planning? Were you ever taught how to deal with money?
“When we come out here (in the world of work), it is on-the-job training. That is something I think should be in every school programme, to manage your money. Because most of the problems we have in this society, can be solved by money, or are created by gluttony. When somebody wants to take the money and do something else with it. It is something if not managed well can have very serious adverse, effects.”
He said the best way to judge how serious the effects of not managing one’s financial resources were, was to ask the same young people 10, 15 years later to account for all the money they earned over that period of time.
A reluctance to even talk about 10 or 15 years into the future was another obstacle, Williams said. Young people were unlikely to initiate conversations with him about planning for their home purchase, retirement or life insurance because, as Williams said, no one, especially the young, likes to think of themselves as dying. “At 23, you think you are invincible.”
Goal setting: Not just wishing upon a star
The result of this type of thinking only become apparent as one approaches the end of one’s working life, said Williams, when people realise they do not have enough to retire on. The situation is common and what is amazing, according to Williams, was that it was not unexpected. Few of the big financial hallmarks in life came as a surprise. Making a sketch of a “life path” on a piece of paper, the financial planner punctuated it with several financial milestones.
“You want a house, possibly in five years. That is 2019. You want to go back to school next year to make yourself more marketable. That’s 2015. But you have a girlfriend and you want to get married, maybe in about two years. Then you might want to have children two and a half years after that. Eventually, you will have to study, where you will get the money to educate these children and, depending on when you start your family, not only will you be sending money forward for your children’s education, but trying to find money for your own retirement as well.”
Williams said he had a simple approach to all these major milestones that young people hope to meet. “I talk to them about the things they dream of, the things that they desire and then we put a date and a price to it all. And then from here, we can build out a time line.”
This is goal setting, said Williams. It must not just be the dream or the desire to acquire the item.
“My definition of a goal is that it is a dream with a deadline...The things that are very often dreams only become goals, when we apply a value to it, in terms of how much will it cost, when do I want to get it. If you have a goal and it is not written, it is still not a goal. The actual act of writing that goal, creates an infinitely higher level to the commitment of the achievement of the goal, than not having it in writing.”
To illustrate, he used an example of the act of buying a house.
“When you say, ‘Winston, I want to buy a home.’ I tell you to tell me a little bit about it in terms of its size, tell me a little bit in terms of where you want this house located. Then, you think about what it is going to cost in that area. Then we look at the price of it today.” Factoring in inflation in calculating the value of the house at the time one wants to buy it, is critical. Williams said he uses an inflation rate of five to six per cent when calculating the future down payment one will need to make on a house.
“Let’s say the price of it today is $1,000,000. That is 10 per cent down. Then there is mortgage indemnity. Then the valuation and the legal fees for conveyance and searches and finally stamp duty. There is the commitment fee to the bank. Let's say that comes up to $175,000. Do you have $175,000? The answer is usually no, because the young person has started working.” At an inflation rate of five per cent per annum, the down payment will be $223,300 in five years.
(Williams uses the following inflation projections for the following goals: education seven to 10 per cent; vehicle purchases three to four per cent) After calculating what the down payment is likely to be, Williams said, this must be broken down into smaller amounts. For example, to save $223,300 over a five-year period, Williams worked out what was the yearly amount that needed to be saved and then a monthly amount. Therefore, $223,300 divided by 5, is $44,660 a year. This figure divided by 12 is $3,721.
Williams advised that the money should be saved in a “holding bay, not subject to any risk”, possibly a money market account. It is an approach, he said, that can also be taken for lesser expenses like Christmas shopping, yearly insurance payments, repairs to homes or cars, school and vacation expenses because they do not occur in a random fashion.
Williams said this means they can be anticipated and budgeted for without resorting to loans, or what he called the “cancer of financial economics” the credit card. But what about a question often asked by young people: do I get a car or a house first?
Williams said, “It depends.”
Priorities and context
“If you inherited a home from your parents, it would very unlikely that a home would be your priority. You might probably want a car, or if you have a bachelor’s degree, you may want to pursue your masters.” In his own view, though, Williams believed having a home should be the one thing young people should focus on first.
“I think the basic needs of all people are food, clothing and shelter, so if we have food and if we have clothing, the other need that we have is for shelter. Now, a car is a good thing to have, the nicer the car the better, but it is not a necessity.”
As for advice offered online and in books telling young people to save money by particular ratios every month, Williams believed financial planning was a highly individualised process and that an honest examination of what the young person’s needs and wants were, as well as the sacrifices they are prepared to make to get them, was more important. He did have his own rule though. Nothing would be possible without saving. Williams said most people tend to spend first and then saved whatever remained.
“I tell them, ‘save first, spend the difference.’”
Knowledge is power
Williams said it was imperative that young people avail themselves of any opportunity to learn more about handling their finances. “Tell young people, when their companies hold seminars like that, make every effort to attend, because that is what you are working for. Would you not want to protect it?”
He also said they should seek professional advice from those qualified to give it, saying that while accountants, insurance agents and investment advisers incorporate elements of what a financial planner does, they are not financial planners. A large part of the difference lies in who the planner works for, said Williams, which is for the client.
Williams told the Sunday BG that he does consultations for free. He said he asks those he meets with, “in all fairness”, to do business with him. He said he may recommend Pan American products, once they happen to be the best one for the client. However, he said in his capacity as a financial planner, he has made recommendations for other financial products as well.