Oran Hall | Financial Adviser | A steep financial hill to climb
QUESTION: With 19 years left to retirement age, credit card debt of approximately $350,000 and an income of about $100,000 and no savings, which products would be best to invest in, that is, 5-year fixed deposits, unit trusts, various types of insurance investments, etc, to be able to afford child's tertiary education in three to four years, retirement in about 10 years, and owning a home in Kingston in no less than one year.
I hope that you will be willing to publish my question in your column so that it could also benefit other persons in similar situations.
FINANCIAL ADVISER: You have a very difficult situation ahead of you and you must take immediate action to bring some order to your financial affairs and thus give yourself even a slim chance of realising your financial goals.
Begin with an assault on your credit card debt. You must eliminate it. You have no savings, so you must generate some to direct to the elimination of the debt. You will get nowhere if it remains, but you should be able to save once it is out of the way.
The credit card is enticing and convenient, but if not managed well, it can be very destructive to financial health and even physical and emotional health.
You must begin to budget. You need a real budget one that you will stick to slavishly, and debt reduction must rank high on it. You have to reduce your spending. In fact, discarding the card or cards would be a good initial step.
As for your goals. Retirement is 19 years away, but you seem to be planning to retire in 10 years. If that is your plan, unless some dramatic favourable developments take place in your life, it seems that you will have to consider shelving that plan.
You have not said if you are a member of a pension arrangement, but it is clear you have no retirement savings of your own. Considering that you could live for a long time, I suggest you plan for a long retirement.
Homeownership is a very good goal, but you need to be able to make the deposit and pay the closing costs. Then, you must consider whether you can afford to pay the monthly mortgage payments. If the lenders are not satisfied that you can afford to, they will not lend.
Your child's education is very important. You have mentioned funding your child's tertiary education in three to four years, but you did indicate there is another child whose education you need to address six years later.
Saving for your children's education requires caution not much risk particularly because the time is limited. Impress on them the need to do well; if they do, they may be able to win scholarships. The alternative is borrowing, which can be costly, but that shifts the burden from you to them. In any event, loans will not cover the full cost of their education.
Your income of $100,000 does not give you many options, and I cannot identify any investment product that will give the kind of returns required to make you realise your very worthwhile and meaningful goals in good time.
The five-year fixed deposit you mention seems to be long-term savings accounts, which allows savers to earn tax-free interest if the funds are saved for five years, no more than $1 million is saved each year and no more than 75 per cent of the interest earned each year Is withdrawn. The tax benefit notwithstanding, rates on these instruments are not at the level to bring you close to your goals.
Unit trusts are many and varied from money market funds to capital growth funds. The latter are the funds that can best give you high returns, but that comes with high levels of risk. It does not seem that your income will allow you to generate the returns to take you to your goals in the time you have set.
Life insurance is primarily for protection. Some policies do generate reasonable investment returns and the returns are generally tax-free but it is best if the income generated is not disturbed. It may become useful in the retirement years, but you should be careful to understand the types of policies you look at as there are cases in which the investment income is required to pay towards the cost of insurance in later years.
There are some policies that give you very little coverage as most of the money you pay is invested. You should consider if such policies can give you better returns than other options such as the unit trusts.
You need more income. Examine the options: another job, a part-time job with your current job, a skill that equips you to employ yourself. As challenging as it seems, begin a rigid programme of money management immediately.
n Oran A. Hall, principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. Email email@example.com.