The Star (St. Lucia) - - CREDIT UNION SUPPLEMENT -

Most per­sons are prob­a­bly ex­pe­ri­enc­ing a re­duc­tion in their dis­pos­able in­come as a re­sult of the re­duced eco­nomic ac­tiv­ity and ris­ing prices. The first re­ac­tion is likely to be that of dis­pens­ing with all sav­ings ini­tia­tives. In­stead of a full cut back, there lies an op­por­tu­nity to re­visit your spend­ing habits so as to em­ploy some cre­ativ­ity in an ef­fort to main­tain your cur­rent sav­ings lev­els. As a start­ing point you will need a plan – com­monly re­ferred to as a bud­get.

Start out with the in­come that you make on a monthly ba­sis. Do not in­clude amounts an­tic­i­pated from over­time hours worked. Then list your monthly com­mit­ments - food, mort­gage or rent pay­ments, util­i­ties etc. Do not for­get to con­sider the pay­ments that are made on an an­nual ba­sis such as house and mo­tor ve­hi­cle in­sur­ance. Al­lo­cate such pay­ments over twelve months. Add up your com­mit­ments and deduct same from your monthly in­come. If you are in a neg­a­tive po­si­tion, you will need to re­visit your spend­ing and re­duce on things that are not nec­es­sary- a com­mon one be­ing eat­ing out.

In­come tax also im­pacts your cash flows. If on an an­nual ba­sis you have a net tax re­fund when you file your tax re­turns you should im­me­di­ately re­visit your tax code based on the al­lowances to which you are en­ti­tled. When a re­fund is due, you are ef­fec­tively giv­ing an in­ter­est free loan to the govern­ment as the re­fund will be paid to you some­time into the fu­ture, and will at­tract no in­ter­est. So it makes sense to have im­me­di­ate ac­cess to your money so that you may in­vest same and earn in­ter­est in­come in the process.

Life in­sur­ance is an­other ex­pen­di­ture that im­pacts your cash flows. The two most com­mon types of in­sur­ance poli­ciy in our en­vi­ron­ment are Whole Life and Term in­sur­ance. A term in­sur­ance has a life in­sur­ance com­po­nent only, is for a fixed pe­riod and, upon death, the face value is paid to your ben­e­fi­ciary. On the other hand, a whole life in­sur­ance pol­icy has an in­vest­ment com­po­nent. As a re­sult, whole life in­sur­ance poli­cies tend to be more ex­pen­sive as you are pay­ing for the in­vest­ment com­po­nent in ad­di­tion to the life com­po­nent. If you have no de­pen­dents you may not need a whole life in­sur­ance pol­icy and can re­duce your ex­pen­di­ture with a term In­sur­ance. If you have a mort­gage loan, your bank will ac­cept term in­sur­ance cov­er­age or mort­gage in­sur­ance that cov­ers the term of the loan.

Keep­ing and in­vest­ing your sav­ings is crit­i­cal - in­stead of work­ing for your money, your money is put to work for you. A dis­ci­plined way of build­ing your sav­ings is to ask your em­ployer to make a di­rect de­posit to your bank ac­count as a salary de­duc­tion. You may start out with as lit­tle as $100. Con­sider for a mo­ment that if you start out with a monthly sav­ing of $100 at an in­ter­est rate of say 3.5%, in 10 years’ time the fu­ture value of your bank ac­count will be $14,527 and you would have earned in­ter­est of $2,427. As­sum­ing that you are 30 years old to­day and plan to re­tire at 60 years of age, if you con­tinue with this sav­ings plan, then by age 60 you will have $64,012 in your bank ac­count as a re­sult of com­pound­ing in­ter­est – by just sav­ing $100 per month.

A ba­sic rule of thumb is that you should have avail­able an amount to cover at least six months ex­pen­di­ture to cover emer­gen­cies should you lose your job. It is strongly rec­om­mended that you place those amounts in a sav­ings ac­count at a reg­u­lated fi­nan­cial in­sti­tu­tion. Do not hide it in some cor­ner in your house, as you will be los­ing value, as your money will not be at­tract­ing in­ter­est.

The golden rule of sav­ing: spend less in or­der to free up money to save more.

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