Sunday Business embarks on a new financial series where we challenge the financial experts to give a 'money makeover' to our subjects. The experts will analyse income and expenditure and recommend ways to cut costs or increase income. And so, we invite you, the public to share your money woes with 'Stretch Your Money' and get ideas on how to better manage your money.
Write to:
Stretch Your Money',
c/o Gleaner Business Desk,
7 North Street,
Kingston.
or fax:'Stretch Your Money'
c/o Business Desk
922-6223
or email: dennisewilliams@gleanerjm.com
Dennise Williams, Staff Reporter
THIS WEEK, we look at 33-year-old Janet Patten, a vendor who sells snacks and school supplies to children outside of a Corporate Area school.
Ms. Patten is very concerned as she does not have an emergency fund and since she is the breadwinner for herself and her two children, she came to 'Stretch Your Money' for help. Here is her budget.
INCOME
Good Month $28,000
Slow Month $20,000
EXPENSES
Electricity $1,500
Water $1,000
Transport $2,000
School Fees/
Expenses $1,250
Savings in
a partner) $4,000
Goods
for re-sale $8,000-12,000
Notice that rent and food expenditure is missing from the budget.
Ms. Patten lives with her mother and uses some of the 'goods for resale' to supply food for her family. She benefits from the cost sharing programme, but is concerned if she will benefit from that in the next school term.
Additionally, the section for school fees and expenses also covers lunch money for her children.
'Stretch Your Money' asked Capital & Credit Merchant Bank (CCMB) and Jamaica Money Market Brokers (JMMB) to look at Ms. Patten's financial situation and make suggestions.
COMMENTS FROM CAPITAL & CREDIT MERCHANT BANK (CCMB)
Ms. Patten must ensure that she budgets every month, in the good times as in the bad (but I will give a little leeway in the slow months).
Savings should be number one on the list before electricity etc. We must learn to pay ourselves first before we start to spend.
After taking the time to complete a budget (which is actually a plan), Ms. Patten must STICK TO THE BUDGET.
Reduce the water bill. Check for leaks etc. as relative to other bills this appears to be very high. Also, review all other bills/expenses and reduce them if possible.
Ms. Patten needs to also check if the margin on the goods she sells is competitive and if she can increase her prices without hurting her client base or bottom line etc.
Partner Plans do not earn interest. She could open an account with CCMB. Ms. Patten could start earning nine per cent on savings (without being charged service fees etc.) and over time, build up her savings.
Additionally, it is the norm to purchase something with one's draw, so instead of actually saving, Ms. Patten is actually putting aside money to spend at a later date.
Rather than entering into a partner agreement, Ms. Patten should save the money, build up a cash reserve, then (depending on her risk appetite she says she wants high returns), she might be willing to take more risk she can purchase some stocks on the Jamaica Stock Exchange which has been outperforming the fixed income market by over 140 per cent (year after year) since the start of 2004.
If Ms. Patten is conservative, there are many fixed income, mutual funds, indexed funds etc. from which she can choose.
Ask Ms. Patten to call Capital & Credit Merchant Bank at 960-5320 ext. 2073.
COMMENTS FROM JAMAICA MONEY MARKET BROKERS (JMMB)
Ms. Pattern appears to be running a thriving business as she is currently making over a 100 per cent return on her investments. As the breadwinner of her family it is a little surprising that there was no allowance for food in the budget.
No mention was made of the amount of the partner draw, Ms. Patten's age or how old the children are.
ASSUMPTIONS
Monthly living expenses equal $5,250.
Partner draw is $48,000 ($4,000 x 12). Using the budget in Excel attached Janet can save between $2,250 and $6,250 per month. Assume Janet saves at least $6,250 per month.
Children are between ages 10-12
Janet's business is structured so that she can save at least $6,250 per month or makes a profit of 150 per cent.
The JMMB Save Smart rate is 13 per cent per annum or nine per cent after tax.
Using the information provided Janet has a number of options available to her.
She could:
Expand her business provided that will increase her profits
Seek other investments that will give similar or better returns
A combination of both - expand her business and seek other investments.
Whatever method she chooses Ms. Patten should choose options that outperform inflation.
RECOMMENDATIONS
The following are my recommendations:As the breadwinner the first thing Ms. Patten needs to have is an emergency account. This is usually three to six months living expenses.
I recommend that she starts with six months living expenses. This should be in a Save Smart money market account for safety, easy access and good returns.
CONSERVATIVE RECOMMENDATION
Objective: Increase or expand business, accumulate emergency funds and protect investments while planning for long term goals. Use next partner draw to create emergency fund comprised of six months living expenses which is $31,500 ( $5,250 x 6) in a Save Smart Money Market account.
The remaining $16,500 should be used to eithera. increase business by purchasing more goods. This will increase her profits and amount she can save; and/or b.Used to open a Savesmart Money market account.
Explore a broader mix of products such as schoolbooks, pencils, sharpeners, etc. to further increase profits from her core business.Invest $6,250 surplus per month in a Save Smart or Tax Shelter (tax-free) money market account towards her retirement and children's education.
Invest subsequent partner draws into a Save Smart Money Market account or bonds. When this amount reaches $100,000 she can invest in a Sure Investor account which provides guaranteed returns for fixed periods.This option allows Janet to expand her business, save monthly, have an emergency account and save towards her children's education and her retirement (long-term goals).
PORTFOLIO PROJECTION
The charts hows projected returns on the portfolio assuming monthly compounding (see chart above)Within eight years, Ms. Patten would have accumulated $1,048,277.17. This is without increasing her savings and assuming she only earns nine per cent per year after tax.
AGGRESSIVE RECOMMENDATION
Objective: Increase long returns on investments, diversify income stream. Use next partner draw to create emergency fund comprised ofsix months living expenses which is $31,500 ($5,250 x 6) in a Save Smart Money market account.
The remaining $16,500 should be used to eithera. increase business by purchasing more goods. This assumes that purchasing more goods will increase her profits and the amount she can save. ORb. Open a Save Smart or Tax Shelter Money Market account.Invest $6,250 surplus per month in the stock market by buying individual stocks or buying shares in the JMMB Select Index Mutual Fund. This could be towards her retirement and children's education. Invest the next partner draw into the stock market by buying individual stocks or buying shares in the JMMB Select Index Mutual Fund.
Use monthly surplus ($6,250) from sales to increase the business by buying more products.For future expansion of business Janet can borrow against her stocks or her investments and still earn interest on them. This option allows Ms. Patten to expand her business, have and emergency account, save monthly, get higher returns on her long-term investments for her children's education and her retirement, access loan facilities (if the need arises) using her investments as collateral while still earning interest.
Portfolio Projection
Assuming average return of 34 per cent per annum on the JMMB Select Index Mutual Fund and 14 per cent per annum(tax-free) on the Tax Shelter and annual compounding, then the following are the projected returns (see chart above) After six years Janet would have accumulated $1,092,655.
CONCLUSION
From the above recommendation the aggressive portfolio certainly gives Ms. Patten more bang for her buck as well as allowing her to expand her business and meet her other goals sooner. However, these will be dependent on her children's education, when she wants to retire and her appetite for risk.
Either way Ms. Patten needs to explore investment opportunities to provide additional income along with her core business.
For further information on how we can help you realise your financial goals please contact Joan Edwards, JMMB at 920-5039-41 Ext 368.
