ONE OF the dilemmas people face is what to do with lump sums during the holiday season. Should you invest or spend? It is possible to do both?
We asked Scotia Jamaica Investment Management (SJIM) for their opinion on the following scenario.
SITUATION
A single 30-year-old with one child has $100,000 available. However, it is Christmas and the pressure is on to spend on new furniture and gifts. Note, however, that furniture is the priority, as a new stove; TV and living room suite is badly needed.
Here are the options:
Spend the money on new furniture, gifts and general Christmas cheer and have no debt in January.
Buy furniture and a few gifts on hire purchase and invest remainder of money.
The hire purchase option works out to $7,000 per month for 36 months with a deposit of $20,000. Another hire purchase alternative is to pay nothing down and pay $10,000 for 42 months.
In terms of investing, the objective is to combine long-term growth that beats inflation, plus some amount of security, and income from investment.
SOLUTION
SJIM explains the solution to this financial quandry. It is always favoured to start the new year off without much debt. In this way you are now able to realistically start an investment plan that is easily maintained. Planning for your future is crucial and therefore it is always advisable to have an investment plan.
As a single parent, there are always monthly expenses (planned as well as unplanned) that must be met, and therefore this investment plan, must take all aspects of your expenses into account.
EXTREMELY HIGH
If the investor were to take out the goods on credit, the higher purchase rate is approximately 72 per cent p.a. add-on (36 months) and 91per cent p.a. add-on (42 months). As you can see, it is extremely high, and therefore, although it gives some allowances in the short run, you will be in a high debt situation in the future. Ultimately it is felt that funds could be better used if hire purchase wasn't considered as an option.
As a consequence, the recommendation would to use $80,000.00 of this money (the $100,000) and purchase the necessities for the home and child.
The remaining amount $20,000.00 could be now used to start an investment plan that encourages regular, disciplined savings. As a young person and a parent, it would be advisable to 'put aside' money towards your child's education.
SCOTIAMINT
Therefore it would be recommended with the funds presently available $20,000.00, to invest in a product that would meet your medium to long-term needs. This can be provided through a product like Scotiamint, which is offered through the insurance subsidiary of Scotiabank Jamaica Scotia Insurance. This is an interest sensitive insurance policy that offers tax-free returns after a five -year period.
What is crucial is that you find a suitable investment product to meet your financial situation, investment objectives and your time horizon. During this festive season, it is quite easy to spend, spend, spend and not be able to account for the lump sum you received at the start of the season. So always make allocations for investments, which will be able to offer some preparations for the future.
