QUESTION: Ms Davis recently returned to live in Jamaica from the United Kingdom. She says she is now ready to plan for the future and is keen to purchase a house within the next year, start a clothing business, start her real estate portfolio, and start investing in the money market in local and foreign currencies.
She has no savings, but recently opened a savings account at a building society which will value $134,400 at maturity. She is about to start a 'partner' which will mature at $100,000 and intends to invest $50,000 in a money market account with a building society. Davis 'predicts' it will be worth $129,450 after one year. She also plans to return to work to secure the deposit and closing costs on the house she wants to purchase and is keen to generate £2 million in five years.
John is an artist who practises and teaches full-time, exhibits internationally, and owns an art gallery online. Because the market cannot afford original art, he depends on reproductions/prints to keep afloat financially. He has been saving the US dollar equivalent of J$5,000 monthly for the last eight months. He wants to own a house or a piece of land in the future and asks the minimum he can save monthly from a teacher's salary.
Jeffrey is in the penultimate year of his degree programme, has $100,000 from an insurance policy his mother bought for him, can save $3,000 monthly, and wants to purchase a house or apartment by the time he is 30. He wants to know the best option to pursue.
PFA: It is commendable that you are now seriously thinking about your financial situation and are planning for the future, Ms Davis. Although it is clear you are keen to purchase your home within a year, I am less clear about when you want to attain some of the other goals. It is clear, though, that you appreciate the value of diversification.
You do have savings - your account at the building society, for example - and it appears you may have other funds considering that you are about to start a 'Partner'.
I am not aware of a money-market account that yields anything close to your prediction. Ask an account executive at the building society to explain the features of the account and particularly how the yield is computed.
Features of the house
Determine from now where you would want to buy your house, its size and its features. Check the prices of houses in that area. Remember that whatever such a house costs today is likely to change when you are ready to purchase. That, and a rough estimation of the yield on your funds, will influence how much you need to save to realise that goal.
In addition to the price of the house, you need to consider that your closing costs could be equivalent to 12 per cent of the value of the property and that your monthly mortgage payment should ideally not exceed 30 per cent of your gross income.
Consider also that you may be required to make a deposit of up to 15 per cent of the value of the house to the vendor. Given the short timeline, you need a good job - fast.
Your five-year goal tells me you are an extremely positive person. You have very high expectations. I commend you for setting goals. To be meaningful, they should be specific, measurable, achievable, realistic, with a time set for achieving them.
It seems home acquisition is your primary goal. Let that be. Set a time to achieve the rest and work at them in an orderly way.
John, you are the best judge of how much you can save from your teacher's salary. Determine how much it takes to support your basic lifestyle, when you want to purchase the land or house, how much it may cost, and the returns you can earn on your savings to arrive at how much to save.
When that time comes, buy only what you can afford. You should consider enlisting help to market your art to make it more worthwhile.
Jeffrey, consider investing the $100,000 in the balanced fund of a unit trust. The equities and real estate therein will generate growth, though depreciation is possible, but the interest-bearing securities will give some protection of capital.
Invest the $3,000 per month immediately by buying units in that fund. Follow a similar approach when you start to work perhaps by buying equities and money-market instruments.
Oran A. Hall offers free personal finance and money management advice. Email: finviser.jm@gmail.com.
