Recently I gave a speech to some trainee financial journalists and thought it interesting enough to abbreviate some of the key points and frame them for BU readers.
Sometime ago, when the present UK Coalition Government was still in opposition, I appeared on BBC Radio Five Live with David Willetts, now secretary of state for universities, but at the time the Tory spokesman on pensions, and the likeable Steve Webb, now pensions minister but at the time the Liberal Democrats spokesman on pensions. We agreed on most of the key points, including our perception of the savings gap in the UK, but where we differed was when I suggested that ordinary workers should aim to save 20 per cent of their take home pay. It was a tough call, and Mr Willetts, who along with Mr Webb was on the phone, while I was in the White City studio, let out a screeching sound. It was clear he was not in agreement.
I now see that, with time, it is not unusual for speakers at pension conferences and seminars to repeat the view that a target of saving 20 per cent of take home pay is a reasonable objective if one wants to achieve a decent retirement income. Of course, all three of us realised that those on low and modest wages would find it rather difficult saving 20 per cent of their pay, and to focus on that is to miss the point. The point I intended to make, and still do, is that workers must introduce a level of discipline in the management of their wages. And, as any good financial planner would advise, the first deductions to be made from their pay packets should be the essentials – mortgage (or rent), on the principle that once must live somewhere, especially if children are involved; followed by paying essential bills, then food, fares to work and school, then set aside a regular set of money as a saving. This priority of payments is essential.
It is important to always have a small sum that one can call on in time of crisis. In the old days we used to call this rainy day savings and ideally it should be in an easily accessible account with a bank, credit union, building society or some other savings organisation. The idea is that it should be available on demand. By definition, therefore, it is advisable that the total amount in a current account, as they are called, should not go over a reasonable amount, say, for example, Bds$2000. Banks unfairly give very low, if any, interest rates on such accounts, usually below the rate of inflation and impose charges to access your own money, from charging for cheque books to monthly standing payments. This means that the purchasing power parity of that saving loses it value over time. In simple terms, although in theory $100 may remain $100 on paper, because of increases in inflation and commodity prices, what that $100 could buy diminishes as time goes on. So, once you have saved up over the minimum (($2000) it is better to transfer the ‘surplus’ to a notice account, one that gives a higher interest rate but you have to give the bank notice of any withdrawal.
In some jurisdictions there are other forms of relatively easily accessible savings plans, such as the Individual Savings Account, in the UK. This is a saving plan that is opened with taxed income, but growth and dividends are tax free. So, if one is on a higher rate of income tax, it is a substantial saving vehicle. However, even for those ordinary savers on modest salaries, it is inadvisable to invest as an individual in equities, or company shares, on the stock market. The best form of equity investments for small investors is through collective investments, which, as the name suggests, is a form of group investments in which costs are shared. There are a number of ways of doing this: investment clubs are very popular in the UK, but we have had a system throughout the entire Caribbean called ‘meetings’ in Barbados, sou-sou, ‘partners’ and by other names in the other islands.
Two things are perceived to be ‘wrong’ with this form of saving: first, its sociological history is such that we tend to miss the advanced nature of the model, in particular the fact that it is based on the very principle on which high finance is based, smoothing, as it is called in insurance. The second ‘flaw’ is that because it has been run by ordinary people almost since the abolition of slavery it cannot, ipso facto, be of any value. But, investments should be approached with caution.
As William Sharpe and Gordon Alexander told us in their seminal work: “Investment, in its broadest sense, means the sacrifice of certain present value for (possibly uncertain) future value. Two different attributes are generally involved: time and risk. The sacrifice takes place in the present and is certain. The reward comes later, if at all, and the magnitude is generally uncertain.” The one thing investment is not is a gamble. It is simple risk/reward, the higher the risk the greater the reward.
Every thing aside, one must be convinced that the fund managers with whom one entrusts one’s money has the necessary research and portfolio management skills to preserve capital and, hopefully, bring in a decent return. There is no room for sentiment in investing one’s hard earned cash. How do they spot upside potential in a firm or geographical market? There is more to retail investments than this, but I am sure you have got the idea. The next important feature when it comes to saving and investing is the institution in which one should invest one’s money and make it work. The conventional insurance model is redundant, since in the modern age an insurance company cannot just hope to warehouse people’s savings and, heavens forbid, if the policyholder has to claim on the policy just pay out an agreed sum. But insurance companies are important, they provide protection – for motor accidents, live cover, income, sickness, etc – and help one to hedge against misfortune. It is the most important aspect of financial planning. Although quite often we may think we are not going to die soon, or even more suffer any serious injuries or grave illnesses, there is a high probability that many of us will, anything from cardiovascular problems, to stroke to amputations to serious accidents at work.
As single people, the need for protection cover may not be as urgent, although there will still be a huge risk, but as a parent or spouse with dependents, it is important that we plan carefully for the future. It is in providing a basket of protection vehicles that insurance companies in Barbados let people down. From mortgage indemnity to income support, most insurance companies take the easy way out and only provide motor insurance cover, and then try their damnedest to escape any responsibility if a claim is made.
The other major institutions for investing are the banks, but contrary to popular belief, the business models of banks are awfully flawed, as I have pointed out previously. What makes banks important, however, to the wider society and more so the economy, is that they lend money to individuals and firms, which stimulate the economy by creating jobs and funding consumer spending. This is called intermediation and is the oil of a well-functioning economy.
Analysis and Conclusion:
I have been savagely criticised for saying that there are two great obstacles to progress in Barbados: those people who can only see future development through the prism of party politics; and, those civil servants who fear for their jobs and create administrative blocks for any idea that did not originate within the public sector. The suggestion, by someone who ought to know better, that Barbados is better off with foreign-owned banks is highly irresponsible. What Barbados urgently needs is a locally-owned bank. These can be a post office bank, which I prefer and is best suited, credit or trade union owned, or a locally owned commercial retail institution. But, whatever the legal structure, a locally owned bank would be more sensitive to the needs of Barbadian households and businesses than a foreign-owned one. Resolving this should be an issue at the forthcoming general election.
A very good article Hal, hats off to you.
Interesting the recent mouthing from Minister Stephen Lashley regarding the sale of the BNB. His statement did not address the MoF’s recent mouthing as well that Republic Bank has made another offer for government’s minority holdings in RBL Barbados.
Lashley must be complimented however for recognising the importance of growing and nurturing strategic assets.
Republic Bank and First Citizen Banks…..have not gone down well with Barbadians….watch and see they will sell to other foreign interest in the future…..not when T& T locking up our fishermen and we cannot get flying fish.How the hell could you expect Bajans to want to continue banking wid them. We may not be able to express the same wid SBI, Brydens and the like….but the feeling are there…The audacity of Trini.. what you expect….our entertainers treatment is another bash….they duz come here like rain but we…ha.My gran mudda used to say still waters run deep…we shall see..
@David | August 3, 2012 at 8:33 AM |
“Lashley must be complimented however for recognising the importance of growing and nurturing strategic assets.”
Complimented for what? For telling us what we already know and have heard ad nauseam from both sides of the political divide? Where was Lashley’s mouth when Bajans and the NIS sold their shares in the BL&P? Could you want a more strategic asset than a country’s power generating plant? Without power generation and distribution there is no modern dynamic economy. Check the chaos and economic dislocation caused by the recent power outages in India.
Your article is most untimely…..NOBODY has money to save (except Blackette & co,)…we battering down in BIM. People go to sleep hungry here regularly……this is no joke…YOU CAN ONLY SAVE when you have extra………right now people ( who have) like Govt …are drawing on all resources (NIS) to make ends meet…Presently we pay A DOLLAR A MILE to drive from point A to B….sheer nonsense. Dog food is being bought wid food stamps…..Blackette believes its for a german shepherd.
It seems you are trying to rival Hitler in the use of propaganda. Maybe all these suffering souls you are referring can save the monthly cellphone payments for a start.
suffering souls you are referring can save the monthly cellphone payments for a start.
You know as well as I do that demographic is the young and the restless..the lost children generation…of mom I need $ 20….or Hon..I need my nails done…not the majority of hard working souls… who do wid out or control a 2009 cell phone expense… wid pay as U -go…like me.
I loss most thru CLICO….and living off my bank account now.
“Lashley must be complimented however for recognising the importance of growing and nurturing strategic assets”
Do we have the drive and the thirst to do grow and nurture? Trinidadian corporate culture is far more ravenous than ours, with capital galore to feed it. We see the results daily. A national unified approach is the only one that can compete.
The problem with saving is that we need to lend with creating productive capacity in mind. Are we happy to lend to buy consumer durables? There is an equation which we need to get right.
“I loss most thru CLICO….and living off my bank account now.”
Onions that is why yuh don’t put all yuh eggs in de same basket. It is like playing the slot machine the machine never loses.
Don’t sweat….The Lord don’t like ugly…..watch and see his retribution and restoration qualities….I cannot lose with Him. You ever heard of Job ?
“Don’t sweat….The Lord don’t like ugly…”
You probably mean that the Lord don’t like unfairness.. But Bushie hope you know that he don’t like foolish either…
So if you tek the couple talents you get, and recklessly ‘bury’ them with Greenverbs- and now you playing innocent – don’t try passing on all the blame…. You got to hold some too…
A thief is a thief is a thief…..we can’t change that..besides…contrary to popular belief….in Barbados, new brooms seldom sweep clean.
Don’t bother Bushie, Onions still know how to fish….and no one can take that away but the Good Lord. They lucky too I is a christian man , if not D wampa might have found work…and I a new home in the south east.
We must wait on the Lord….stand still and see salvation..for the be-ridden.
We had a classic example wid a certain fella…”don’t panic”
Save the sadsop story.
WE ALREADY HAD A LOCALLY OWNED BANK – IT WAS CALLED THE BARBADOS NATIONAL BANK. ask the two wicked political parties what became of it
Before you condemn all the infelicities by these “hench men”…you would opt to take a turn in my short comings…..All the thiefing and crookery by these DEMINS…that the whole lot including Mona Lisa…. shud B in a cell up East or cutting soft stone like in the Olden Days…
Now they TRADING in Govt lands…..where will the CROOKERY end ?
Now we could better understand why Integrity Legislation had to wait till Yr 5 for the whole perry gang might have ended up behind bars in zebra suits..The people really getting their eyes juck out by these bottom feeders.
We Bajans need some divine intervention I swear.
The government of the day put shares in the NATIONAL bank up for sale, and instead of investing we were busy buying reconditioned cars and SUVS, and listening to an Opposition politician David Thompson (who bought apparently). Now some years after the fact we are busy complaining.
Even if the share offering process was flawed (some will argue), how many of us protested? We simply were not interested in owning shares in BNB!
The best NATIONAL bank is one owned directly by citizens, not indirectly as taxpayers. As someone said earlier, Stephen Lashley ought to keep silent. He is against the sale of the BNB, but sat in a Cabinet that sold government’s shares in the sole electricity supplier on the island. But then again this government does not understand the strategic importance of energy to national development.
You know the answer. It was the boom years, nobody cared.
We had the boom years
Now we have the doom years
David | August 3, 2012 at 4:11 PM |
Save the sadsop story.
Rflmao…David you have me brekking up.
Onions you are so typical of the hypocrites when tings ent gine wunna way wunna does call out de Lawd. RFLMAO
Come home my child, come home..to the arms of sweet deliverance …we keep praying too for you…it will happen…don’t fight it…See Onions baking sweet bread for you my Doubles…..best storm food…the kitchen smell heavenly…..
@ David (BU):
Any further word about the Four Seasons Hotel Investment project? You really think that soft alibi about legal red tape is really the reason for the delay with this project?
There seems to be some serious concerns by member states of the IADB of Barbados’ application for a loan to finance in this type of private sector commercial project. One valid query raised is if the Barbados NIS can find funds to invest in the Four Seasons project then the government can tap into these excess funds to finance its social capital programmes and infrastructural projects instead of approaching low cost funding sources within the IADB.
Isn’t it paradox, or should we say a double whammy, that while the country’s international credit rating has been downgraded to ‘junk status’ certain powerful members of the IADB on the other hand want to see us graduate from entitlement to low interest soft loans for our social and infrastructural development projects.
Have not heard of any information which contradicts earlier status.
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