Introduction:
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.
Saving:
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.
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