Mon | Jun 17, 2019

Oran Hall | Saving to buy land

Published:Sunday | July 8, 2018 | 12:00 AM

QUESTION: I am seeking some advice as it relates to saving and investment. I would like to do some saving towards purchasing a piece of land in another two years. I am a very determined saver, but I need to make my savings work for me. I just don't want to be saving and, at the end of the day, not seeing any returns on my money.

- Raquel

FINANCIAL ADVISER: You have set yourself a worthwhile goal, but I am not able to say if you can achieve it in the time you have set because I do not have sufficient information to make such a determination.

Land is one asset in which you can invest. It rarely loses value, and its location is very important as it determines its value and the extent to which it appreciates, whether you plan to hold, work it or build on it,

Have you considered where you would like to buy it and the size of the lot you would like to buy to get an idea of how much it would cost and the expenses you would incur to make the purchase?

How much money do you have to put towards buying the land? These questions are important in helping you determine how much you need to accumulate to make the purchase and how much you need to save monthly or per time period determined by you. Is there likely to be a gap between how much you would need and how much money you can accumulate?

In the event of a shortfall, how likely is it that you would be able to borrow to cover the difference? Is two years really realistic, considering the questions I just raised?

You want your money to work for you. For that to happen, you need to save regularly, keep what you earn by earning as much tax-free income as possible, avoid withdrawing from the principal sum, and save over a long time, which allows the power of compounding to work. Two years seems to be a short time.

How much are you able to save from your current income? It is likely that you may need to increase the level of your savings to realise your goal if your savings are below where they should be after you evaluate your position.

If you have been making a budget and sticking to it, good. But if you have not been doing so, now is the time to begin.

Key to growing your money is the returns you make. You mention making your savings working for you, so it seems that you prefer to use savings instruments to grow your money. Savings accounts and certificates of deposit will not be of much help, considering how low the rates are and that the interest earned is subject to tax.


Tax-free interest


Long-term savings accounts generate tax-free interest and pay more than most other savings instruments but do not qualify as the sum you put aside each year would have to be held in the instrument for five years. The maximum sum that can be saved to derive the tax-free benefit is $1 million per year, and no more than 75 per cent of the annual interest can be withdrawn, and you would not want to withdraw the interest.

Furthermore, since you would not be able to withdraw more than the $1 million saved each year, plus interest, that would not suit you as you would very likely need more than that sum to complete the transaction.

Treasury bills, which are issued by the Bank of Jamaica, do not pay interest but do generate income - which is the difference between their value at maturity and what they cost. That income would also be subject to tax.

The financial instruments I mentioned above all promise security of principal but do not generate significant levels of nominal income. In terms of real income, that is, taking inflation into consideration, the situation is much worse.

To grow your money meaningfully, you need to invest to allow for the value of your principal to grow as happens when you invest in ordinary shares, for example, but it does not seem that that is the course for you to follow, considering that there is no guarantee that you would be able to recover all the funds you have invested when you are ready to buy the land because stock prices fall, just as they increase.

I suggest that you do a full evaluation of your situation. If it means that you have to increase your level of savings and/or borrow to realise your goal, then do so, but it does not seem that you can depend on income from savings instruments to contribute significantly to what you will require to buy the land - and in two years.

- Oran A. Hall, principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel.