Borrowing from yourself

PFA: There is much that you have not said but I will offer the best advice I can in the circumstances. There are things that we must establish at the outset.

It is very important to have funds readily available for emergencies. Depending on your circumstances, a sum equivalent to three to six months' income is recommended. Borrowing is a costly way to fund any kind of activity but it can be very worthwhile if what the funds are used to purchase is able to generate sufficient income to service the debt and yield a surplus. In this way, debt can be quite effective in increasing wealth. Unsecured loans are very costly, though.

Generally, the cost of servicing a debt is far more than the income that can be earned from investments that earn interest. A savings account is not an investment and generally pays a very low return. Moreover, it is likely that the loan would have to repaid with after-tax income.

I like the approach that you are taking to creating and building wealth. You already have some unit trust, though you have not said if your investment objective is capital growth or income. In any case, you have put yourself in a position to earn superior returns to what you may have been able to earn by buying individual securities on your own. You also own life insurance with investment. This is quite similar to the unit trust.

emergency funds

You now want to start a taxi business but have not said if you have funds other than you have mentioned to cover any emergencies that may arise. You have not said either if you have additional funds to go towards the cost of purchasing the vehicle.

You can get a loan from a source that, at first glance, seems cheap. That source is you but you must first determine if the business proposition is sound. If you have other funds to cover emergencies and some of the other expenses, you could use the funds in the savings account instead of borrowing from a financial institution.

But you must be a good borrower; repay your loan and pay the same rate you would the financial institution. That way, you would soon restore your savings and earn a better rate than is being earned on the savings account.

To build some discipline into the transaction, have a set time each month to make the repayment. In fact, I suggest you put your funds in an instrument that gives a better yield than the savings account, which you should use for funds required regularly. Interest rates are low generally but repurchase agreements and fixed deposits still pay more than savings accounts.

Keep a special account for expenses related to operating and maintaining the car, or at least keep good, clear records relating to income from it and the expenses directly related to it. I trust that it will generate more than enough to service your debt to yourself and leave you a tidy profit at the end of the day.

I wish you success.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of "The Handbook of Personal Financial Planning", offers free counsel and advice on personal financial planning. finviser.jm@gmail.com