The Potential Problem That Ann and Jack May Face - Case Study Example

? Case study The Potential Problem That Ann And Jack May Face The currents status of the financial position of Ann and Jack is apparently stable with surplus of USD 2,087. All expenses are being met successfully. However, the current situation is showing no problem for the fact that family is currently managing payments by only paying percentage of their total expenses. This practice is not creating burden on their financial status in the current scenario but are expected to create problems in the long run. This practice is not workable in the long run. It is for the reason that over a period of time the income of the family (mainly regular income as salary) will end and while the mounted debt payments will be due. It is noteworthy that family is though enjoying the current ease of payments but is piling up debt that will move beyond the capacity of the family in future. Major pressures will be piled up from regular home installment, investment unit’s huge payment that is also not offering redraw facility, credit card that is piling up with regularity. The dividends from the stocks that Ann inherited are already recognized as franked and so cannot be relied for payment of certain of such debt. One aspect that identifies the issues is the capital appreciation from stocks in three years is 2.2% only. This percentage appears worthless as it is multiple to the percentage payable on the investment unit. Also investments made by the family are not generating the notable income such as tenant income from investment unit is running in deficit of USD 134 after meeting expense of interest. Two children are still to gain the higher education, the price of which is constantly on rise due to economic pressures. This problem will be complimented with the fact that both bread earners of family are in their late forties; therefore, the woman will retire in middle term in future while man though has his own business but will reduce the capacity to visit same number of clients as he does today and so will earn less or no. Also fast paced technological changes will ultimately require men to hire workforce which will add cost to the business. Hence, the overall revenue and expense plan is not worth. Considering these factors the future of the family is gloomy and troublesome. It can be safely stated that the future of the family is at financial risk. Steps To Improve the Situation with Respective Rationales The reflection of future developed from the assessment of the case clearly requires that it is high of time for family to assess the contribution from each cost incurred and respective benefit derived from it in current point in time as well as for future. This long term planning requires family to set the future goals. Goals to be set as suggested must meet following requirements: Each goal set must ensure that it results in meeting the financial benefit in the long terms. Goals must also enable family to align their current financial resources in a manner that are able to generate the productive results. With above two financial directions for setting goals and well as the case information, following goals must be set by the family: Readiness to re-allocation of the financial resources. Meeting and paying-off the debt burden without generating any additional debt. Enable the family to meet the educational expense of the children Enable the family to meet the meet medical requirement for father and Jack and Ann in future Enable the family to meet the fixed expenditure of the family safely once the family bread earners retire. The last goal of the family is to ensure the contribution in the family budget from every earning head. Once the family has determined what financial resource they require in the different points in time, then it shall focus itself in directing the financial resources accordingly. This will require the family to rebuild its budget. Following steps are suggested to the family for the reallocation of the budget: The family must retire the debts it has piled from two cars and a credit card bill. This total amount to be paid for the immediate retirement of such bill is USD 85000. To mention this bill does not include the bill of the home theatre system. Retiring of this bill will result in saving of USD 3038 that were being paid in monthly installments. Payment of this amount will require family to have additional amount. To generate this amount it is suggested that family shall sell its stocks that Ann inherited from her father which is valued at USD 240,750. Selling of stock is recommended for the following reasons; first, the stock are already recognized as frank, second, the stocks over the past three years have only generated the capital appreciation of 2.2% which is quiet minimal. This percentage of capital appreciation is not able to cover any of the expenses. Hence, family can pay off debts that are mounting by employing this amount productively and effectively. Another step that family shall take is to sell the investment unit on the price offered by the tenant. Sale of investment unit will generate amount of USD 540,000. The sale is suggested for the reason that investment is on interest only loan and it also does not offer redraw facility. As soon as the interests’ payments are completed, the family will be required to pay of the principal and the arrangement by the family clearly indicates that they will not have amount available to pay off the principal. More importantly, sale of this investment unit is also suggested for the fact that tenant’s income is so lower than interest paid by the company. The difference between the two cash flows on monthly basis is USD 134 in negative. Hence, family shall sell the unit and reallocate the proceeds as suggested below. Sales proceeds from the stock (after paying of cars and credit card expenses) as well as investment unit will provide the family with additional money USD 695,750. This amount is required to be invested as in education plan, medical cover for the family, investment unit and business opportunity as discussed in the mentioned format in the below points. The recommended amount of above mentioned proceeds to be invested in the education policy is USD 50,000 which is 7.19%. Currently the two children are studying in the private school. As the soon as the third child will reach the age to go in the private, the eldest one will be done with his education. The similar trend will continue for the time difference between second and the fourth child’s time to reach the private school. Hence, the education related expenditure will remain more or less equal to the mentioned amount. Therefore, the recommended amount is increased as compared to the current school fees of children to account the inflation and other factors that result in rising cost over the years. The second section of investment is recommended in the medical policy which is 20 percent of the remaining proceeds. This percentage or USD 139,150 is recommended to be invested in the medical fund for the reason that father of Jack being old will get medical policy at higher premium percentage. It is also aimed at meeting the medical expenditure for Jack and Ann in near future as they are also growing their age. Hence, it is important to have medical since after retirement pension cannot cover all these expenses which often gets too high. The third section of the proceeds to be nearly 50.31 percent or USD 350,000 shall be invested in another investment unit. This investment shall be made in an investment option similar to the one that has been already sold but on well though out condition and must not create deficits like the previous ones. The revenue in terms of the tenant income this investment unit will be employed to take up the portion of the household expenses. It must be invested with much detailed assessment of location and other factors to generate attractive revenue stream consistently in future. For the purpose, the suggestion as well as guidance from the real estate agents must be sought. The final section of the proceeds shall be diverted to business recommended by the family friend. The proceeds to be allocated to the business is around 22.51 percent of the total or USD 155,600. The idea as defined by the family friend refers that great potential of the business considering the rising concerns related to oil prices. Hence, the returns from the business will enable family to meet the home expenditure. The step sister who is not sharing any money in the household expense shall be asked to take up the remaining debt of home theatre system. This will clear all mounting debt from the families head. Once the debt is over, the step sister shall take up percentage or one fifth of the total home loan payments. Since family is based on eight people, three shares will be paid by the head of family. The head of the family will be paying off this share from savings done on retiring loans. After completing the home theatre system one share will be paid by sister in law. By this time eldest son is also expected to start earning; hence, one share out of five will be taken up him. Similarly, as other children grow old, shares will be taken up by them. This will reduce the payable share for Ann and jack and hence will be manageable within pension funds income. For the allocation in self managed funds, it is recommended to allocate these funds through professionals. Ann is marketing executive and Jack is in the business of technology; therefore, both of them are not expected to have any critical knowledge required for the effective management of the funds. Hence, these funds shall be allocated through professional considering fact that Ann and Jack. The revenue generated from these funds is to be allocated in meeting the other requirement of home that arises over time. Also this will contribute in clearing the entire bill of the credit card on monthly basis after retirement. Onwards, the shopping from credit card shall be paid off on monthly basis as they will not have any other expense of the meeting debt installments. Amount for emergency shall be kept aside or shall be placed in better investment option that is able to fetch returns covering inflation. Amount saved for business shall be increased frequently or invested in developing expertise in technological considering the changing pace of the technology. Other option that is to be benefitted from this increased amount will be to employ it in paying off the salary of the employee. It is assumed that Jack will have to hire employee as he grows old and reduces the ability to go the home of many clients. Assumptions The above assessment is developed based on the following assumptions: Sister in law agrees to pick the share as required by the family; similarly, other family members will also take up as decided. Most importantly, the economic conditions remain viable so that stocks and home can be sold as planned. The education and medical plan is able to cover the respective costs. The gross income is charged for taxes and other expenses such as fuel etc at 30%. Outcomes Though, as mentioned earlier, the family is not facing any problem in current point in time, this recommended plan will result in developing family’s similar ability in future. There will be no mounted debt payable over family. This management of debt will also secure their assets as failure to repay debts will result in default and loss of asset. The well managed plans for education and medical will also enable family to meet their requirement as when needed. Hence, the family will not be dependent to sell off any of their assets to meet any urgent demand. Read More