Financial planning for the Smith family - Case Study Example

? Financial planning for the Smith family Introduction The Smith family is totally in a cash crunch. Despite the family’s combined gross income of $80,000 per year, their monthly outflow is greater than their inflows. They fully understood that they had a cash flow problem but they did not understand where their money went. The family has had a lot of trouble in setting up their future financial goals. The family would like to save for their retirement and their children college education but they never seemed to have extra money on their side. The Smith family has got a very tricky situation and their financial goals are a bit unrealistic. This is because the family wants to set aside $350 per month for their children’s college education. This from my point of view is quite high because it will amount to$ 4,200 annually. Amber’s goals on the other side are still not realistic. This is because she says she wants them to save $100,000 on their children’s school fees. This is very unrealistic because at the moment, their salary per year cannot even add up to $100,000 per year. The family has not put down in calculation the amount of money that they require for their kids’ education when they get to college. Luke for example, they have no idea how much they will pay for his college education hence they cannot plan for the future goals and how much exactly they require. Amber is thinking of overtime work so that she gets extra money for luxury items. They have made plans for a vacation, a new home theatre system, some new custom furniture and a different car for Joel. They want to apply for a new credit card with a limit of $50,000. The family has got so many plans for the extra money that they have and have forgotten the most basic things like their children’s future education and they want to pump so much money into their luxury life. They want to buy a new car which according to me is not that necessary at the moment simply because the car that they have can be easily repaired and used as they continue to save (Fedorowicz, 1977).. The Smith family has got a mortgage house and their balance on the mortgage is $131,000. They purchased the house 5 years ago by paying a deposit of $200,000. Borrowing $140,000 and used $60,000 that Joel received from his late grandfather. The following information shows the family’s financial information. This will help or act as a guide to preparing a good balance sheet and a financial statement. Electricity, water, sanitary services, and garbage pickup $225 Natural gas $125 Mortgage payment $877 Home insurance $150 Home security $55 Groceries $750 Telephone, long distance calls and home Internet $90 Cell phones/Smartphones $140 Car loan payments $520 Car gas, maintenance, and insurance $430 Clothing $200 School programs and dues $150 Children’s programs $850 Restaurants $450 Approximate minimum credit card payment $174 Other Church donations $50 $100 Notes: Expenses for the children’s programs include (per month): ? Karate $120 ? Gymnastics $160 ? Piano lessons $225 ? Guitar lessons $125 ? Hockey $220 RRSP contribution room carry-forward for 2012: ? Amber $95,300 ? Joel $25,200 As long as Landon remains under the age of six, the family will qualify for Universal Child Care Benefit payments of $100 per month, which will increase total income. Family assets and liabilities Cash $850 Chequing account 1,300 Current savings 2,200 Home (market value) 300,000 Mortgage 130,924 Home furnishings 5,500 Joel’s car 1,500 Amber’s car 18,000 Car loan 13,500 Credit card balance 5,800 Amber and Smith FAMILY BALANCE SHEET         ASSETS       THE CURRENT ASSETS   Current Assets:   Cash in bank   Current savings 2,200   0   Stock, Mutual Funds 0   Pension Plan 0   Life Insurance - surrender value 0   RESP's 120,500   Other Current Assets 0   TOTAL CURRENT ASSETS $122,700       LONG TERM ASSETS   Business property, real estate   Personal real estate 19,500   Cars   Household Furnishings 5,500   Other personal property   Other assets   TOTAL LONG TERM ASSETS $25,000             TOTAL ASSETS $147,700         LIABILITIES               SHORT TERM LIABILITIES   Credit Card Debt 5,800   Personal Line of Credit 0   Short Term Loans 0   Personal Income Tax Installments Due 850   Other Short Term Liabilities   SHORT TERM LIABILITIES $6,650       LONG TERM LIABILITIES   Mortgage - home 130,924   Car Loan 13,500   Other Long Term Debt 1,152   TOTAL LONG TERM LIABILITIES 0     $145,576           TOTAL LIABILITIES $152,226                   Net worth The net worth = total liabilities- the total assets 152,226-147,700 4,526 The family will not be able to reach their goals simply because they have a high liability and will end up paying its debts more than enjoying the money. Amber says that they want to save $100,000.This is not realistic because from the balance sheet, the family has got so much debt to pay for, hence they will not achieve that. Mortgage, insurance and other expenses are already too much to pay for hence they will not meet their target based on what they have. Amount of annual taxes the family will pay The total gross income per year is 152,226 The tax charged is 6.5% of 152,226 =$ 9894.69 Appropriate maturities for the Smiths savings goals The family should save a more reasonable amount of 5% of their income every year in order to reach their goals. For the car, the family should spend less than $10,000 for both their cars. This will help the family to plan for their kids’ education and be able to do other things because it is very costly for them to spend over$ 19,000 for both their cars. In their retirement plan, the family should be able to save at least 3% of their annual returns which in this case is 3% of 152, 226=$ 4566.78 Bank term deposits are not the right for this family because of the high interest rate. There is too much to pay for therefore the family should not take it unless it was at a lower rate than 2%. Based on all the statements prepared, the family does not have enough liquidity to finance all this because it has only a balance of $ 5,800. They are almost running out of cash at the moment. The adjustments required would be to take a credit card with a higher limit of over $100,000. The credit card offer is too low for the family based on all the needs that the family requires. Therefore there should be a higher limit credit card for them to meet their financial goals. References Fedorowicz, Z. (1977). Financial planning. Warsaw: Central School of Planning and Statistics in Warsaw, Research Institute for Developing Countries. Read More