Personal Finance - Phillip and Belinda Jameson - Essay Example

?Personal Finance Phillip and Belinda Jameson are in dire need of a financial plan, particularly after the death of Belinda’s mother who had left herhome to Belinda. The couple has to choose between renting the house as an investment property or to sell it and invest on the proceeds. Philip is 52 years and Belinda are 45 years, and they are blessed with two children: Barry aged 14 and Gavin aged 12. Philip is employed in IT role by a local authority where has worked for the past 12 years while Belinda is s state primary school teacher. The two children attend a nearby secondary school and likely to attend university. As a planner, I will ensure that the advice give to the Jameson family is suitable to the financial circumstances, and situation of the family and the financial plan will match their level of financial literacy. This paper will produce a comprehensive financial plan for the Jameson family under the following headings: 1. Current financial situation Before setting goals and strategies, it is important for the Jameson Family to determine its current financial standing. Determining the current financial position is the first step in the creation of a personal financial plan (Gitman and Joehnk, 2008). Having a thorough understanding of ones current financial position will help in the formulation of well informed and realistic goals. Therefore, the Jameson will need to determine the family’s current net worth by getting the total of their current liabilities less the total current assets. The following charts will be used in the calculation of the net worth of the Jameson Family- it is simply a family balance sheet for the Jameson Family. Assets (What the family owns) Asset Owner Value Notes Cash Joint $10,000 Access account with cheque facility attached; current interest rate 1% pa Home Joint $600,000 Contents Joint $70,000 Car 1 Philip 2007 VW Jetta Car 2 Belinda 2010 Toyota Yaris Shares Various: see below $232,641 on 8/1/13 See * Inherited property Belinda $400,000 This was the estimated value of the house on his mother’s death three months ago. She had owned the house since 1981. It could be rented out at about $300 pw, but is unoccupied at present. Total Assets 1,312,641 Liabilities (What the family owes) Current Bills Owner Value Cash expenditure Joint $80,000 Insurance premiums Phillip Belinda 1,546.48 478 Total current Bills 82,024.48 Outstanding Debt Owner Value Mortgage loan Joint 100,000 Personal loan Belinda 17,000 Credit Card Joint 5,000 Total outstanding debt 122,000 Total liabilities 204,024.48 Net worth of the Jameson Family Total assets less the Total liabilities= 1,312,641- 204,024.48= $1,108,616.52 A net worth of $1,108,616.52 for the Jameson family is an indication of a better financial position for the couple/family. The client’s situation Broad category Age Group (years) Characteristics Middle age 45-55 Children usually leave home or attend tertiary education. Level of income increases. Superannuation, debt reduction, asset accumulation and risk management would be important in this stage. 2. Objectives Setting financial objectives and goals is the second step in the preparation of a personal finance. Setting of goals or objectives will give the couple a direction for their plan as well the destination toward which they should head (Gitman and Joehnk, 2008). Some of the obvious objectives include monthly savings and retirement investments. The goal should be very smart, measurable, realistic, time based, attainable and specific. The objectives of the Jameson Family will be categorised as short term, long term or even intermediate. The development of these objectives will allow the family to achieve successes early in the plan while keeping their eye towards the future (Koh, 2012). It is also quite important for the family to establish its priorities, consider its net worth in order to make realistic objectives which align with their financial situation (Melicher and Norton, 2011). The objectives or goals should be stated as dollar amount against its future date or time periods. The following are some of the objectives of Jameson Family: Intermediate goals (1-10 years) Goal Total cost Duration Monthly cost Target date Superannuation Philip 3 years 11,500 2016 Long term goals (Over 10 years) Goal Total cost Duration Monthly cost Target date Superannuation Philip Belinda 3 years 16 years 11,500 2,280 2016 2023 3. Analysis and problem identification The goals established cannot be accomplished by just creating them. It is important to devise strategies which will help in bridging the gap. For the Jameson family, a consistency exists between the means and ends. The net worth of the Jameson Family is enough to cater for the family’s goals. The net worth of $1,108,616.52 is enough to cater for the short and long term goals of the family and still be left with some assets. If Jameson Family continues at their present activities like spending, saving and investment, then it is certain that the set objectives will be achieved. Future projections The liabilities of Jameson Family are projected to increase in the future. There are no indications that the assets will increase in the future. Assets do depreciate, and it is quite possible that the inherited property, car and home will continue depreciating in the future and so the value will decrease. The value of shares in the future is uncertain as it will depend on the prevailing market conditions and the forces of demand and supply. The family has opted to fix the interest rate for the mortgage loan, and this means that the family may have to bear huge monthly payment of the mortgage loan for the next 2 years. Cash expenditure is also expected to increase. The children are growing and so are the needs, and this is one factor which will contribute to the increase in cash expenditure. Problem identification The net worth of the family is far too much for the family to be engaged in Superannuation as the only investment. The family has two children who attend a nearby state secondary school and would soon join university. The fact that the parents expect the children to make use of the HECS scheme and live at home while at the university and that may be the reason why the couple has not invested in the education of their children. Given their family current financial situation, it would be advisable for the couple to invest in their children education in order to prevent them from using the HECS scheme which they are bound to pay after their studies at a discount. Investing in the children education will not be that costly since the children will be living at home in the course of their study and hence there will be no need for accommodation expenses and meals outside the college. The only expenditure will be transportation, school supplies and school fees. Philip is likely to retiree before his two children complete secondary school education. This means that he will receive his superannuation before the two children joins the university. The investments and the mother’s salary may be too low to sustain the family for many years. This means that the family may at one point suffer from a financial constraint. Another problem is that the family seems to have taken much consideration in investing in death, total permanent disability and income protection which can only be compensated in the occurrence of the insured peril. Another problem is that the family is not sure on what to do with the inherited house which Belinda inherited from her mother. This is an important asset, and so the couple should be able to make a viable decision about it. 4. Strategies and recommendations It is important for the Jameson family to be prepared for any eventuality in future. The total sum assured for the properties like the house, contents and the personal insurance may not be sufficient. It would be therefore advisable for them to opt for a different investment like real estate as this would mean a continued monthly income (Koh, 2012). An additional investment which will bring in income would be beneficial for the family whose bread winners are soon going into retirement and whose children are still at tender ages. The further investment will be quite helpful to the children as inheritance from the parents in case of eventuality like uncertain death of the parents. This kind of investment will be aimed at securing the future of the two children. Though insurance is important, it should not form the major focus of the family objectives. The major focus should be investing in properties or other investments which will yield continued income for the family. For the inherited house, the best option would to rent it and receive the rental income on monthly basis. Selling the property and investing the proceeds may not be the best option as investments are prone to risks and failures. All these would provide scope for improvements on the financial plan of Jameson Family. Superannuation is advantageously taxed for the people who are less than 60 year. This means that the superannuation of Belinda and Philip will be highly taxed considering that both are thinking of retiring at 55 or before 55 years. Once it is taxed, it would mean that they will not receive the full superannuation amount and these calls for them to devise another strategy which will earn them income once they retire. The family might also consider increasing its superannuation contributions for the sake of the expenses in the future. In simple terms, the alternative possible strategies for Jameson Family is to gear up and acquire additional assets outside superannuation in order to be able to cater for all of their expenses upon retirement and to have a secure future for their two children. For the education of their children, it is important for them to plan well before the children joins university. This report will assume the following: The children will join university at the age of 18 The cost of education will increase at 4.4% per year The family income after taxes is over $74,357 The parents will start saving in 2013 The savings will grow by 5% per year The total cost of the education of the children will be $50,632.72. Holding all the above assumptions, the parents will be required to save an estimated amount of $3,869 per year for the child and this includes the 5% increase in the cost of education and inflation. Source: http://www.getsmarteraboutmoney.ca/tools-and-calculators/resp-calculator/#.UXet4UoXY7B The above table shows the names of two children and their year of birth. The children are expected to attend university after completing their secondary education. A 4.4% inflation rate will be used to determine the percentage that the costs of education will be rising each year due to tuition and inflation increases (Winger and Frasca, 1999). To calculate how much is needed to be saved. The family income after taxes, the year when they plan to start saving, total amount saved so far and the inflation rate. Source: http://www.getsmarteraboutmoney.ca/tools-and-calculators/resp-calculator/#.UXet4UoXY7B Total cost of the children’s education $50,632.72 This cost is inclusive of costs of transportation, supplies, purchase of books and entertainment or personal costs. Rise in education cost per year 4.4% Family income taxes over $74,357 This amount is estimated after the education of the other four children is paid for. Year when saving will begin 2013 No amount has been saved so far towards the child’s education Savings towards the child’s education will increase by 5% per year. Source: http://www.getsmarteraboutmoney.ca/tools-and-calculators/resp-calculator/#.UXet4UoXY7B The strategy to invest in the education of the two children will see Philip and Belinda invest $50,632.72 per year in the children education plan in order to cater for their university education and other related expenses. The parents will be able to save for their children education before they retire. This will also save the children from using the HECS scheme which is subject to repayment at an interest rate after the completion of the study and after securing a job. References Stammer, D. (2010, Feb 10). It’s important to strike the right balance. 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Introduction to Finance: Markets, Investments, and Financial Management. John Wiley and Sons Read More