Analysis of Couples Financial Situation - Case Study Example

Case study - investment Case study - investment Student’s Name Professor’s Name Course Title Date Introduction Our client is a couple where the husband, is self employed as a mechanic while the wife works as a receptionist. Problem identification and financial situation Our client is a couple where the husband, is self employed with a net annual income of $ 85,000 and club earning of $20,000. They require money to take care of their father for next 6 to 12 months and funeral costs in 12 months time. Their three children are attending day care 5 days per week for 45 weeks of the year. They should prepare for $27,337.50 annually. In addition they need to prepare to pay for loan, credit card amount and mortgage. If all this are not planned for and the obligations fall due within a short period, they default and the consequences of default are dire. Moreover, their credit card keeps increasing every month. Couple’s financial situation: Cash inflow: The wife earns a gross income of $55,000 p.a. and she has a salary sacrifices $5000 per year for her superannuation has $67,000 in a Capital Guaranteed Fund. After deduct salary sacrifices, she has a taxable income of $50000. Her tax charge is $ 7,797 thus her cash inflow is $42,203. He earns a gross income of $85000 from him business and a week end job at the local club earning $20,000 gross per month. He contributes $2000 to him Self-Managed Superannuation that provides a concessional contribution. After deducting superannuation the tax income is $103,000. His Her tax charge is $ 25,058 and thus take home pay is $77,942 per year They own an investment unit that generates a $165 per week income from unit rental. This brings in rental is $1980 per year. The unit is managed by an agent thus subject to agent’s fee, corporate levy, content insurance, and water rate. We assume the total other expenses 20% that is $396.. The total expense is $6050. The investment unit is a loss generating venture of $4,466. The lady has a share portfolio which she inherited from her mother two years ago at a valued of $27,550 with a capital gain of $3,550. The gain is 3,550 They have a saving account with $10,000 for emergencies and a cheque account with $12,000 which he keeps for the business. This totals to $22,000 According to above cash inflow information, the total cash inflow is $141,229 Cash outflow: The couple a home in which they owe a $450,000 and they pay mortgage interest $2,471 per month. The annual repayment is $29,652 per year They own an investment unit they need to pay $110,000 in 8 years are have interest charge of 5.5% p.a. and repayment is year is 13,750 They have two car loans that require $754 per month with 2 years to run and $533 per month within. Each car loan has an early break fee of $500. The annual outflow for this expense $15,444. Their living expenses are $1,800 per month and they a private health fund costing $293 p.m. this leads annual cost of $25,116 They have three children attending day care 5 days per week for 45 weeks of the year at $45 per day per child with a 15% reduction each for the second and third child. The total cost annually is $27,337.50. They have two personal loans, one of $15,000 taken out to pay for a world trip they had last year which costs $546 per month and another of $6,000 taken out to pay for some eye surgery she had last month at a cost $218 per month. They cost $9168 per annum. They have a store credit card for a home entertainment system at cost of $800 per month. The annual cost is $9,600. Their credit card has an outstanding amount of $18500 with 3.5% per month. The minimum payment amount is $647.5. They need to repay $7,770 per annual. According to the above information, the total cash outflow is $137,837.50 Net cash inflow is $3,391.5 Key assumptions and understanding of facts The assumptions made are that Superannuation allowable rate is 9.5% The couple files their returns jointly and the tax rate are 0% for the first 18,200, 19% for the next 18,800, 32.5% for the next 43000 and then followed by 37% for 7,630 as shown in the appendix We have also assumed that car loans interest is not allowable expenses for tax purposes. Action to taken and reasons to improve their position From the information above the couple have Net cash inflow is $3,391.50 without considering costs of taking care the father for one year and eventual funeral expenses. This means that they do not have enough cash to meet expenses for the father and other emergencies not planned for. The husband can increase his take cash inflow through advertising of his business and offering after service product like oil or water. He can also attract more customers by use of social networking sites like facebook, as well as in media. He can start a blog with is services. This will increase reputation thus income. They can reduce household expenses by asking his brother to become independent or charge him rentals from her young step-sister e.g. charging $150 per week. That rental can eliminate part of the household expense. The husband can also withdraw from the contributes $2000 to self-managed superannuation fund because of he is employed by himself. The wife can also reduce or cease her salary sacrifice to increase take home pay. In this year, she can reduce to the amount the concession limit of $25000 instead of $60000. They should sell their rental unit which loss making to increase cash inflow or get cash to pay loans that are expensive to maintain. The balance can be invested in short term bond short term bonds can provide them some sort of passive income this time. The stocks they hold should be no more than protection against inflation and also a small form of growth for the little time they have left in this world. The share portfolio should be maintained as a young couple needs future incomes. If it is sold it should be reinvested to a profit generating venture. Sell share portfolio and invest high growth dividend stocks for them because they are relatively young and in the prime of their lives. They will benefit strongly from the combined capital growth and the steady dividends stock securities can provide. Insurance products that can provide pension for both of them are very inferior in terms of earnings potential. It is also ironic for them to place their trusts in insurance companies as these same companies are also investing in the stock market to create their revenue using the premiums paid to them. They can also to reduce the household expense by management of electricity bill, water bill, and gas bill through consume less electricity and water such as switch off the light when no people using. They should purchase a private health cover to their family. If their families incur any unexpected event, they can claim the money from insurance company. They don’t need to spend a lot of money at that time. He should purchase saving insurance from insurance company instead of self managed funds. The client should think of investing in portfolio consisting stocks, mutual funds, treasure bills, bonds and traded funds. The client should think of investing managed portfolios because they do not have shares that as high volatility in returns. The main reason is because they lack information that will enable trade in the stock market regularly. This will offer a good alternative to investing in apartments. Effect of that action The wife will have an extra cash flow of 5000 taxable at marginal tax rate of 37%. After deducting tax, she will receive $42,050. If the husband withdraws self-managed superannuation fund he will have $2000 to family cash flow. They can rental unit at $210,000 this will provide funds for investment in income generating venture. It will the capital gain of $100000 where 50% of capital gain will be taxed at his marginal rate tax of 30%. After deducting CGT of $15000, he will receive $85000. This can pay personal loans and car loans of 21,000, car loans 39,620. the rest should be reinvested The purchase of insurance will release time to manage business as well increase returns. They can reduce household expenses by asking his brother to become independent or charge him rentals from her young step-sister e.g. charging $150 per week. That rental can eliminate part of the household expense. They should sell their rental unit which loss making to increase cash inflow or get cash to pay loans that are expensive to maintain. The balance can be invested in short term bond short term bonds can provide them some sort of passive income this time. The stocks they hold should be no more than protection against inflation and also a small form of growth for the little time they have left in this world. The share portfolio should be maintained as a young couple needs future incomes. If it is sold it should be reinvested to a profit generating venture. Sell share portfolio and invest high growth dividend stocks for them because they are relatively young and in the prime of their lives. They will benefit strongly from the combined capital growth and the steady dividends stock securities can provide. Insurance products that can provide pension for both of them are very inferior in terms of earnings potential. It is also ironic for them to place their trusts in insurance companies as these same companies are also investing in the stock market to create their revenue using the premiums paid to them. They can also to reduce the household expense by management of electricity bill, water bill, and gas bill through consume less electricity and water such as switch off the light when no people using. Situation after the selling rental unit Cash inflow: The wife earns a gross income of $55,000 p.a. and she has a salary sacrifices $0 per year for her superannuation has $67,000 in a Capital Guaranteed Fund. After deduct salary sacrifices, she has a taxable income of $50000. Her tax charge is $ 7,797 thus her cash inflow is $42,203. He earns a gross income of $85000 from him business and a week end job at the local club earning $20,000 gross per month. He contributes $2000 to him Self-Managed Superannuation that provides a concessional contribution. After deducting superannuation the tax income is $103,000. His Her tax charge is $ 25,058 and thus take home pay is $77,942 per year The lady has a share portfolio which she inherited from her mother two years ago at a valued of $27,550 with a capital gain of $3,550. The gain is 3,550 They have a saving account with $10,000 for emergencies and a cheque account with $12,000 which he keeps for the business. This totals to $22,000 According to above cash inflow information, the total cash inflow is $145,695 Cash outflow: The couple a home in which they owe a $450,000 and they pay mortgage interest $2,471 per month. The annual repayment is $29,652 per year Their living expenses are $1,800 per month and they a private health fund costing $293 p.m. this leads annual cost of $25,116 They have three children attending day care 5 days per week for 45 weeks of the year at $45 per day per child with a 15% reduction each for the second and third child. The total cost annually is $27,337.50. Their credit card has an outstanding amount of $18500 with 3.5% per month. The minimum payment amount is $647.5. They need to repay $7,770 per annual. According to the above information, the total cash outflow is $89,875.50 Net cash inflow is $55,819.50 Conclusion: In conclusion the above steps will help the couple reduce monthly expenses as well as reduced risk of default. They will reduce interest expense significantly by selling the property and paying off the loans. References Bruner, RF., 1998. Case Studies in Finance: Managing for Corporate Value Creation. New York: Irwin McGraw-Hill. Graham, B., 2006. The Intelligent investor. New York, McGraw Hill iShares FTSE/Macquarie G I 100 Fd (ETF), 2012). Available from: [Accessed 10 May 2012]. Krackov, L.M., and Kaushik, SK., 1988. The Practical Financial Manager. New York: New York Institute of Finance Rader, J. & Logue, D. 2004. Managing pension and retirement plans: a guide for employers, administrators, and other fiduciaries. Oxford: Oxford University Press. Whinney, J., 2011. The benefits of ETF investing. Available from: [Accessed 10 May 2012]. Read More