Personal Finance - Current Financial Situation and Actions to Improve Position - Case Study Example

FINANCE (CASE STUDY) al Affiliation) First Two Things They Should Do Work out their Current Saving Capa A financial overview of the couple tells me that they are able to live comfortably without having to stay in debt or struggle to meet their needs. Kevin and Alex are not poor, they have well paying jobs and at least they have tried to invest (which is a good indicator of their willingness to sacrifice and build on what they have. As a result of this, the very first thing they should do is to find a way of minimizing their expenses and saving as much as possible. They should work out how much (after paying off all their debts and driving down their expenditure) they can save every month. Good saving habits and practices begin with a clear knowledge and understanding of what one is capable of and how much one can spend at any given time without negatively affecting his/her financial health. The couple must therefore know how much they are capable of saving every month, compare that figure to the actual amount they are saving and then start cutting down on unnecessary spending. Work out a Saving Plan Ascertaining saving is only the first step. It acts as a precursor to the next course of action, which is working out a saving plan. The most important thing to note here is that one thing leads to the other, and in a case like this it is advisable to move in a systematic and methodical manner. Assuming the couple has now figured out how much they are capable of saving every month, they can now move to achieve that goal. All expenditures should be planned in such a way that the saving targets are either met at the end of every month (or even surpassed). So long as the couple is saving money, meeting its targets and avoiding unnecessary expenditures, a strong financial foundation has been laid which will act as a launching pad for financial security and freedom. Their Current Financial Situation I would say that the couple is currently doing fine. Their total expenditure per annum is $228,348, compared to their total income per annum which is $294,650. This means that at the end of every month they are able to save $66,302. In addition to this, their investments and assets total $1,771,500, while their total debt is $28,965. I would therefore say that since the couple is not in debt and they are able to save some money, their financial position is pretty healthy. As a consequence, it is possible that through better saving and spending habits, they can save even more money and maintain a positive financial outlook going forward. All the Aspects of their Finances Kevin and Alex are capable of saving more than they are saving now. The only thing they need to do is to eliminate any unnecessary costs and expenditures that can only serve to increase their debt. It is however encouraging to see that both of them have invested in either a superannuation or some other type of fund. Alex diverts a portion of her salary ($33,000) to a superannuation fund, while Kevin has invested in a superfund. Apart from this, the couple has invested in a share portfolio, an investment unit and a debenture. The superannuation is important because it provides them with a sense of security and something to fall back on once they are either retired or are unable to work. The debenture, investment unit and share portfolio also offer viable financial alternatives that would otherwise be unavailable if the couple did not seek financial security. Their Overall Situation I would laud the couple for making efforts to secure their future, because although they are faced with numerous financial challenges, they are managing to stay afloat. With a combined income of less than $300,000, it is commendable that they have made some very good investment moves. They took out a mortgage, and even though it was $850,000 at the time they took it, their house is now worth $1,050,000. This means that once they stop remitting the monthly payments that are due, they will own their home and probably get even a higher value for it if they decide to sell. Although I have already mentioned other investments undertaken by the couple, I would like to add that once they are through with paying school fees (their children are not so young) they will be able to save even more. This will boost their financial security a great deal, considering that they are likely to be less productive by that time (Alex will most likely have retired). Actions they can take to Improve their Position Focus on Paying down Debt (especially the mortgage) and Avoiding Unnecessary Expenditures Driving down debt should be the primary focus of this couple, although they might be tempted to invest and attain financial security, first on their list should be the adoption of techniques meant to minimize debt whenever possible. The reason this is important is due to the fact that debt is the biggest obstacle to growth and independence. It does not matter how much investment one makes; provided debts are piling up there is a reason to be worried. Clearing debt is likely to provide the couple with the freedom to flex their financial muscles elsewhere, something which would be rather difficult if they spent most of their income and gains paying debts. In addition to this, financial services institutions prefer dealing with people who have good credit ratings. This means that if Kevin and Alex want to be able to secure loans and financial assistance of a significant amount, their credit must look healthy. This can only be achieved by constantly trying to drive down and clear as much debt as possible. Try Government Schemes Government schemes offer the best and most reliable financial incentives. Despite the fact that the private sector may promise good returns in a short time, government schemes offer friendly rates that come with long-term benefits. For instance, a person applying for a loan in a private financial institution may not qualify because of stringent credit rules and ratings. However, government schemes are very accommodative and even people with a considerable amount of debt can secure financial assistance. Government schemes can allow Kevin and Alex to borrow money and re-invest while paying off their loans and other debts in a gradual manner. This will allow them to grow faster than expected and to improve their credit rating within a short period of time. Seek ways of Protecting their Assets Investment and the acquisition of assets should not be done blindly. A lot of emphasis should be placed on providing security to assets that have been acquired, with a view of preventing total collapse in case of unexpected events, disasters or fluctuating and unpredictable markets. In light of this, insurance should be considered whenever possible so that asset protection and recovery is guaranteed whenever any unexpected events occur. The benefit of asset protection is that the couple will have the confidence to go out and inject money into a project or idea knowing that they are secured against the usual suspects like destructive natural events, accidents and volatile markets that often scare away potential investors. Develop a Wealth Creation Strategy (like debt recycling, for example) From the case study, it is apparent that the couple has the potential to create wealth and generate more income than the one they are currently earning; this cannot be done without a proper and elaborate plan though. A good wealth creation strategy would provide a solid base on which the couple would build and grow their investments, and would therefore have to be devised with the help of a professional financial adviser. After adopting the strategy, knowledge would again be required in its application, but if implemented appropriately it can open so many doors for investment. The effect of a wealth creation strategy is primarily centered on its role as a guiding tool and yardstick. Anybody who comes up with a good strategy and puts it to work effectively has a huge chance of realizing his/her investment goals. I see this case study as a similar scenario, and I do not doubt that Kevin and Alex would find it invaluable since they still need to be guided on how to invest. As a result, a wealth creation strategy should play an integral role in the investment moves made by the couple. My Assumptions I am hoping that the couple will try to minimize some expenses that I consider unnecessary, as well as take up the options I have suggested above. For instance, it does not make sense having three children who are all attending private schools and yet they are struggling to pay the school fees. They can take them to public schools and save on some money, and then when they are capable they can even take them to private universities. At the same time, I think the car loans are a huge rip-off. By the time the couple is done with the payments, they will have paid a lot more money than the cars actually cost. I am assuming that they will sell the cars and invest the money elsewhere, and then use the car loan payments to clear their mortgage debt. I am also assuming that the couple can increase their investments while driving down their debt at the same time. Debts like the $11,000 Alex owes her parents and the one on the credit card should be settled as soon as possible otherwise it might prove problematic in the future once it accumulates. Their Situation after the Suggested Actions Ok, assuming the couple implement my suggested actions, their financial position is likely to be much better than what it looks like now. After settling or minimizing all their debts and unnecessary expenditures, money will be freed up for investments and savings. Currently, the couple remains with $66,302 after all bills are settled, but I expect them to be in a position to save over $100,000 after following my suggestions. In addition to this, I expect them to have cleared their mortgage payments since they will have more money to save and spend, cleared their car loans (or sold their cars altogether). Read More