Perfect Financial Planning - Example

Personal Financial Plan Table of Contents Introduction 3 Stage 3 Financial Situation 3 Stage 2 3 Identification of Financial Goals 3 Ranking of theGoals 4 Financial Resource Available 4 Financial Commitment for Each Goal 4 Stage 3 5 Asset Planning 5 Pension Scheme 7 Bank Loan 7 Investment 9 Conclusion 10 References 11 Introduction The prime objective of the assignment is to develop a financial plan detailing about all the financial goals. In this regard, there is an analysis of the personal finance using several financial tools for better effectiveness. Moreover, the paper intends to identify the short-term, mid-term and long-term financial goals and hence, providing priority to them accordingly. This is followed by the financial commitments that are required for each of those goals especially the retirement plan. Further, the assignment incorporates all the possible financial factors that would lead to a proper financial planning in an organized manner. Stage 1 Financial Situation In order to undergo a perfect career planning there is a requirement of adequate knowledge of the current scenario of the financial condition of an individual. In this context, my present age is 28 years and undergoing a military service since the past 10 years. I have a wife and two children of 8 and 10 years in my family. I and my wife have a combined annual income of $160,000. However, the major concern for me is regarding the financial stability after retirement and also to purchase a real estate for rental income. Stage 2 Identification of Financial Goals Although, I have no such financial obligation, but still there are few financial goals that I need to gain. One important aspect for me is to save for retirement. Another long term financial goal is purchasing a real estate, which will be used for purpose of rents. Besides these, another important long term financial goals is securing the education of my two children. Besides, these there are also some of the short-term financial goals. These include providing finance for purchasing a new car in the coming Christmas. It also includes replacing the old television. Ranking of the Goals It is to be noted that financing for the retirement saving is of utmost priority along with premium regarding the insurance to be filled on regular basis. Another important concern besides the retirement savings is the purchase of a real estate. This is of the second priority as the investment on the real estate would lead to an annual income from the rental use of the same. This is followed by providing premium of the educational insurance at regular basis. However, purchasing a television is of lesser importance, which is followed by the purchase of a car. Financial Resource Available The financial resources that are available at present are around $200,000 in the bank. Apart from this, there is hardly any liquid asset that is available with us. On an average basis there is an annual savings of around $35,000 from the combined income in my family. Financial Commitment for Each Goal For the commitment of each goal there is a requirement of significant amount of finance. It is estimated that for the purpose of retirement savings $10,000 is required to be financed annually. It is also estimated that the in order to pay the educational insurance premium, there is a requirement of around $15,000 on yearly basis for a proper coverage. Moreover, for the purchase of a new real estate, it is expected that around $150,000 contribution is required. Furthermore, the price of a new car is expected to be around $75,000 and television that around $3,000 on an average. Therefore, the financial commitment in order to achieve the goal is considerably high for the old couple. Stage 3 Asset Planning The first thing that needs to be done on priority basis is to cover the retirement savings, which require a contribution of $10,000 to the pension scheme. This is the top most priority for securing the income of an individual after attaining the age of retirement. Investing money in the retirement scheme leads to future security of an individual hence the contribution of $10,000 is of importance for leading a secure life after retirement. The finance for the same can be paid from the annual savings i.e. $160,000. This is the best resource to be used as the resource is the annual savings and the contribution is to the annual investment and hence, it maintains a perfect balance for the financial stability. For the finance of the retirement savings $10,000 is to be used from the annual savings of $35,000. This would lead to the remaining balance of the annual savings to be $25,000. After this the next priority is contributing a sum of $150,000 for the purchase of a real estate. The financial resource available is around $200,000 that is kept in the bank and apart from this there is only $25,000 available in the annual savings. However, it would not be a wise decision to use $150,000 from the available assets in the bank that would lead to the remaining of $50,000 in the bank and $25,000 only. The reason behind this is that there are also certain liabilities that need to be mitigated. Hence, it would be a wise decision to take some amount of bank loan for the purpose of purchasing real estate. The loan amount in this context must be such that I will be in the condition to pay back the amount with interest without affecting my major priority. Hence, the loan amount should be around $50,000. The rest is required to be paid from the financial resource that is kept in the bank. Therefore, after paying the amount for the real estate, I will have a financial resource in the bank would be $100,000. After contributing to the retirement savings and purchasing of a real estate, the next big priority is securing the education of my children. The education insurance yearly is required to be paid in installment for the security and safety of my family. The amount, which is around $15,000, can be paid by the annual saving amount, which is around $25,000. In this regard, as a source of asset for me is my annual savings, and hence as a planner I need to use this amount as a priority to pay the child education premium. The reason behind this is that the use of the annual savings money will not require any interest payment. Also, the use of annual savings amount will help me to deposit my money on time and not be a defaulter in the payment of the education insurance installment. With the payment of the installment in the child education insurance scheme, the remaining balance in the annual savings would be $10,000. The next thing that is important is the purchase of a television. A television would cost around $3,000. The available liquid asset in the bank is $100,000 along with available annual savings balance is $10,000. Thus, it would be a wise decision to use the available financial resource and not to use any of the form of credit purchase. This is because the credit purchase requires interest payment with higher percentage. Thus, the money available in the annual savings balance is required to be used. After the use of the same, the balance of the annual savings would be $7,000. This is followed by the requirement of finance for the purchase of a car. A car would cost around $75,000. There is also available balance of $100,000 as a liquid asset in the bank and also a sum of $7,000 in the remaining annual savings. However, it is also advisable not to use all these finance. The reason behind this is that the use of these resources would generate a risk of unavailability of liquid assets for me. In case of any emergency, there would be no money available for the same. Thus, it is advisable that some amount of the money for the purchase of the car should be availed through the use of automobile loan. The automobile loan, should be around $25,000 and the rest $50,000 is required to be managed by the use of liquid asset from the bank. This would lead to a balance of $50,000 in the bank as liquid that would suffice the need in case of emergency. The regular income would help us to pay the interest for the loans taken. Pension Scheme There are several pension schemes that can be used for the purpose of retirement solution. The leading pension scheme provider in the world includes the Chesapeake Energy (CHK), Devon Energy (DVN), Qualcomm (QCOM), and many more. Any one of those can mitigate the requirement of providing pension scheme. Bank Loan There are two cases in which bank loans are required to be availed. One of them is for the housing loan with an amount that is required to be taken as a loan is $50,000. This loan can be taken from any of the bank from the United States. Bank includes the J. P. Morgan Chase & Co., Bank of America Corp., Citi Group Inc., and many more. In case of J. P. Morgan Chase & Co., the mortgage rate for housing loan is 3.125% for 15 years (JPMorgan Chase & Co., 2014). Similarly, the mortgage rate for the Bank of America Corp. is also 3.125% for 15 years (Bank of America Corporation, 2014). However, the home loan interest rate in Citi Group Inc. is 3.250% for 15 years (Citigroup Inc., 2014). Thus, comparing at the interest rates of the three different banks, it would be a wise decision to purchase home loan from either J. P. Morgan Chase & Co. or Bank of America Corp. the reason behind this is that both the banks have lower interest rates than Citi Group Inc. Besides this there is another consideration, which is regarding the loan repayment tenure. The loan repayment tenure is considered to be 15 years. This is because the loan amount is comparatively less, which is $50,000. It would also not be a wise decision to purchase a home loan from the bank, which has repayment tenure of 30 years and engage into a higher percentage of interest rate payment for the housing loan. The reason for higher interest rate for 30 years loan repayment is because of the uncertainty risk that the bank possesses in the repayment of the loan. However, one of the most important things to be noted that the yearly amount that is required to be paid for the repayment of the loan, with the consideration of 3.125% interest rate for 15 years is roughly calculated to be around $4,000. On the basis of my age and so also my annual income level, 15 years of tenure would be justified to an extent. Besides the home loan, there is also a requirement for the car loan of $25,000. The automobile loan can be purchased from any of the several banks in the United States. These banks include Bank of America, J. P. Morgan Chase & Co., Wells Fargo, and many more. The car loan interest rate in Bank of America is 2.34% for a new car (Bank of America Corporation, 2014). While the car loan in J. P. Morgan Chase & Co. is 2.28% for 48 months of repayment and 2.39% for 60months (JPMorgan Chase & Co., 2014). The interest rates are for the car loan of a new car. Another bank, which is Wells Fargo, can be considered as in this bank the interest rate for loan repayment for the purchase of a car is 2.84% (Wells Fargo Bank, 2014). Thus, evaluating all the rates of the three different banks, it would be wise decision to purchase a car loan from J. P. Morgan Chase & Co. that has a repayment period of 48 months. This is by far the cheapest car loan available in the market. Further, the repayment within 48 months would not be a major issue. Therefore, the yearly loan repayment that is required to be paid considering the interest rate to be 2.28% for tenure of 4 years, which is roughly calculated to be around $7,000. Also looking at the annual savings and the composite annual income of my family, paying $7,000 annually for 4 years would not be a major issue. Investment There are certain major areas where the investment is required to be done. The most important investment is in regard to the investment in the retirement savings scheme. The retirement saving scheme costs $10,000 for yearly payment. This is mandatory and needs to be mitigated at any cost. Another concern is regarding the investment in the real estate. The investment in the field of house loan would require a repayment amount of yearly $4,000. Moreover, the other investment is regarding the repayment of loan for the purchase of the new car, where the annual repayment is around $7,000. Further, there is also the requirement of the annual payment of $15,000 for the educational insurance premium. This accounts for the maximum investment annually. These all together make a sum of $36,000 for the total yearly payment considering all the liabilities. However, it is also to be noted that the purchase of television would not add to the liability list from the succeeding years, as the complete amount is paid at the time of purchase. Nonetheless, it is also to be noted that as the tenure for the repayment of the car loan is only up to 4 years. Therefore, after 4 years there would be only the requirement of the repayment of home loan. Thus, there would be a reduction in the liability by $7,000. This would lead to the total liability after 4 years to be $29,000. The annual savings is $35,000 and the total annual liability is $36,000. Thus, there is a minimum of $1,000, which is to be saved in order to mitigate the liabilities. This has to be done by the extra savings through lowering expenditure. However, one more aspect that is required to be considered is the time-value of money. With the rising inflation the annual savings would not be as easy after some years. Further, considering the two children would also cost additional liabilities at the time of higher education for the two. Conclusion From the paper it can be ascertained that from perfect financial planning, a proper development of the financial stability of an individual can be derived. There are several categories of financial liabilities for an individual. Thus, with proper planning and with the proper allocation of the available financial resources an individual can undergo better financial advantage. There are also some more aspects that are required to be considered before undergoing financial planning. These include the consideration of the time value of money, proper budgeting, asset planning, proper investing, and many more. These would lead to the development of an individual, with regards to financial firmness. References Bank of America Corporation. (2014). Home. Retrieved from https://www.bankofamerica.com/ Citigroup Inc. (2014). Home. Retrieved from https://www.citimortgage.com/Mortgage/Home.do JPMorgan Chase & Co. (2014). Personal. Retrieved from https://www.chase.com/ Wells Fargo Bank. (2014). Home. Retrieved from https://auto-loans.wellsfargo.com/ Read More