Personal Financial Planning - Norton and Fergie - Assignment Example

Personal financial planning Course Author Name Name of Affiliation Outline I Introduction II Short-term and long-term life objectives III Current financial situation A). Balance Sheet (Statement of Net Worth) B). Income and statement C). Tax calculation D). Tax liability VI The asset allocation of Norton and Fergie’s total assets, V Discussion of the issues arising from their financial situation, VI Superannuation adequacy for their retirement VII Assessment of insurance arrangements VIII Discuss possible options for legally minimising References Introduction This is financial plan which will assist the Norton and Fergie to make investment and saving decisions. It contains an opinion however the financial planner shall not be held lay able for the performance of investment decisions made from his recommendation. In the report there will be a budget cash flow statement and taxes that will be charged. It will have short-term and long-term life objectives of the clients. The short-term and long-term life objectives offer a general analysis and four specific types of objectives. The general analysis will look at the overall financial position of the client. The specific objectives will help the client plan to pay off debts, save for their retirement, protect their income, and save for round the world cruise on the Costa Darwindia. Short-term and long-term life objectives The couple is contemplating to make savings for round the world cruise on the Costa Darwindia estimated to cost them $88,000 and invest in growth assets. They have also priorities of settling short term and medium term needs so he will be free to invest to gain some capital and to prepare for the presupposed future needs. These include the settling of credit card facility of $20,000, payments of a personal loan which was used to purchase Ford Falcon car immediate clearance of overdraft facility of $ 5600. The couple is pursuing this as their short and long-term objectives which they need to fulfil. To attain these objectives, the couple will need proper financial planning based on their current financial income and expenses as well as their liabilities. This financial plan/ statement of advice offers detailed information both qualitative and quantitative that will assist Norton and Fergie achieve these objectives. Current financial situation Currently the couple is employed at a salary of $90,000 and $50,000 p.a for Norton and Fergie. They also own a house worth $600,000 with contents worth $ 84,000, they also posses two cars of a street value of $50,000. The couple has invested in managed funds as well as in the stock market at $40,000 and$30,000 respectively. The following is the income and expenses statement, aggregated asset/liability statement and tax income statement reflecting their situation. Balance Sheet (Statement of Net Worth) Description Norton Fergie total Assets Town house 600,000 Household contents 84,000 2cars 50,000 Investment in cash mgt trust 120,000 Savings 7,500 Investment in managed funds 40,000 Stock 30,000 Superannuation 90,000 60,000 150,000 Deposits 12,000 Mortgages (40,000) Credit card (20,000) Personal loan (40,000) Overdraft (5,600) mortgage (400,000) Net worth 587,900 Income and statement Incoming Norton Ferge total Gross salary 90,000 50,000 130,000 Received Superannuation contribution (9%) 8,100 4,500 12,600 Interest from deposit (three deposit) 150 2.5% interest on transactional bank 188 Dividend income 1,424 Total cash in flow 144,362 Cash outflows Income tax (20,922) Living expenses (950 x52) (49,400) Interest on overdraft 15% (840) Interest on personal loan (4,800) Interest on mortgage (33,600) Interest on credit card (3,400) Superannuation contribution (9%) (8,100) (4,500) (12,600) Total cash outflow 125,562 Net cash saving 18,800 Savings in bank 7,500 Total savings 26,300 Workings i). Superannuation contribution (9%) of basic salary ii). Interest on overdraft 15% of 5,600=840 iii). Interest on loan 12% of 40,000 iv). Interest on credit card 17% of 20,000=3,400 v). Interest on loan 8.4% of 40,000 v) it is assumed the bank balance for transactional bank was uniform monthly for 12months v) interest on term deposit is for three months that is the amount earned vi) dividends Company Investment Current prices No. Of shares DPS Dividends Woolworths 7,500 36.4 206 1.26 259.56 Telstra 7,500 4.92 1524 0.28 426.72 AGL Energy 7,500 15.86 473 0.61 288.46 Meyer 7,500 3.17 2366 0.19 449.54 30,000 1,424.28 Tax calculation Tax paid by the individuals will depend on their income bracket. The following is tax calculation for the husband and wife. Taxable income is shown below Incoming Norton Ferge total Gross salary 90,000 50,000 130,000 Received Superannuation contribution (9%) 8,100 4,500 12,600 Interest from deposit (three deposit) 150 2.5% interest on transactional bank 188 Dividend income 1,424 Interest on overdraft 15% (840) Interest on personal loan (4,800) Interest on mortgage (33,600) Interest on credit card (3,400) Superannuation contribution (9%) (12,600) Taxable income 89,122 Tax liability Taxable income Rate 18,200 0% 0 18,800 19% 3,572 43,000 32.5% 13,975 9,122 37% 3,375 Total 20,922 From the income statement above it can be noted that the net savings for the couple is $ 18,800 and they have cash inflow of $ 144,362. In the computation of cash inflow, income from the two managed funds has been assumed to be negligent since it’s not provided for. In computing the expenses all interests from have been accounted for and they include interest on overdraft, personal loan, mortgage, and credit card facility. The superannuation contribution made by the employer assumed to be a fringe benefit. The asset allocation of Norton and Fergie’s total assets, There are several styles or principles that determine the assets allocation when choosing types of different assets. The most popular method of determining allocation is to choose the assets depending on the age or goal of the client. If the client is young, then stocks that are poised for growth are chosen because the client still has plenty of working years ahead of him and very little bonds for the portfolio because he doesn’t need the slow but guaranteed income from bonds. The assets of the couple are held as follows; Decomposition into various categories amount allocated Australian shares, International shares, Listed property, Direct property Australian fixed interest International fixed interest cash Town house 600,0000 Personal items 84,000 84,000 cars 50,000 Cash management trust 120,000 120,000 Bank account 7,500 7,500 Managed funds 20,000 6,000 4,000 3,000 4,000 3,000 Managed fund 20,000 9,000 5,000 1,000 2,000 1,000 2,000 stock 30,000 30,000 superannuation 150,000 Term deposit 12,000 12000 totals 45,000 9,000 4,000 126,000 1,000 24,500 Direct or indirect held assets Direct Amounts Indirect Amounts Cars 50,000 Cash management trust 120,000 Personal items 84,000 Managed funds 40,000 Transactional bank 7,500 superannuation 150,000 stocks 30,000 mortgage 600,000 Term deposit 12,000 183500 910,000 In trying to reallocate and balance the investment of the couple, various factors come into play. Currently the couple needs cash for day to day personal expenses; they have also investments which cannot be reallocated such as a town house and superannuation. The couple can reallocate three assets the term deposit, managed funds and direct shares. The table shows that Australian shares has a total of $45,000, international shares $9,000, listed property $4,000, cash $24,500, international fixed interest $1,000, and Australian fixed interest $ 126,000. the investment looks more balanced except there is too much investment in Australian shares which needs to be changed and investment in Australian fixed interest consist of cash management trust deposits which can be utilised for the planned vacation and the balance reallocated among other assets. Therefore I propose the reallocation for the above mentioned items as follows. amount allocated Australian shares, International shares, Listed property, Direct property Australian fixed interest International fixed interest cash Cash management trust 120,000 120,000 Bank account 7,500 7,500 Managed funds 20,000 6,000 3,000 3,000 3,000 2,000 3,000 Managed fund 20,000 5,000 5,000 2,000 4,000 2,000 2,000 stock 30,000 30,000 totals 41,000 8,000 5,000 127,000 4,000 12,500 The most popular method of determining allocation is to choose the assets depending on the age or goal of the client. If the client is young, then stocks that are poised for growth are chosen because the client still has plenty of working years ahead of him and very little bonds for the portfolio because he doesn’t need the slow but guaranteed income from bonds. The portfolio this time is designed to hold more bonds than stocks because the client will need most of them within a few years of their lives and has no more time to wait for the stocks to mature and provide them with the income they need (Graham, 2006). Only the 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 (Bruner, 1998). The other recommendation is that they should think of investing in diversified portfolio which will be in a form of managed funds. This will provide a good investment vehicle as their will be less variations in returns. Managed funds do not require services of investment advisor but the investment Discussion of the issues arising from their financial situation, The current financial situation of the couple is wanting in many ways because the couple remains with only $ 18,800 before making any principal for liabilities held. The mortgage of $400,000, credit card liability of $20,000, a personal loan of $20,000, and an overdraft facility of $5600 requires monthly principal payments which cannot be sustained by the current financial situation. The couple needs to utilize the term deposit of $12,000 to offset an overdraft of $5600 which attracts an interest rate of 15% while the deposit earns an interest of 5%. The balance of $6,400 will be used to reduce the amount for the credit card facility which has an interest of 17%. This is credit card liability should be avoided because the cost of main ting it is going up. The couple should agree on how much they should withdraw from their funds to offset the balances. These have dramatic impact on their capacity to save and invest for their future. Their investment can reach its highest potential if they start early, meaning; they should to increase his income as well to contribute in order to enjoy their retirement years later. The credit card facility will have a liability of $13,400. This liability together with a personal loan of $40,000 which attracts an interest of 12% should be paid off immediately by reducing the amount invested in cash management trust from $120,000 to $66,600. This is because Paying for car loan for car in installments will attract a huge amount of interest therefore couple should use $ 40,000 from other sources before increasing their emergence saving to clear an outstanding loan amount of car. This is aimed at reducing the amount of interest paid out as well as reducing the monthly principal payments for loans. This will leave the couple with only one liability of the mortgage which can be sustained by annual incomes of the couple. Usually it is prudent for a couple to have cash outflows which can be sustained by their net income arising from certain source of income. In this case , the couple have a gross salary of $130,000 with expenses amounting to $125,562 leaving only $5000 to cater for principal installments for loans. Should any of the unlikely event occur like loss of job, a couple will find themselves in a greater difficult does the need to change to a more sustainable financial position. Looking at the income statement as well as asset liability statements we will note the following ratios. ratio Calculation Figure. Liability/ asset ratio 565,600/1,153,500 49.03% Mortgage/ town house 400,000/600,000 66.7% Car loan/cars 40,000/50,000 80% Liability/disposable assets 565,600/319,500 177% Personal expenses/gross salary 49,400/130,000 38% The ratios above shows that the liability to asset ratio is 49.03% which is acceptable however, the non-disposable assets like town house, superannuation and household items are eliminated and the ratio of liability becomes 177%. This is quite dangerous for people who are at the ages of 45 for Norton and 44 Fergie. It means that if the couple is not very careful in the management of their finances they may not have enough many for investment. The car loan to car ratio is 80% which means if the cash are disposed off they will only be able to their loan. The mortgage to town house ratio is 66.7%. This means that the couple has only a stake of 33.4% in the townhouse. This financial position should change to give the couple enough financial security now and in the future. The couple should also discuss how their money should be managed and keep records for references. From this perspective, the couple can come with a plan governing aspects such as monthly expenses, combined plans and individual plans. With a background they can therefore discuss the management of their finances or get the services of a professional if need be. The extra risks when purchasing assets like stocks would be the possibility of having a well performing stock but it does not pay dividends because the company needs to use it for successive investments in order to reach its goals for growth (Graham, 2006). The client would be forced to sell a portion of the stocks if they ever need some cash for personal use and that is not necessarily a good thing because there would be capital taxes involved. It is still better to depend on the dividends these stocks produce because they are passive in nature. Of course, if the client is old and near the end of their life, there is no issue with liquidating some or most of their holdings whenever they need it seeing as they are not going to be able to stay alive and make use of it in the long run anyway. The risks for bonds on the other hand would be the lower returns they have for the investor. They are indeed safer than stocks but any investor would be plagued by inflation if they happen to be unable to invest in a bond with a higher rate than inflation. Bonds should only be chosen for the sake of having an emergency cash fund that yields a decent rate of return. Only stocks offer the possibility of a very healthy profit potential. For both bonds and stocks however, there are common risks that should be dealt with by the investor. There shouldn’t be any excessive trading for stocks and excessive movements for bonds as well because they all incur a broker’s fee or management fee from the brokerage house that you are buying securities from. You earn your profit from choosing securities well and let time do its work on the growth aspect but financial firms derive their revenue from the constant activity of the financial market regardless of whether or not it is good for you. This is the reason why financial brokerage firms encourage day trading in the first place. For the investor however, the rules are different and you would be well advised not to follow what is being done by the majority of the market (Graham, 2006). Another risks for both these asset classes, would be governmental regulations that can affect the profitability of the companies you are investing in. There are also potential civil wars that can hamper the operational capabilities of the companies you are investing into. Even if you have already been able to determine the fundamental business strength of a company there are always these factors that can’t be explained nor predicted in the financial statements. It is the same reason why any investor should monitor their investments for potential changes in the market that can alter their assets profitability for short term and long term scenarios. There are also rare but nonetheless significant events that can totally impact your investments like civil war in the country you have chosen to invest in or a major civil disturbance at least. Any weather disturbances that can hinder the operations of your chosen business will naturally impact your returns as well. Typhoons, floods as well as landslides can all happen anytime. Even the totally unexpected disaster that happened to Japan has far reaching consequences for related business that are not even located in Japan itself. Of course, the detail would also depend on what is the nature of the business you have invested upon. The possibility of default is also present for both stocks and bonds asset class because the companies behind them are facing financial concerns always in the real world. It is for this reason that investors should be very wary and thorough when investigating potential assets to buy. Obvious financial weaknesses as well as operational risks should be fully evaluated before buying anything. It should be noted however that not all risks involving a security for investment can be gleaned just from reading their financial statements. The most significant risks are sometimes based in the future hence; there is no current data that will indicate this for you. The best way to deal with this risk aspect is simply to try to ascertain the future risks in addition to the thorough financial analysis. Any future changes in technology that can render a company’s competitiveness should also be considered for probability. This is also a very significant risk for the asset because it can range from a decrease in profitability to outright bankruptcy. The investor should guard for this possibility as well. The type of risks might not always be obvious but they do have very significant impacts on businesses even if they happen rarely. It should be considered as well into the decision when buying these types of securities. For bonds, obviously the investor should never choose those with weak financial foundations. For stocks, the future profitability is considered equally important as the current financial status because stocks are chosen for their growth not just current financial health. All in all, the risks associated with both stocks and bonds can best be determined by due diligence before committing any funds to any of them. If a person is not financially savvy, he or she should best leave the financial decision to a capable financial manager of their retirement funds (Rader and Logue, 2004). Superannuation adequacy for their retirement The couple should think of putting more into retirement savings in a qualified retirement plan where they will enjoy deferral tax payment until they receive retirement benefits. The tax benefit deferral cannot be observed at once but over the year until someone retires. When the couple contributes towards a qualified retirement plan it will be beneficial to them the money will be earn interest, which will not be taxed until they retire. In the event that the money withdrawn from the fund in lump sum it will be taxed once. Assessment of insurance arrangements The couple has both has insured the house the House and its Contents are fully insured but they do not have insurance cover for the cars, life insurance, health insurance or income protection insurance. This is inadequate and they need to have a hybrid form of insurance wherein the income from their monthly premiums are also invested in the stock market by the insurance companies financial managers and then a portion of it is given to them with the additional sweet promise of having insurance coverage during the coverage of the insurance policy and after it has been fulfilled completely (Bruner 1998). In short, they are no better than my initial and strong recommendation of investing in stocks themselves without the hassle of having an insurance company take their cut with it. It is best for them to take out only one life assurance to be used by either of them. They only need to choose a plan that allows it to be applicable to either partner. They need to combine it with investing aggressively in stock units. The purpose of not having insurance for both of them is to eliminate the excessive burden of having to pay for monthly insurance premiums. The income they can possibly derive from stock dividends could greatly outpace the income they can possible derived from having to pay monthly insurance premiums. This is the reason why the advice is only to take out insurance because it provides a safety net somehow but not so much that it takes away the potential for even greater income potential. Possible options available for legally minimise their tax There are many ways the couple will explore in trying to minimise tax that that they pay. One of the strategies that is available to the couple is to make contribution to retirement fund which may have a disadvantage of reducing their annual income for paying principal instalments of loans. However this approach will reduce the amount of taxes they pay because Australian law allows contributions to retirement benefit schemes to be subtracted from gross income before the taxable income is determined. This is because upon attainment of the set retirement time, the retirement reserves are still taxable under certain circumstances. When the person requests to get his retirement savings as a lump sum, it is taxed in pertinent tax bands for personal income as well, individuals who give up work after 60 years or withdraw on reasons of medicinal basis are accountable to tax on the balance of the lump sum at broader tax bands, successfully plummeting the tax rate. Broadly, the option of entrée retirement reserves as a lump sum may consequently considerably trim down the tax reserves received from contributions made during the revenue earning years. Another approach is contributions to a Registered Home Ownership Savings Plan where it is provided that an individual is allowed for a deduction from gross income if the saving plan is recognised and the house is for dwelling. This will have a disadvantage since already the couple is burdened with a number of liabilities which does not leave extra money for investment. The couple currently has a mortgage for the town house where they live. This mortgage attracts Interest is Deductable. Interest acquired on individual credits is deductible from gross income prior to getting at the chargeable income, subject to a maximum value per month. Individual Investment in Various Assets so as to Avoid Taxes on Gains - The postponement of taxation of capital profits for more than two decades has meant that persons have not been subjected to taxes on income gained on attainment and consequent discarding of assets such as fixed possessions, equities, and predetermined income securities. When the identical investments are made in the path of a corporate body, the yield can guide to taxable proceeds at corporate tax rates. It must be cautiously illustrious that tax exclusion is where the realization and clearance of assets is not a company activity carried on beneath the pretext of individual investments. This exclusion can be benefitted from by investment through Unit Trusts or other Collective Investment Schemes such as mutual funds. Such investment channels are subject simply to preservation of tax on dividends and interest income that they obtain, with successive allocations from such units to members being tax excused. They should invest in Index funds that is those held and make up a particular index in the same relative proportions as the index. Index funds are passively managed, meaning that the fund manager trades only as necessary to match the index. Such funds are appealing in part because they are generally characterized by low turnover and low operating expenses. Another reason index funds have grown rapidly is that there is considerable debate over whether mutual fund managers can consistently beat the averages. Their fund should be put in tax-managed funds which are taxable mutual funds that are generally managed without regard for the tax liabilities of fund owners. Fund managers focus on total pre-tax returns. However, recent research has shown that some fairly simple strategies can greatly improve the after-tax returns to shareholders and that focusing just on pre-tax returns is not a good idea for taxable investors. Tax-managed funds try to hold down turnover to minimize realized capital gains, and they try to match realized gains with realized losses. Such strategies work particularly well for index funds. However, the fund will deviate from strictly following the index to a certain extent to avoid realizing taxable gains, and as a result, the fund holds turnover to a minimum. Fund shareholders have largely escaped taxes as a result. We predict funds promoting such strategies will become increasingly common as investors become more aware of the tax consequences of fund ownership. Conducting Business Using a Corporate Entity so as to Enable Comprehensive Deductions of Business Expenses- While expenditures reasonably incurred in the creation of income are tax deductible in spite of the outline of business, carrying out business by means of a business entity facilitates clearer isolation of business from personal expenditures, thus enhancing the subtraction of certain expenses. Individuals appointed in different professions, including amusement can set up companies to which they direct their income. This enables them to diminish taxable income by charging their gross income with definite tax deductible expenses they mainly possibly would fall short to deduct if they accomplished their business as individuals. References Australian Taxation Office for the Commonwealth of Australia, 2012. Individual income tax rates. 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Managing pension and retirement plans: a guide for employers, administrators, and other fiduciaries. Oxford: Oxford University Press. Whinney, J., 2013. The benefits of ETF investing. Available from: [Accessed 28 April, 2013]. Read More