Importance of Saving and Financial Planning - Statistics Project Example

PERSONAL FINANCE PLANNING Student’s name Course & code Professor’s name University City Date Importance of saving and financial planning To begin with, young families comprise of fresh graduates who have little or no work experience. The result is low payments which only cater for basic expenses hence little or no savings. Secondly, many young families are subject to monthly payment of loans such as student loans, car loans and mortgages alongside other expenses such as insurance and pension schemes (Houle 2013). Such families are usually overwhelmed by the various household expenses such as food, water, electricity, clothes and entertainment among others (Darko, Egget & Richards 2013). In the UK for instance, according to a report, 3685 TISA Fact Sheet (2013), there is a notable savings gap for both short term and long term in most households. This is especially in the face of increasing costs of public service and increased life expectancy. In another report, Tackling The Savings Gap (2015), it is revealed that most Britons do not expect comfortable livelihoods upon retirement due to a shortfall between the expectations and the reality. In the case of Baz’s family, mortgage, food and car loan and car expenses such as petrol, servicing and insurance are among the outstanding expenses. Surprisingly, this family burdens itself with two cars with Yasmin not contributing much to payment of the bills. Lastly, such families are faced with inexperience with respect to personal finance management and planning. Often, mistakes are made such as having expensive cars and spending too much on entertainment and other unnecessary expenditure. These are just a few of the reasons why young families are unable to save significantly. Nevertheless, it is important to start financial planning at a young age. According to The Scottish Widows Savings Report 2014, taking the very first step of saving is significant in managing one’s future and money. For instance, an individual at the age of twenty is usually experiencing the genesis of large financial responsibilities. It is at this age where the financial foundations are laid. For instance, an individual earns their firs salary during this age, experiencing large debt sources such as car or student loan repayment and insurance among others (Finke & Huston 2013). During thirties, even larger responsibilities start to emerge as the individual transitions to home ownership and family responsibilities. During this age, an individual is required to have cleared non-mortgage loans as the mortgage sets in. one learns the basics of extended insurance at this age of financial planning, as well as asset allocation for various long term investments. During the age of forty, retirement savings are built up separately from other savings. It is during this age when an individual may have to prioritize retirement savings over others such as education for the children (Landerretche & Martinez 2013). The other phases include preretirement and retirement ages where retirement stops becoming abstract to becoming real. During the retirement age, financial planning ceases to be a major concern especially after plans have been made on how and when to transfer the accumulated wealth to the next generations. In essence, saving and financial planning are essential and lifelong processes (Credit Crunched 2013). Short term recommended actions Short term personal finance planning involves goals that are attainable within a period of one year. Such goals involve saving for purchases beyond household expenditure but can be bought within a short time frame. In short term planning, the objective involved is smaller and constraint within a tight time frame (Dorfman 2012). This especially involves saving in accounts that have high interest returns on savings. Using low interest items will not work for short term planning. According to a report by The Joseph Rowntree Foundation (2014), short term financial planning is significantly influenced by lack of financial resources like wealth, savings and other assets. Assuming that Yasmin receives Child Support for Sam and Alisha of £20.70 and £13.70 respectively, then she receives £1651.2 for both children on an annual basis. Added to her monthly income of £400, this amounts to £6451.2 From the average monthly expenditure, it is deducible that the family pays £33,000 for expenditure each year. In the current year, the family will spend an additional £4100 for flights and overdrafts hence £37100. Currently, assuming that the flight money will not be paid in the next 12 months, the family has a surplus of £16278.4. However, it is not clear how much overdraft Baz will accrue in the short-term. Even so, the surplus will not be enough to meet the goal of moving to a new and larger house in the next 3-5 years. Details Baz (£) Yasmin (£) Joint (£) Income 48,000 6451.2 54451.2 liabilities 38172.8 Liquidity (deficit/surplus) 16278.4 In the short term, given that Baz is likely to accrue overdrafts while still paying his credit cards which have high interest (29.8%), he will be spending more on such loans while his savings are of low interest (0.55%). To increase the surplus amount at the end of the year, Baz will have to clear all his loans that have a high interest rate such as the credit cards and car loans in order for him to remain with the mortgage loan. To do so, he must save less on the short-term for him to lay a larger financial base and contribute more on his pension plan. The following table illustrates the existing loans which have to be cleared, with the exception of the mortgage loan; Existing loans in 2015 £256620 Mortgage 250,000 Car loan 1440(17% assumed) Credit card 4673 (29.8% assumed) overdraft 507 (1.4% assumed HSBC Bank) Exclusive of the mortgage, it is crucial for Baz to clear the other loans amounting to £6620. To do so, he will stop saving in the short run and use Sam and Alisha’s as well as his ISA; instead of selling the old car which is used to take them to school and back. By so doing, Baz will only have the mortgage to worry about in the short term. The following table will outline the family’s financial position after the debt is paid; Personal debt Amount per annum (£) Cleared from Adjusted investment balances Mortgage 250000 Not cleared Car loan 1200 1200 from Sam ISA 2200 Credit Card 3600 3600 from Baz ISA 400 Overdraft 500 500 from Alisha ISA 2043 TOTAL PERSONAL DEBT 255300 Total savings for 2015 for the debt cleared 1320 Long term recommendations Long term planning involves objectives that take more than one year to achieve. The first step of implementing long term personal finance planning is getting rid of all debt especially car loans, credit cards and other such as student loans. It is however not possible to get rid of large debts such as mortgage that easily (Hastings et.al 2012). This often starts in the short term planning phase and transits into the long term. Long term planning dictates that such debts as credit cards should not be in the picture. It is also crucial to save a lot during long term planning as well as having an ultimate goal such as buying a new car, big house or starting a company. However, the objectives in the plan must be SMART (specific, measurable, attainable, realistic and timely). Baz’s main objectives are to move into a larger house as well as to increase his pension contributions. Without the children’s ISA, Baz will have £400 in his ISA and an additional £1320 in the surplus. He will also have a retirement fund amounting to £20160 for the seven years he has worked. Assuming that they will move to a six bedroom house in the next 3-5 years while he increases his pension plan to 10%, he will need a long tern action plan to achieve such objectives. To purchase a good detached six bedroom house, he will require about £800,000. In the UK, a dental nurse earns about £20,000 per annum. Yasmin currently earns about £4800 per annum. Being a qualified dental nurse, she is in a position to add more that £15,000 to her annual earnings. This will ensure that she is able to save for herself while she is enrolled in a pension scheme. It is therefore highly recommended that Yasmin gets a full time job so as to contribute to the long-terms goals of the family. To avoid such instances as using credit cards to cater for emergencies such as the flight to the Emirates, the family should be committed to contribute to an Emergency Fund Kitty. This will ensure that such emergent issues are catered for without having further debts with subsequent interests.. According to TSIP (2015), saving the future of UK residents will involve saving more in place of borrowing and spending as well as provisions for emergency situations such as the one of Baz herein. Appendices expenditure 2016/17 2017/18 2018/19 2019/20 2020/21 notes salary 68000 68000 68000 75000 75000 Baz salary increased to £55,000 from 2019 while Yasmin’s salary remains constant for the five years. Tax and NI 2250 2250 2250 2812 2812 Tax remains as low as 3.75% of the Net Income given that he was paying £150 per month. Pension contribution 4080 4080 4080 4500 4500 It is considered herein that according to the recommendations given, Yasmin gets a job paying £20,000 annually. Rent/mortgage 16200 16200 16200 16200 16200 Debt repayment - - - - - Normal living expenses 12000 12240 12484.8 1534.496 1565.19 Assuming an inflation rate of 2% every year from 2017. Savings 6800 6800 6800 7500 7500 insurance 3600 3600 3600 3600 3600 surplus 23070 22830 22585 27353 27323 Financial asset/liabilities property 500,000 480,000 460,000 459,000 456,000 The estimated worth of the current house, equipment and the two cars considering depreciation over the five years. Pension fund 25040 29920 34800 40100 45400 savings 8566.86 15404.26 22241.66 29782.91 37324.16 Starting from the annual 6800 plus the 1320 saved by paying debt, plus 400 left in Baz ISA account thus 8520 from 2016 (junior ISA balances after debt payment not considered). Interest 0.55% p.a Debt - - - - - It is assumed that Baz has repaid all his non-mortgage debts as recommended in the short-term plan. mortgage 81000 insurance 18,000 Paying the same insurance of 3600 annually for the five year period. Financial wealth 760885.16 Inclusive of the surpluses of all five years Reference List Assets, savings and wealth, and poverty : A review of the evidence . Joseph Rowntree Foundation. 2014 http://www.bristol.ac.uk/media-library/sites/geography/pfrc/pfrc1405-assets-savings-wealth-poverty.pdfs 3685 TISA Fact Sheet, 2013. http://www.tisa.uk.com/downloads/3685%20TISA%20Factsheet%20(FINAL%20SCREEN).pdf Credit Crunched . CFA 2013 http://www.cfa-uk.co.uk/Credit%20Crunch_full%20report.pdf Darko, J., Eggett, D.L. and Richards, R., 2013. Shopping behaviors of low-income families during a 1-month period of time. Journal of nutrition education and behavior, 45(1), pp.20-29. Dorfman, M.S. and Cather, D., 2012. Introduction to risk management and insurance. Pearson Higher Ed. Finke, M.S. and Huston, S.J., 2013. Time preference and the importance of saving for retirement. Journal of Economic Behavior & Organization, 89, pp.23-34. Hastings, J.S., Madrian, B.C. and Skimmyhorn, W.L., 2012. Financial literacy, financial education and economic outcomes (No. w18412). National Bureau of Economic Research. Houle, J.N., 2013. Disparities in Debt Parents’ Socioeconomic Resources and Young Adult Student Loan Debt. Sociology of Education, p.0038040713512213. Landerretche, O.M. and Martinez, C., 2013. Voluntary savings, financial behavior, and pension finance literacy: evidence from Chile. Journal of Pension Economics and Finance, 12(03), pp.251-297. Tackling the Savings Gap. True Potential 2015 http://www.tpllp.com/tackling-the-savings-gap/ The Scottish Widows Savings Report 2014 http://www.scottishwidows.co.uk/about_us/media_centre/reports_sandi.html Read More