The Importance of Saving and Financial Planning - Case Study Example

Name: Course: Lecturer: Institution: Date: ScenarioOne: Jenny Jones Aged 26 The Importance of Saving and Financial Planning It is always in the best interest of an individual to save and plan their income and expenditure from a young age. A dollar invested today is worth more than a dollar invested tomorrow. The sooner an individual starts saving, the greater the benefits. One of the important reasons for saving and planning finances early is the power of compounding because the long the period spend in saving, the higher the returns. This allows earning of extra money on the interest earned from investments. Accordingly, when an individual starts saving early and maintains this for a substantial amount of time, the individual earns more in the form of an interest. Importantly, this gives a person the cushion to save in lesser amounts (Van Rooij et al., 2012). Conversely, a person gets to manage investment risk better through financial planning and saving at an early age. The financial markets are very uncertain; this is the only certain thing about markets. The capital markets favours investors with long-term investment prospects, thus setting continued investment plans would be of great advantage. The advantage with long term investment prospects is that it ensures the effects of the inevitable market volatility is minimised. As such, by saving and investing early gives your money additional time to mitigate the market risks and hence come out a winner. Another importance of saving and financial planning is that it teaches a person financial discipline and ones learns to focus at the plan always when trying to spend some money to avoid misuse. For example, investing certain amount of salary upfront one knows exactly how much one is left with. Therefore, in the process of spending, one develops a habit of spending less to ensure adherence to the budget. A person differentiates a want and a need; this brings the much needed financial discipline in life because one does what is necessary and avoids inefficient financial issues (Lusardi & Mitchell 2013). Additionally, Jorgensen & Savla (2010) asserts that saving and financial planning, especially at young age, helps someone to mitigate risks of life in a better way, which helps in the future development. A person is able to avoid accumulating and taking additional debts, but repays the earlier debts first. This is because one would have enough financial support in form of emergency funds to counter any eventualities of life. This helps a lot as it makes a person to feel secure and away from financial distress (3685 TISA Fact Sheet, 2014). Short Term Actions for Jenny Jones to Address Debt and Cash Flow One of the actions she should take is to cut on her spending as Gitman et al., (2010) reports, she should avoid the overspent activities like payment of rent and look for a house where she can pay very little amount by herself. Jenny Jones should be able to differentiate between a want and a need. She should cut on the wants and use that amount to settle the debts (True Potential 2015). For instance, Jones should cut on entertainment costs because they are things that she can postpone and do later after being well financially. Currently, she is spending $80 monthly on entertainment, which would be taken to her debts first. She can be able to live with reduced or no entertainment to sacrifice for the future. As such, she should cut the entertainment cost to $20 per month or less. The extra $60 and above should be channeled towards repaying the credit card. This would avoid her being charged the exorbitant interest on the credit card repayment and reduce the period of repaying her debts. Moreover, she should cut on amount spent on clothes by putting on the old clothes for some time (The Scottish Widows Savings Report, 2014). She can be buying new clothes after every three months instead of every month and save the rest. The amount should be used to cater for the student loan or any other debt. Besides, Jones should avoid using the car every time and take public transport when possible to cut down the associated cost. It is paramount that she uses the car when it is essential, this would cut the costs of running the car such as repair and petrol. Basically, cutting on her spending will enable her to repay the debts, avoid take additional debts and hence be in a better financial position as Chandra (2011) recommends. Another action that Jones should take is to avoid paying for the expenses annually. She should pay for the bills and other expenses as they fall due or incurred, which in most cases should be monthly. She should use the amounts for the later months of the year and invest them in short term investments to earn interest. This interest income will earn her more income (Joseph Rowntree Foundation. 2014). Hence, she should invest the expense amounts for months from July to December at the beginning of the year and use the revenue to repay some of her debts. Chandra (2011) adds that one such investment is buying treasury bills that mature in less than one year. She can also invest in other investments and discount them once she needs the money to pay for the expenses. Although this would not earn as much money as she would want, it would help her to cater for some of her needs as a dollar is better than none. As Cardoen et al., (2010) acclaims, Jones should avoid as much as possible to use the credit card and learn how to manage her little income since credit cards have hidden costs that she should keep away from. She should avoid depleting her savings as this would prompt her to use credit which is expensive. The debt on the credit card has a very high interest rate, avoiding this credit would save her a lot of money which she can use to repay the Barclays bank loan. She should also try and talk to her friend to allow her stay with her for sometime as she repays her loans, as this would help her have some savings before she moves to her personal house where she would be catering for all the expenses. Long Term Actions to Achieve Stated Goals One of the major actions that Jones should take is to plan for next year’s activities, today. She should not wait until the New Year to plan for it. Instead, she should make a good plan and wait for the future. She should outline what she wants to do, buy, save, earn, and invest (CFA, 2013). Then she evaluates the income and then project. If she can look back at her calendar for the last few years, there is evidence of circles of famine. She should not ignore the lesson, she should build a healthy and long-term relationship with what she earns byusing the circles to create a plan, and then review it regularly. She should be able to know her baseline survival income and the amount she needs to save every month for the next one year. This will enable her to avoid spending without saving (Lumpkin & Brigham 2011). By cutting down, his rent first would help her to recover her loans and then after she regains a good financial status, she would look for a house where she can pay high amount for rent. Another action that Jones should take is to look for ways that she can supplement her income. Jones should consider her earnings, how much she spends repaying her loans and plan to look for other sources of finances to be able to meet her needs instead of relying on the overdrafts. The fact that she is having a lot of debts is a sign that she is not earning enough money. As such, she should set up a business; this business will earn extra income to her and hence increase her earnings (Open University, 2015). She should also put her investments in different areas to elevate the level of her revenue and manage to meet her needs, as well as saving. She can have a part time business and or look for another part time job, since in the current job she is not very busy. Essentially, having an extra source of income will strengthen her financially and she will be able to clear the loans and move on. She will be able to repay off the debts without taking overdrafts and save more. Once she repays the debts, she will be able to start investing the extra income as Remund (2010) underlines. The investments would accord her income as well for future developments. Recommendations Essentially, Jones future looks bright and secure if she can follow up on the short term and long term actions recommended above. Healthy financial planning and stable income would enable her to live quality life. The quality and value of living will be determined by how she is willing to sacrifice for the long term good. Cutting costs is the most important aspect in improving his financial discipline. She should not go for holidays and other entertainment if she cannot afford them. Consequently, she should not borrow money for unnecessary and unwarranted activities. Additionally, she should avoid paying for expenses annually; rather she should pay as incurred. Moreover, she should avoid as much as possible to incur debt on the credit card. To expound her income sources, she should search for a second job or start up a business. This would enable her to cater for her needs as well as save and invest. Lastly, financial discipline is critical in achieving her stated goals. She must exercise it even at all cost. Essentially, these actions will ensure that Jenny Jones will have a healthy and stable financial life, this will improve her living. References Cardoen, B., Demeulemeester, E. & Beliën, J., 2010, Operating room planning and scheduling: A literature review; European Journal of Operational Research, 201(3), pp.921-932. Chandra, P., 2011, financial management: Tata McGraw-Hill Education. Gitman, L.J., Juchau, R. & Flanagan, J., 2010, Principles of managerial finance: Pearson Higher Education AU. Jorgensen, B.L. & Savla, J., 2010, Financial literacy of young adults: The importance of parental socialization: Family Relations, 59(4), pp.465-478. Lumpkin, G.T. & Brigham, K.H., 2011, Long‐Term Orientation and Intertemporal Choice in Family Firms; Entrepreneurship Theory and Practice,35(6), pp.1149-1169. Lusardi, A. & Mitchell, O.S., 2013, The economic importance of financial literacy: Theory and evidence (No. w18952), National Bureau of Economic Research. Remund, D.L., 2010, Financial literacy explicated: The case for a clearer definition in an increasingly complex economy. Journal of Consumer Affairs,44(2), pp.276-295. Van Rooij, M.C., Lusardi, A. & Alessie, R.J., 2012, Financial literacy, retirement planning and household wealth; The Economic Journal, 122(560), pp449-478. Websites 3685 TISA Fact Sheet http://www.tisa.uk.com/downloads/3685%20TISA%20Factsheet%20(FINAL%20SCREEN).pdf CFA 2013. Credit Crunched. http://www.cfa-uk.co.uk/Credit%20Crunch_full%20report.pdf Joseph Rowntree Foundation. 2014. Assets, savings and wealth, and poverty: A review of the evidence. http://www.bristol.ac.uk/media-library/sites/geography/pfrc/pfrc1405-assets-savings-wealth-poverty.pdf Open University, 2015. Saving us from ourselves – how can we make the UK more financially resilient? http://www.open.ac.uk/business-school-research/pufin/sites/www.open.ac.uk.business-school-research.pufin/files/files/PUFin-Green-Paper-saving-us-from-ourselves-13July2015(2).pdf The Scottish Widows Savings Report 2014 http://www.scottishwidows.co.uk/about_us/media_centre/reports_sandi.html True Potential 2015. Tackling the Savings Gap. http://www.tpllp.com/tackling-the-savings-gap/ Appendix Five - year financial projection Jenny Jones Monthly Current 2016 2017 2018 2019 2020 Student Finance 109 139 189 189 189 189 Credit card repayment 75 150 0 0 0 0 Rent 450 500 500 500 500 500 ISA 50 50 62 112 112 112 Study Loan 190 105 105 105 0 0 Car Loan (until June 2017) 95 95 95 0 0 0 Council Tax 100 * 100 100 100 100 100 Electricity and Gas 35 30 30 30 30 30 Water 18 16 16 16 16 16 Contents insurance 10* 10 10 10 10 10 Car Insurance 57 57 57 57 57 57 Petrol 200 100 100 100 100 100 Car servicing etc 15* 10 10 10 10 10 Gym fees 50 30 30 30 30 30 Running club subs 10 10 10 10 10 10 Food 150 150 150 150 150 150 Entertainment 80 20 20 20 20 20 Clothes 30 0 0 30 0 30 The above figure is calculated through looking at the current situation and projecting on what is likely to happen in the future. Read More