The Short-Term and Long-Term Financial Goals - Example

Financial management Student’s Name University Course Code and Title Lecturer’s Name Date 1. The short-term and long-term financial goals for Craig and Susan i. Susan who is a part time worker as a computer technician intends to pursue a full time career as a business manager for a computing firm in the near future. With this there will be an increase in her income up to $ 65,000 per annum. ii. The couple is currently renting a three bedroom apartment and they are paying a rent amount of $ 2,500. They have a plan to own their own property in three years’ time. They already have laid down plans for this whereby Craig has set aside a small fund for this which is invested in a portfolio of blue-chip shares. iii. The Millers have a goal to provide for the cost of tertiary education for their children. They intend to complete and establish a tertiary program in three years’ time. The expected fee for their children is $ 50,000 per annum for every child. Other costs will total to $ 80,000. iv. They have a goal of saving for their retirement so that they will be financially independent after their retirement and they believe that this is necessary. They however have no established retirement plan. 2. i. The income and expense schedule for the Millers INCOME AMOUNT ($) Total pre-tax salary 246,000 Interest from Craig’s savings 1,250 Interest from Susan’s savings 60 Dividend cheque 1,500 Lottery wining 20,000 Cash bonus 4,000 Total superannuation dividend payment a 5,000 Salary increment b 8,610 Equity investment interest c 9800 Interest from time deposit d 2500 Total income 298,720 EXPENSES AMOUNT ($) Rent for apartment 30,000 Total utilities 37,500 Total work related expenses 12,000 Total donations 800 Tax returns preparation cost 200 Total income tax e 93,203.65 Total expenses 173,703.6 Disposable income (income – expenses) 125,016.35 ii) The net worth statement for the Millers ASSETS LIABILITIES Liquid assets Amount($) Total cash and cash equivalents f 319,860 Investment assets Blue chip shares 70,000 Term deposit 50,000 Superannuation account 100,000 TOTAL ASSETS 539,860 Current liabilities Amount($) Rent 30,000 Utilities 37,500 Credit card balance 48,000 Credit card interest 680 Taxes e 93,203.65 Total liabilities 209,383.65 NET WORTH SUMARY Total assets $ 539,860 Less: total liabilities $ 209383.65 NET WORTH $ 330,476.35 iii) a) Savings ratio is an economic terminology that generally refers to the portion of the disposable income of an individual that is saved. It is expressed as a percentage. This ratio is calculated as follows: Savings ratio = savings/disposable income. The amount of savings that the Millers have is: Accounts savings for both = $ 25,000 + $ 4,000 = $ 29,000 Super annuation account for both = $80,000 + $ 20,000 = $ 100,000 Blue chip shares and term deposit = $ 70,000 + $ 50,000= $ 120,000 Total savings = $ 29,000 + $ 100,000 + $ 120,000 = $ 249,000 Savings ratio = $ 249,000/ $ 125,016.35 = 1.992 This is a positive savings ratio. It implies that the millers spending is healthy as compared to their earning b) Liquidity ratio illustrates how easy it is for an individual to convert their assets into cash and is an indication of how many months an individual can survive and meet expenses if there is no more income. It is calculated as follows: Liquidity ratio = cash assets/ total expenses Cash assets = $ 539,860 Total expenses = $173,703.65 Liquidity ratio = $ 539,860/ $ 173,703.65 = 3.11 c) Solvency ratio is a measure of an individual’s ability to pay debts owing. It is calculated as follows: Solvency ratio = after net tax income/ total liabilities After net tax income = $ 298,720 - $ 93,203.65 (net tax) = $ 205,516.35 Total liabilities = $ 209,383.65 Solvency ratio = 205,516.35 / $ 209,383.65 = 0.982 d) Debt service ratio indicates the ability of the individual’s income to pay for the services that they consume. It is always ideal if it is above 1. Monthly debt service ratio = Net income/ total debt service Net income = income – net tax $ 298,720 - $ 93,203.65 (net tax) = $ 205,516.35 Monthly income =$ 205,516.35 / 12 months = $ 17,126.36 Annual total debt services are: Rent = $ 30,000 Utilities = $ 37,500 Credit card interest= $ 680 Taxes =$ 93,203.65 Work related expenses=$12,000 Total = $ 173,383.65 Monthly debt services = $ 173,383.65 / 12 months = $ 14,448.64 Monthly debt service ratio = $ 17,126.36/ $ 14,448.64 = 1.185 This is a positive debt service ratio and indicates that the miller’s income can be able to sufficiently pay for all their debts. 3. i) Amount paid to the bank every year Total amount of loan granted = $ 800,000 x 95% = $ 760,000 Amount paid = total amount of loan x interest charged $760,000 x 7% = $ 53,200 ii) Amount they owe to the bank when the first child goes to the university The total amount that the millers should pay = $ 53,000 x 30 years = $ 1,596,000 The amount that they will have paid by the time their first child goes to the university = $ 53,000 x 18 years = $ 954,000 The amount that they still owe: $ 1,596,000- $ 954,000= $ 642,000 4. Since they want to receive an amount of $ 120,000 per year as retirement payment, using the 4% rule, this means that they need 25 times this amount. The inflation rate is 3%. In 30 years $ 120,000 of today will be: $ 316,800 The total amount that they need in their savings is: $ 316,800 x 25 = $ 7,920,000 The yearly contribution will therefore be: $ 7,920,000 / 30 = $ 264,000 5. Craig’s taxable income is as follows: Pre-tax salary = $ 200,000 Cash bonus = $ 4,000 Salary increment = 3.5% x$ 200,000 = $ 7,000 Total taxable income = $ 211,000 Using the tax rates applicable for an Australian resident: Any amount above $ 180,000 is taxed as $ 54,000 + 45 cents for every 1$ above $ 180,000 45 cents x ($211,000 - $ 180,000) = $ 13,950 Tax payable for Craig = $ 13,950 After filing the tax return with the state tax agencies, all documents that relate to tax should be kept safely. These documents are : a copy of the tax return itself, proof of filing such as a certified mail receipt or electronic filing acknowledgement, receipt for tax deduction. These documents should be kept for at least three years which is the time that tax returns are audited for validity. The couple should keep two copies of each of these documents, preferably an electronic or soft copy and the original copy. The documents should be kept in easy to remember place and also separately so that incase of damage not all will be lost. The electronic document can be stored in a CD-ROM and a password applied. 6. It is very important that the millers write a will so that their assets would fall to the right hands in case they die. For a legally valid will, the following should be considered: I. The will should be in writing II. The will should be signed at the end by the couple who in this case are the testators. III. There should be at least two witnesses during the signing and the witnesses should be at least 20 years old. The witnesses should also sign at their place. IV. There should be intention by the millers to take effect as a will. The will should be drawn by a qualified lawyer. Although this is not a must, it is recommendable because any mistake made in the will would be more expensive. The major assets that the millers have are; equity in blue- chip worth $ 70,000 and term deposit worth $ 50,000, the property purchased worth $ 800,000 and the bank savings should be directed towards their immediate dependants who are their children. The assets should be divided equally between the two children that they intend to have. The superannuation funds should be directed towards paying for the mortgage. 7. Need for permanent disability insurance cover This insurance cover will ensure that in case any one of the couple is unable to work due to occurrence of a permanent disability there will be an income from this cover. According to the Australian taxation office ruling, the amount for this cover is paid from the superannuation account. The Millers family will be able to meet their daily expenditure and also pay for the mortgage taken. Need for income protection insurance. Craig and Susan have a stable income which they have committed to various uses. Income protection insurance will benefit them in case one or both lose their jobs. They would still be getting a certain percentage of their income in case of loss of job. This can allow them to comfortably take mortgage for the property purchase without the fear that incase of loss of job they would be unable to pay for the mortgage. The millers are intending to have two children and they will be their provider. With income protection insurance they will have peace of mind knowing that their children will be provided for in case the source of income is lost. 8. Susan has a plan to pursue a permanent career which will increase her income. She should do this without procrastinating so that she can be making a bigger contribution to the family. Her annual earnings will increase by $ 19,000 if she takes the career as a business manager in a computing company. With an increased salary, she should increase savings which are now $ 4,000 and this will increase her interest earning from savings. Craig dislikes financial surprises. He should take up the income protection insurance so that incase he loses his job due to one reason or another he will be getting a portion of his income regularly. The millers have equity holdings only in blue-chip. There could be a potential problem if this company started making losses and their plan for property purchase would be jeopardized. They should diversify their investments by investing in other companies and this would be even better because their income from equity holdings will increase. Based on the disposable income available, the millers can invest in other areas like the real estate. This will lead to increased income and they will be able to comfortably pay for their mortgage. Craig and Susan want to be getting an annual amount of $ 60,000 each as retirement payment. Due to the inflation rate which is 3%, they should be increasing their contributions for retirement annually to cover this. The plan for them to prepare for the tertiary education for their children is very good. This should be implemented quickly so that other financial commitments may not overthrow it. Having a joint savings account means increased interest generation for their money. This is recommendable. Craig should keep a good track of records in tax. He should store all the tax documents safely so that incase he is doubtful of tax calculations, a claim can be made. The millers should have a budget outlining all their annual projections of spending. A budget is a very important tool in financial management (Robertson, P. 43) .This will help them in their spending so that they don’t live beyond their means. This will also help in analyzing their spending against their earning. References Robertson, P 2009, ‘Right on the money: financial advice for tough times’, New York: Faith Words, pp. 13 Garman, E 2012, ‘Personal finance’, Australia Mason, Ohio: South-Western Cengage Learning, pp.34 Appendix 1. Total superannuation dividends calculation Total accumulated amount in their account= $ 20,000+ $ 80,000= $ 100,000. The dividends payment rate is 5%. Amount payable = 5% x $ 100,000 = $ 5,000a 2. Total salary increment calculation. 3.5% increment every year. For Craig the increment will be; 3.5% x $ 200,000 = $ 7,000 For Susan the increment will be; 3.5% x $46,000 = $ 1610. Total increment = $ 8,610b 3. Equity investment interest = 14% x $ 70,000 = $ 9,800c 4. Term deposit interest = 5% x $ 50,000 = $ 2,500d Calculation of tax paid. 5. Total taxable income = total salaries + salary increment + cash bonus $ 246,000 + $ 8,610 + $ 4,000 = $ 258,610 Using the Australian taxation office rates; Any amount above $ 180,000 is taxed as $ 54,000 + 45 cents for every $1 above $ 180,000 $258,610- $ 180,000 = $ 78,610 $78,610 x 45 c = 3537450/100 = $ 35,374.50 Gross tax = $ 35,374.50 + $ 54,000 = $ 89,924.50 Additions: Medicare levy = $ 3,879.15 Less: deductions = $ 600 Net tax = $ 89,924.50 + $ 3,879.15 - $ 600 = $ 93,203.65e 6. Total cash and cash equivalent = $246,000 + $ 73,860 = $ 319,860 f 7. Amortization schedule Period Interest $ Principal $ Balance $ 1 2 3 4 5 6 7 53,200 49,476 46012.68 35,604.47 22,70.95 22,544.98 20,966.84 0 102,676 148,688.68 184,293.15 206,997.10 229,541.98 250,508.82 706,800 657,324 508,635.32 324,342.17 322,071.22 299,526.24 278,559.4 Read More