Finance and Investment - Essay Example

Case Study Customer Inserts His/Her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name 18th July 2013 The issues that the couple has now and those that it will have in the near future Some of the problems that the couple has now are: The couple has high credit card bills amounting to a minimum of $35,560. The credit card incurs $1,244.6 interest annually. They are also expected pay for next terms’ school fees for their children. The school fee for both their children is $60,000. The couple is feeling strained because they have to pay the total amount due for the entire year in the first term. High tax rates: if it is approximated that the tax rate is a minimum of 30% yet the couple’s annual income before tax is $280,000. This would mean that the couple is charged $7,000 monthly in taxes and $$84,000 per annum. This leaves the couple with an annual income of $196,000. This is income exclusive of other sources such as savings and savings accounts. This shows that the level of tax consumes a huge section of their income. Unfortunately, the couple has little or no control over tax rate because it is determined by the government. The couple should worry that their income is still insufficient to cater for their expenses. For example, the couple’s expenses including mortgage, school fees, salary sacrifices, agent salary, lines of credit and loans amount to $272,831. This is against a net income of $196,000. This leaves the couple with a negative income of $76,831. Although the couple has interest earnings from debentures and savings accounts that can be used on emergencies, they are straining to make contributions to these savings accounts. For example, they have to joint savings and Anne has concessional contribution from her bonus. All these contributions and savings drain their dispensable income. Some of the problems that the couple will have in future are: In the future, the couple may have to worry about rising interest rates. Currently, they are only incurring 9%, 8.25% and 8.65% in interests in each of the three loan facilities they currently hold. These rates are expected to rise especially for the second loan which will clear in 2 years time. This interest rate is expected to have doubled by the time that the loan is cleared. The couple has a credit card and a mortgage in additional to the other loans. The credit card is already posing a long term problem of payment default. For example, it has an outstanding bill of $35,560. The incur $1,244.6 in credit card interest rates payable per annum. If the outstanding bills are not controlled, they interest payable in future are likely to rise. They also have a line of credit which costs them $98,100 in interest for the last 4 years. The interest rates applied on the lines of credit are subject to change over the years which can reduce the couple’s dispensable income over time. The couple is also risking getting listed on the Credit Reference Bureau if they continue to have high outstanding credit card bills. The couple should also worry about their eldest son who lives with them. Currently, he works and gets paid and for the purpose of this study, it is assumed that he helps in paying off some of the bills. However, this is only assumption and it is possible that he might want to start his own investments, enroll in further studies or get married all together. This may reduce his assumed contribution to the family’s expenses. Therefore, the family risks losing his assistance in clearing some of their bills. The necessary steps the couple needs to take to improve and better their situation The couple can improve and better the situation by: Taking their children to a cheaper school. For example, they are spending $60,000 p.a. in school fees while they could pay less in public schools. Given that the first born son is not schooling, the current tuition fee is too high for only two children. By enrolling them in less expense private schools or public schools the couple can get better terms of payment. For example, they may get a chance to pay the fees in installments unlike what happens at the current institution. They should reduce their credit facilities. The couple should refrain from undertaking any other loans after they finish repaying their third loan which are clearing in 1 year’s time. The couple should also manage their credit card bills in order to reduce the current outstanding bill of $35,560. They should do this by increasing their monthly repayment amounts. The couple should also reduce the amount of salary that they sacrifice. For example, both David and Jennifer sacrifice $355,000 in the superfund and Anne sacrifices her bonus of $15,000 as concessional contribution. If they reduced their contribution to superfund to $300,000 then they can use $55,000 to clear off their credit card bills and they can use the remaining cash to clear off other credit facilities. They should also consider coming to an agreement with their eldest son so that he can be assisting them with household expenses. Considering that he is not paying rent and he is earning $16,500, then he is in a position to assist in miscellaneous expenses. The couple should budget their monthly account payments. They should ensure that they distribute their income in a manner that would satisfy all their bills and expenses. Therefore, they should avoid contributing too much on one bill and neglecting the other. For example, it has been observed that the couple has been neglecting their credit card payments yet they pay huge amounts of school fees. They should ensure that the credit facilities do not exceed the allowable or the arranged limit. For example, they have three loans, a line of credit, a credit card and a mortgage. Therefore, instead of adding more credit facilities, they should consider reducing the ones that are already in place. Before acquiring the credit facilities, the couple should ensure that it makes calculations on the estimated cost of the credit. The calculation should include the number of payments that are expected to be made during the life of the facility and the monthly repayments. They should then compare the cost of loan to the cash price of the product. Such comparison would enable the couple to make rational decision on the best method of acquiring a given product. In doing so, it is important to compare the interest rate being applied on the credit facilities with other financial institutions. The couple should use their Self Managed Superfund and superannuation totaling to $355,000 to pay part of their mortgage or to clear their credit card bill. They can also invest part of the money in real estate or financial items such as shares. The couple should use rental income from their new home to cater for some of their bills. The rental income totals to $24,000 and this can be used to clear one of the loans. Anne should execute her mother’s will in order to raise more cash to clear off the mortgage or other more needy bills. The couple should invest their Self Managed Superfund in the best interest earning facilities or properties. For example, they can buy cheapest shares in the market on long term basis and sell them when the market prices rise. Appropriateness of your strategy in addressing the issues The above steps are needed because the couple needs to reduce the burden it has with loans. For example, if they reduce the number of loans they have, then more money would be available to clear other bulls such as credit cards. It is also necessary to reduce the bills in order to reduce the inconvenience accompanied by inconsistent services. If they reduce the burden they have on other credit facilities such as credit cards and mortgages then they can have more cash to invest in other financial items such as shares and stocks. This can increase their income level. Clearing outstanding credit card bills would also help the couple to avoid being listed at the Credit Reference Bureau. The couple needs to enroll their children in cheaper schools because the current bill is high and the level of income is low. The couple is already living above their means. Therefore, they need to reduce unnecessary expenses by seeking cheaper schools. Cheaper private schools or public schools with good performance rating can enable the children to acquire the same level of skills at a lower cost. By consulting with their eldest son to assist with household expenses, the couple will have reduced the burden of miscellaneous costs. For example, the eldest son can assist with clearing telephone and electricity bills or buying food stuffs. This can reduce the couple’s expenses and use the same cash to clear off more urgent bills. The couple should reduce their salary sacrifices because such a move increases the amount of money available to clear their credit card bills. they can also reduce their contribution to other facilities such as concession. The couple should also budget their monthly payments in order to reduce instances of impulse or unnecessary spending. By budgeting, it is possible to cater for all the needy bills and it would help to allocate the available cash appropriately. If Anne executes her mother’s will she will have more disposable income in place to cater for other bills. For example, she can use such cash to pay part of the mortgage. If the couple uses income from their superannuation funds as well as rental income from their investment unit to invest, they can raise more money to clear their bills. The expected outcomes from taking those steps By taking the above steps, the couple would have reduced the current outstanding credit card bill. For example, if the couple managed to save $5,000 per annum from their salary sacrifices, this amount could be used to reduce credit card bill to $30,560 from the current bill of $35,560. This is exclusive of the interest that the couple makes. By enrolling their children in cheaper schools, the couple is expected to save more money to be able to put in other investments and to clear their credit card bills. For example, if the couple can spend $40,000 to $50,000 in school fees then it can save $10,000 to $20,000. If they manage to save the latter, then $10,000 can be used to clear part of their credit card bill or one of their loans and the rest can be invested elsewhere. If the couple clears the third loan within the expected 1 year’s time and does not take up another one, then they can reduce their annual expenses by $7,285 inclusive of interest expenses. This money can either be used to reduce the other loans or credit card, or it can be used to invest in items such as shares. The couple can come to an agreement with their eldest son so that he can contribute at least 5% of his income to household expenses. This would amount to $825 which can be used to clear water, electricity and telephone bills or to fuel cars if any. Regarding the will, if Anne executes her mother’s will, then she can end up receiving a huge amount of money that can be used to reduce the amount mortgage financing. When the couple learns to manage its monthly payments, it would have more disposable income to invest. By maintaining their credit facilities within the allowable limit, the couple can be able to have more money available for investments (A Recipe for Right Sizing Credit Facilities 2013) Assumptions It is assumed that Anne undertook execution of his mother’s will. This would increase the level of disposable income that the couple could use to clear their mortgage It is also assumed that the couple’s eldest son is not schooling or, if he is schooling, his tuition is not being paid by his parents. It is assumed that the couple is charged tax on their salary. The assumed tax rate used in the calculations is 30%. Since the only expenses mentioned relate to the family and not business, the only taxable item is the couple’s salary. It is also assumed that the couple will not request their eldest son to execute their will until they are old enough. This will give them more time to clear off their bills and settle down. References A Recipe for Right-Sizing Credit Facilities: Use these 5 steps to avoid the pitfalls when reducing credit facilities 2013, viewed 16 July 2013, www.fico.com Read More