Current and Future Problems That the Couple Will Encounter - Essay Example

CASE STUDY By Student Name Course code + name Professor name University name City, State Date of submission Current and Future Problems That the Couple Will Encounter The Non-Deductible Pay-Off (Mortgage) The strategy employed by the couple to pay the mortgage debt is likely to be quite effective. Mortgage repayment will guarantee return but, at the same time, it will require a very high disciplined approach. This directs all the cash flows and any cash surplus into repaying the home mortgage. It has been noted that the couple is repaying a mortgage without a redraw facility. It has also been noted that the couple has four children, all who are, in school. The current problem that the couple faces is concerned with the repayment of the mortgage without a redraw facility. This means that within the next two weeks and when the school fees for their school going children falls due, they cannot withdraw from the mortgage to pay for their children’s tuition. The couple will suffer higher taxes of an extra 30 %, which they would have saved had the mortgage allowed for the re-drawing element. The element is a tax effective means of saving for the educational expenses of the children. Thus, it can be assumed that the aforementioned situation is the problem that the couple has to contend with at the moment. Unit Trusts It has been noted that Jack has conducted a unit investment and just like any other investment, Jack is likely to face the risks that are associated with other investments at the moment as well as in the future. The first problem, which he would likely face, is the loss of control on the unit investment; Jack is not involved directly in deciding on the manner in which he can have his money invested. The investment is done according to the wishes of the investment unit manager. It must be noted that as long as the manager has invested the funds in accordance with the investment unit prospectus, then Jack will not have any course of action or any form of control over his investment. This is both a current problem that Jack faces as well as a future challenge should he continue with the investment unit. It must also be mentioned that the investment managers are highly trained technocrats who portray higher knowledge on financial investments and within investment units. They are likely to take more time in carrying out extensive research before they can conduct any form of investment. This will call for immense level of patience on the part of Jack. The problem that Jack will, therefore, experience is the time lag between investing and getting returns from the investment. The second problem facing the couple, at the moment, regarding the investment unit is the payments of the fixed fees and charges. It has been noted that the couple is faced with a lot of bills that need their immediate attention. The fees and charges that must be paid to the investment unit managers are not considered for free. Jack, as the sole holder of the unit scheme, is aware that the services being offered by the investment units are not unaccountable. Therefore, Jack has to bear with the costs of maintaining the investment unit. The third challenge faced by Jack, in respect to the unit investment, lies with the opportunity cost; this is a cost that Jack must endure since it is the cost of the forgone opportunity. This means that the money, which Jack has invested in the investment unit worth $ 465,000 at an interest of 5.5% per annum and currently valued at $ 540,000, would have been used in doing any other business apart from being confined to the investment. The immediate problem to Jack is the cost that he has suffered on having to invest the entire amount in the investment unit instead of investing in any other business. Thus, the future problem will be concentrated on the lack of benefits that would have, otherwise, accrued to him. It must, however, be noted that carrying out a certain investment will guarantee better yield of returns. Should the investment unit yield good returns at the end of the investment period, then Jack will have made the best investment decision ever. On the contrary, should the investment turn out to perform poorly, then Jack might feel that his investment choice was not the best and thus, he will have suffered the cost. Jack is also well aware that his investment in the unit depicts a slightly lesser risk than other available investments within the market. He therefore, faces a future problem of suffering losses when other high-risk higher return investments perform better in the market. Another problem that Jack will face in the future will revolve around the uncertainty in respect to the performance of the investment unit in the future. Investing In a Company The problem that the couple is likely to encounter in investing in the company would be the likely crash in the prices of their respective shares. Because of a myriad of reasons in the market, the prices of the shares significantly drop. Therefore, the couple should be able to discern on whether to go on with the investment or not. Consequently, another future problem that might be faced by the couple rests with the assumption that the company might go into liquidation. This means that all of their investment within the company will have been eroded at the end of the immature life of the company. Finally, the couple has to deal with concerns of fraudulent stock brokers. The stock brokers might take the investment amount and instead of using the amount properly by investing on the behalf of the clients; the couple, they might end up investing for their personal gains. Self Managed Superannuation Funds It has been noted that Jack has a self managed fund; the problems that he faces are concentrated with making the right decisions regarding the fund since it is his responsibility, as the owner, to make correct and informed decisions that will not disappoint him financially. He also faces a future challenge of being penalized should he fail to observe all of the legislative requirements. Subsequently, Jack’s inability to diversify investments might trigger a challenge as a whole. This is because Jack might not be placed in a fairer position to accumulate sufficient funds that will enable him diversify his portfolio to other areas of the industry in order to reduce the imminent level of risk. Retrospectively, he is also likely to incur an extra cost on the administration and consultancy services related to the fund (Berthelot, 2001). On the other hand, Ann possibly faces a future problem since she will not be able to access the complaints tribunal on matters of the superannuation fund. Loans and Emergence Savings It is assumed that the couple will face a problem of increased debts arising from the accrual of interests on their car loans; and thus, the couple faces a dilemma on whether to repay part of the loan using their emergence savings. Steps That the Couple Should Take In regards to their mortgage, the couple needs to portray effective accountability and responsibility skills and also, depict elements of prior planning for them to be effective in repaying the mortgage. The couple should as well set aside investments that are identifiable specifically for the future educational requirements of their children. This will be necessary even if such a decision will require a long-term investment plan regardless of whether they are sub-optimal. Concerning the issue of investment unit, the first step that the couple should take is to hire a qualified and experienced investment unit consultant. The best consultant would be the one placed in a position to explain to the couple the nature of the risks, which will be involved in their investment. The couple can as well get investment promotional materials in order to acquire more knowledge on the various risks that their investments can be faced with They should also make investment to a company only through an investment firm; this step will ensure that the couple is advised accordingly. To invest in the company, Jack can sell the investment unit in order to raise the required amount and later, invest within the company at a cost of $ 50,000. The remaining amount of $ 500,000 can be used to repay their car loans. On the self managed superannuation funds, the couple will need to get a knowledgeable consultant who will recommend skilled trustees that will offer guidance on the best ways possible of managing their funds. The couple should increase the amount of speculative and precautionary cash by 100%; this will cater for such emergency cases like the hospital bills for Ann’s father and take advantage of business activities that might arise. Reasons Why the Steps Are Needed; By carefully conducing profound planning with some level of discipline and thus, setting aside identifiable investments for the purposes of their children educational needs, the couple should be assumed to be comfortable that, in doing so, they will be availing funds, which will meet their children’s school fees requirement. The couple will also be able to meet their other financial commitments like paying mortgage that they service currently. By getting an expert in the investment unit, the couple will be able to share and get an exposure on the right level of risks that they will likely face (Berthelot, 2001). It is assumed that they will adopt prior mitigation strategies in order to avoid any future negativities and costly outcomes like suffering an unnecessary loss. By investing within the company, it is assumed that the couple will benefit from the dividends and the un-taxable capital gains. They will further enjoy an advantage of protecting themselves from the public domain in respect to the amount of the investment they own within such companies. It is assumed that by repaying their car loans, they will be on their way to securing financial stability. Further, it can be assumed that by getting a qualified trustee to guide them on the superannuation funds, the couple will not suffer from unnecessary costs that might have resulted in cases the expert opinion was missing (Berthelot, 2001). The steps of increasing the amount of precautionary and speculative cash will assumedly help in catering for emergencies, which are inherent in nature. In case of an investment opportunity, for example the one that involved investing in a given company, the couple will have enough funds to cater for such activity. Expected Outcomes It is assumedly clear that the couple, after conducting immense investments, will have helped itself and their family as a whole, since they would become secure in matters related to the available funds, which will assumedly cater for the needs of the family including the school requirements and other bills of the family. The family will be able to enjoy a good financial security having evaluated their options and choosing the best solution. In addition to this, the couple will be prepared for possible extreme outcomes from their investment unit. It is likely that they will not suffer more loss because they would have followed the advice availed by a qualified and competent consultant and should they suffer any loss, it would be unavoidable one. The couple is expected to reduce the amount of work that they do in managing their investments since the investment within a company is managed by a team of qualified personnel. They are expected to possess lesser stress levels and fewer frustrations from the loans acquired to buy cars in cases where they are asked to conduct repayments. It is assumed that the couple is expected to incur minimum losses from their investments. It is expected that they will receive maximum benefit from the superannuation funds if managed according to the best advice of the trustee. The couple, having saved enough for the emergencies and taking advantage of the business opportunities that might arise in the market, will not have to dispose-off other investments. They are also expected to have enough funds to cater for the hospital bills of their sick parent and subsequently, take care of the unemployed step-sister. Reference List Berthelot, Y. (2001). The international financial architecture: plans for reforms. International Social Science Journal Read More