Investing and Forecasting Problem - Case Study Example

A Case Study on Finance Name: Institution: Introduction Investing involves the use of available funds to improve the net worth or wealth of a person. In this particular case study we will look at the problems affecting the couple mentioned and how these problems can be solved. The problems are those that affect them both currently and those in the near future. The study further illustrates outcomes of taking these steps. i. Identify the problem the couple have now and/or will have in the near future A close investigation into the income and expenditure of the spoken of couple, we discover three main problems in the present time. Fist, the couple spends more than they earn. For instance, in the first month alone their wealth is valued $ 58,303.75 Second, the couple has a high credit card balance which is noted to increase every month. Normally in finance, the ideal situation is to have a credit card balance of zero which helps cushion against high rates of interest that come hand in hand with a positive credit card balance. The only way to get out of this tough situation is to make more than the minimum monthly payment thus resulting in less interest being obliged. The high credit card balance results from the following loans: Mortgage of $580,000 with a minimum repayment of $2,890 per month Two car loans i.e the 1st loan with $25,500 outstanding & costing $1,556 per month with 4 years to run and the 2nd loan with $18,000 outstanding and costing $933 per month with 3 years to run. Two personal loans i.e the first one was for $15,000 taken out to pay for a world trip and costs $546 per month. The second is $6,000 taken out to pay for some eye surgery and costs $218 per month. Their credit card has an outstanding amount of $25,565 and they make the minimum payment of 3%. These problems with the staggering rates of interest and inflation rates may result to further increments in credit card balance in future. Thus the couple’s main problem is high credit card debt. Various steps need to be taken to get out of this situation. ii. Identify the necessary steps the couple needs to take to improve and better their situation Getting out of debt requires a combination of various strategies if not all. Below are some of the steps the couple could employ to get out of this situation. a. Avoid creating further debt b. Increase their monthly payment rate c. Increase the emergency fund d. Identify one debt and grant it all they’ve got e. Request for a lower interest rate from their creditor f. Create a monthly budget to better manage their money for their debt g. Withdraw from their retirement fund h. Go through credit counseling iii. Explain why those steps are needed a. This alone cannot set the couple free but will at least stop the situation from getting worse. Not much progress can be realized if more debt is added while at the same time another is being serviced. The couple should resist the temptation to create more debt by cutting up their credit cards or even by freezing their credit cards[For09]. b. Since the couple had been paying only the minimum on their debt, it will take a very long time to move out completely. Thus, there is need to increase the monthly payment rate for instance, from 3% to 5%.When the rate of repayment is small, you may realize you’ve tripled or doubled the original debt by the time you finish servicing the loan. c. An emergency fund helps you prevent creating more debt by providing you with a safety net that you can use instead of a credit card when an emergency comes up[Deb12]. The recommended emergency fund is 6 – 12 months of living expenses but focuses on building a minimum of $ 1,000 in the short run. Currently the couple has $15,000 in the emergency account to help increase the amount that can be used to service a loan. d. Some people increase all their minimum payments by just a little bit, but that way your payments only drop by a small amount each month. The couple can construct more noticeable advancement by making a big disbursement to just one of their accounts each month until the debt is totally paid back. In the intervening time, the minimum payment on all their other accounts should be made. Then the same step should be repeated for another debt and even for another until they’re all settled. e. Higher interest rates keep the couple in debt for a longer time because so much of their payment goes toward the monthly interest charge and not toward your actual balance[For09]. They should request their creditors to lower their interest rates. Often; customers with good payment history can negotiate lower rates. If they use a balance transfer to get a lower rate, they should try to pay off the balance before the promotional rate expires. After that, their balance will be subject to the higher interest rate. f. The more money the couple put towards their debt, the faster they can pay their credit debt off for good. If they already lack one, they ought to create a monthly budget to better manage their money and possibly help them figure out how they can cut out some expenses and use that money for their debt settlement. They may also be able to raise money for debt settlement by selling things from their home or creating income from a personal investment. g. The couple may consider pulling money from their retirement accounts to pay off their debt. However, since the two have not attained age 59 ½, they will face early withdrawal penalties and additional tax liability if they withdraw money from certain retirement plans. Plus, when retirement comes around, their savings will be short not only from the money they withdrew but also from the interest they could have earned. Borrowing from their retirement is also risky since they will have to pay back the loan within a few months if they leave their job. h. Debt management plans through credit counseling agencies typically last four to six years[Deb12]. But, the couple can make use of the lower interest rate and minimum payment they negotiate to pay off their credit cards by sending an extra payment every month. Let the credit counseling agency know which credit card they to send the extra payment to. This is basically the snowball method of paying off their debt, except the credit counseling experts are supervising their payments. iv. Illustrate the expected outcomes from taking those steps Increasing the minimum repayment rate from 3% to 5% would mean the payment amount would be $1, 2 78.25 which is a 2% increase from $511.30. 3% of $25,565 = $1, 2 78.25 2% of $25,565 = $511.30 Further, the length of repayment decreases from 50 months to 20 months a clear indication that when the minimum amount of servicing a loan is increased, the repayment period is decreased. Further illustrations for other loans are as follows: Mortgage of $580,000 with a minimum repayment of $2,890 per month if increased to $3,500 per month could be repaid in 165 months other than the 200 months in the previous arrangement. The same concept could be applied to the two car loans as follows: 1st loan with $25,500 outstanding & costing $1,556 per month with 4 years to run. Suppose the servicing amount is increase to $2,000 per month, the amount would be serviced in 13 months and not 17 months as in the previous arrangement. 2nd loan with $18,000 outstanding and costing $933 per month with 3 years to run. If the servicing amount is increase to $1,500 per month, the amount would be serviced in 12 months and not 19 months as in the previous arrangement. In the case of the two personal loans, the same concept still applies. The first one was for $15,000 taken out to pay for a world trip and costs $546 per month. If the servicing amount is increased to $1,000 per month, the amount would be serviced in 15 months and not 27 months as in the previous arrangement. The second is $6,000 taken out to pay for some eye surgery and costs $218 per month. If the servicing amount is increase to $1,500 per month, the amount would be serviced in 4 months and not 27 months as in the previous arrangement. Visiting a credit counseling agency would help in making appropriate financial decisions and in proper budgeting with available income so that the couple can deal explicitly with the debt burden that they so far are facing. Higher interest rates keep the couple in debt for a longer time because so much of their payment goes toward the monthly interest charge and not toward their actual balance. They should request their creditors to lower their interest rates. Often; customers with good payment history can negotiate lower rates. It is clear from the provided rates of interest that interest rates are increasing annually which makes the cost of repaying the loan very high. This can be avoided by the couple if they request for constant rate of interest throughout the repayment period for instance, they can request a constant rate of 18% which is not subject to any change i.e it remains constant throughout the period of resettlement. Pulling money from the retirement account like attaching the superannuation fund as collateral to any loan owed would reduce the amount $67,000 to a figure lower than that due to early withdrawal penalties and additional tax liability if they withdraw money from certain retirement plans. The same would happen if the superfund is used for the same purpose. For instance the supper fund would reduce to an amount less than $34,000. Conclusion In conclusion, the couple can overcome the high debt by avoiding further debt, increasing their monthly payment rate, increasing the emergency fund, identifying one debt and grant it all they’ve got, requesting for a lower interest rate from their creditor, creating a monthly budget to better manage their money for their debt, withdrawing from their retirement fund and going through credit counseling. The above steps have various economic implications as is spelt above. Bibliography For09: , (Forgue & E., 2009), Deb12: , (Deborah., 2012), Read More