The Money Outflow - Case Study Example

Running Head: Financial Analysis Name Course Lecturer Date John and Mary income and expenses The couple has an income of $140,000 which is earned from; media grossing where Mary works and earns $85,000, part time job in a club where John earns $10,000 and a gardening business they operate which gives them $45,000 as the profit. Their expenses which cater for their mortgage payment, day care for their three children and contributions to a superfund, business expenses and savings among others total $145,608. This is an indicator that the couple is spending more money than they earn. The money outflow is much more than inflow. This is a problem to them because if this persists, the couple will accumulate a lot of debt and loans since their account cannot support their living standards. This will translate to bankruptcy in the near future. The couple has a deficit of $5,608 every year. There problem depicts them as poor financial planners because they spend more than they earn and thus have to incur liabilities to meet their needs. This also indicates that it is difficult for the couple to develop their financial structure as their problem indicates they do not budget for their finances and thus are not in a position to invest or save. Necessary steps the couple needs The mortgage cost that the couple is paying is much higher and thus too expensive for their current amount of income. Considering the amount of income that the john and Mary are earning, the mortgage payment should not be as much as they are paying. To reduce the deficit the couple needs to prolong or add the mortgage payment period and hence reduce the mortgage cost per month. They should reduce it to less than $2,000 every month. This will improve their cash flow to be positive. It will also enable them spread the payment of the mortgage to other years and thus will not have to incur additional debts to pay off the current mortgage. The cost of day care with respect to their income is much higher since it takes a considerable amount in their income thus contributing to the deficit. Some institutions provide and offer cheaper day care services. As such, john and Mary should enroll their children at a day care institute that offer cheaper but quality services. The $90 per day is much expensive; it is the highest in the market. They can enroll for a day care costing $50 for a day. Alternatively, the couple can hire a carer or use the services from care providers. This will provide them with a better and cheaper means of taking care of their children and eventually enable them cut down on their expenses. John’s contribution to his self-managed superfund is very high. Considering the amount of income that he earns every year, he should reduce the amount of concessional contributions to $1,500. This will save the couple $1,000 which they can invest to earn more income as well as reduce their current rate of expenditure. In the same way, Mary’s contribution to her capital guaranteed fund is much more. The salary sacrifice of $5,000 pa annum is much more. As such, she should reduce the amount of salary sacrifice to $3,000. This will save her $2,000 and they use it to invest in income generating portfolio. This will also make them achieve the goal of financial responsibility by spending within the limits of their income. The two car loans are a huge burden to the couple. To reduce the deficit john and Mary should add the loan payment period and consequently reduce the monthly payment to $1,000 every month for the $25,500 and $500 for the $18,000. This will reduce the monthly payment and increase the payment period. Alternatively, they can do away with one of the loans. The couple is not in a stable financial position to be financing two car loans. In addition, the two cars are a luxury and they do not have enough income to sustain them. As such, they should dispose one of the cars and pay off the loan. Yet, the most effective is doing away with one of the loans because prolonging the payment period for the loans increases the interest payable on the loan thus making them spend more in the long run. John should reduce the term deposit to $5,000. The extra amount of $5,000 should be invested in an income generating investment to increase the family’s income. They can for instance expand their gardening business so that much income is realized and their worth is increased. The home entertainment system is not a necessity and they can do without it. This is one of the expenses, which is making the couple to have deficit. They need to learn the financial discipline of prioritizing. They should dispose it off or reduce the monthly payments to reduce the cash outflow. Currently the cash outflow is much higher than the inflow. The credit card is another expense that is burdening the couple. The credit card is increasing every year at a very high rate. John and Mary should control the sp ending by having and a preparing budget. The cost of the credit card is increasing as the credit itself increases. They should also ensure timely payment since delays in settling credit card payments attracts interest for the couple making their expenses very high. For the two personal loans, they can reduce the monthly payments and increase the payment period. In the first case, john and Mary were not supposed to take loan in order to pay for a world trip. They should therefore reduce the monthly payments so that they reduce their overall financial obligations. The world trip monthly payment can be reduced to $300 and the eye surgery to $150 monthly. They should also think of medical cover in future so that they will use it to cater for their medical expenses. John’s young nephew is a liability to them. Although his nephew is earning, he is not contributing anything to the family and even paying the bills or other house expenses. As such, john should inform him to be contributing some amount towards the payment of utility and other house expenses that he is using. It is good that he sends as much to he can to his family but he should reduce the amount and contribute in the house. This will help john and Mary to meet the house expenses and therefore reduce the deficit. The expenses, which include living expenses and non-financial bills, are very high. The expenses of $3,000 every month are much higher. Considering that, they do not spend most of the day in their home; they should not spend as much as $3,000 in a month. As such, they should focus on reducing the number the expenses to $2,000. These expenses will also reduce it john and Mary will dispose on e of the family car. They will save from buying petrol and other expenses of maintaining the car. The private health cover is very important. A comprehensive health cover would be enough to cater for hospital and other medical expenses. This would save them the amount they got as loan to pay for eye surgery. In essence, they should increase the private health cover to $500 so that it will be enough to cater for all the family’s medical needs. The share portfolio that Mary received from her mother is a good platform to make investment. Though the portfolio is generating income, the portfolio can earn even more if the amount of the shares can be increased and or invested in another portfolio that earns more revenue. As such, Mary can convert the share portfolio to debenture bonds. Debenture bonds are more productive than shares. This is because debentures have a higher interest rate than the shares and they have a guaranteed income (shares portfolio have no guaranteed income). This will make more income and therefore present Mary and john I n a stable financial position. The joint savings account that john and Mary have is a very good savings for a rainy day. However, the $15,000 can still be earning interest in the savings account. Therefore, they should liaise with the providers of the savings account to make the amount earn interest for the duration that the savings will be in the account. This will increase their income. Mary’s second fund from her former employer of $11,400 is a very good investment capital. Since she has superannuation of $67,000, she should convert $11,400 in to another investment capable of generating regular income. As such, I would recommend to Mary to convert the fund to treasury bonds. Treasury bonds are better than the fund as he has already another fund. Lastly, john should increase his gardening business. The business has potential to bring home more income than $45,000. In essence, adding capital in the gardening business will expand it and hence generate more income. The $5,000 from the term deposit should be used to increase the stock in the business. This is very important as it is his own business and therefore he has time and recourses to make the business generate more income. In the same way, he can reduce the business expenses so that they do not consume large amount of the income generated by the business. He should strive to ensure that the business expenses are less as possible and only incur expenses that are necessary and unavoidable. Why these steps are needed These steps are very important in order to improve Mary and john financial status. It is very important that they be in a financial position where by they will be able to meet their expenses, contribute to their respective superannuation funds and importantly make savings. Currently, they are not saving except in superannuation. This is very risky for the family because they are not doing anything to stabilize and improve their income. These steps are important, as they will enable them to make savings. These steps will ensure that they will have enough money to make investments. Expected outcomes This indicates that Mary and John will have an excess of $44,333. This will enable them support their living expenses and at the same time make investments. This will be the amount that they will have to make more investments and make savings as well. They will be able to finance all the loans, make statutory contributions and make savings. It will not only stabilize their financial position but also it will ensure that they increase income-generating avenues. This will also enable them live within their affordable means. References Alexander, Carol. Market models: a guide to financial data analysis. John Wiley & Sons, 2001. Read More