Financial Planning - Brad and Angelina - Case Study Example

Running Head: Financial Planning Name Course Lecturer Date Executive Summary Fundamentally, financial planning is the process of establishing a budget based on provided information about income and expenses. The objective of this financial planning advice is to provide the client with comprehensive financial planning services. This report analysis and provides advice to Brad and Angelina, a recently married couple with intentions to plan their future. The report starts by explaining the need for financial planning to the couple. It then provides the specific elements in the planning for their income, making savings and investments as well as making retirement plans. It provides Brad and Angelina with risk management and insurance, budgeting as well as strategies for making investments. Moreover, the report provides them with how they can minimise their taxes legally (effective tax planning), estate planning and salary packaging. Essentially, this report provides a viable financial planning to Brad and Angelina. Table of Contents Table of Contents iii 1.0 The Need for Financial Planning 1 2.0 Planning the Economic Environment and Sources of Finance 2 3.0 Risk Management and Insurance 3 4.0 Budgeting 5 5.0 Investment Strategy ‑ Direct And Managed Investments 7 6.0 Superannuation and Retirement Issues 9 7.0 Tax Planning 10 8.0 Estate Planning 11 9.0 Salary Packaging 12 10.0 Conclusion 13 11.0 References 14 1.0 The Need for Financial Planning Personal financial planning is very important for this couple. There are various reasons as to why they need financial planning. The first step in personal financial planning for Brad and Angelina is to set financial goals that they want to achieve in both short term and long term goals (Altfest, 2007). The financial goals must have a time frame and be quantifiable as well. This will necessitate planning, the planning process will help them to define as well quantify their goals. Essentially, financial planning is the process through which Brad and Angelina will chart a roadmap to meet their financial goals, expected and unforeseen needs in their lives. The essence of this is to take the necessary steps to ensure that they are well equipped to accomplish their short term and long goals as they have set out to achieve as well as deal with contingencies. Changing lifestyles and inflation are two major factors that make financial planning very important for Brad and Angelina. The general rise in price levels leads to fall in value of money. Financial planning will help them to be equipped with the impacts of inflation especially during their retirement when expenses will continue to rise while their income streams dries up. Changing lifestyle is also very critical especially now that they are young and likely to earn more income. With higher disposable income it is likely that they will upgrade their standard of living. This financial planning will help them to upgrade their lifestyle and maintain it as well. This financial planning will also help them to be prepared financially to deal with any contingencies such as medical emergencies or unplanned expenditures that they might have to incur. This will provide them with sound financial planning and it will enable them to easily mitigate such situations without straining their finances (Harrison, 2005). 2.0 Planning the Economic Environment and Sources of Finance Brad and Angelina are formally employed. Their employment is the only source of income as they do not have additional sources of income. This only makes financial planning more essential. In light of the economic conditions, they need to have additional sources of income in order to boost their employment income. The rate of inflation is relatively low; this will help them to purchase car and home at the right price. However, the inflation may change in future. The interest rates are also relatively low. This gives them an opportunity to purchase house and care at relatively the right prices without the influence of the economic factors. The economic condition in Australia is very stable (Hanna, & Lindamood, 2010). The prospects of portfolio success are very high. This is very encouraging for Brad and Angelina in their pursuing of investments and securing their future. 3.0 Risk Management and Insurance Currently, Brad and Angelina do not have any insurance plan in place. Insurance is very important and they need to have insurance for various aspects. They need insurance for their health (Brad and Angelina and their children). Although there is medical levy that is deducted with taxes to cover their health needs, it is not enough cover and therefore they need comprehensive health insurance to cover them and their children (Hershey et al., 2007). For this reason, they should register for a comprehensive medical cover. This will make them to be paying $750 per person per year. This health insurance cover will increase as they near their retirement to a maximum of $1,500 per year. Brad should have a $500,000 group life insurance policy, the beneficially of this policy should be Angelina. Angelina should also have a life insurance policy of $300,000 whose beneficially should be Brad (Fox, Bartholomae & Lee, 2005). This life insurance is enough and within their financial needs. For the life insurance, they should be contributing $750 and $500 for Brad and Angelina respectively Brad and Angelina should also have homeowners insurance for their new home when they purchase (Lusardi & Mitchell, 2007). They should have liability coverage of $150,000. In addition, they should pay annual premium of $1,000 towards insurance for their home. Since they also want to purchase a car, they should have a comprehensive car insurance policy. This should see them commit $1,500 annual premium. Another type of insurance that they need to have is an insurance cover for their jobs. They should contribute annual premium of $800 to an income protection cover. This cover will provide them with income in event they are out of employment, it is important as it will not deprive them of income in event one of them or both lose their jobs (Lusardi & Mitchell, 2011). Moreover, they should have a car insurance cover when they purchase the car. The annual insurance premium should be $1,800. This will give them a comprehensive car insurance cover. Essentially, these insurance cover are enough. They will cover their health, life, home, income and car fully. The insurance will act as risk management as well. Generally, these aspects of insurance are not only enough but also enough measures to manage risks and contingencies as well as emergencies. 4.0 Budgeting Brad and Angelina Living Budget For the year 2014 Income Annual Monthly Brad Gross Salary $70,000 $5,833 Angelina Gross Salary $50,000 $4,167 Total Income $120,000 $10,000       Income taxes     Brad - Income tax $15,697 $1,308 Angelina - Income tax $8,547 $712 Total Payroll Tax & Income Tax Withholdings $24,244 $2,020       Net income $95,756 $7,980 Savings     Regular addition to savings $1,200 $100 Salary sacrifice – Brad $6,000 $500 Superannuation contribution $10,800 $900 Total Savings $18,000 $1,500       Disposable income $77,756 $6,480       Living Expenses     Mortgage payment $16,800 $1,400 Car loan payment $9,600 $800 Credit card balance payment $900 $75 Water, electricity and waste $1,500 $125 Phone expenses $900 $75 Internet access $500 $42 Groceries $4,950 $413 Food (away from home) $1,500 $125 Car insurance premiums $1,800 $150 Life insurance premiums $1,250 $105 Health insurance premiums $1,500 $125 Car expenses $2,280 $190 Maintenance & repairs for the car $550 $46 Minor medical and medicine expenses $600 $50 Purchase of personal items $900 $75 Donations and gifts $600 $50 Property taxes $450 $38 Entertainment $1,500 $125 Total living expenses $48,080 $4,009       Amount Available for Investment $29,676 $2,471 5.0 Investment Strategy ‑ Direct And Managed Investments Making investment is very important for Brad and Angelina future. Making investments will guarantee earnings and income in future especially when they retire. The income from investment they will make will also boost their income considerably. In managed investment, Brad and Angelina will have the opportunity to pool their resources together within other investors to make a broad range of investment (Murphy & Yetmar, 2010). Usually, such type of managed investment is managed by a professional with huge understanding and knowledge in managed investments. Some of the managed investment in which Brad and Angelina can invest their extra funds is equity trusts, insurance bonds, property trusts and superannuation funds. These types of investment will present Brad and Angelina with an opportunity to make indirect investment. This is because they will not own fully the investments; they will also not be involved in managing and making decisions about the portfolio as this will be left to the professional manager (Gitman & Joehnk, 2007). I recommend Brad and Angelina to invest in securities. They can buy stocks of a company listed in the stock exchange; this will give them an opportunity to review the previous performance of an entity before buying its shares. Shares are very good as they will be entitled to share of profits that the company will make. They will receive dividends from the company they will invest. Besides dividends, they will be in a position to make capital gains when they sell the stocks of the company. To make capital gains the shares will have increased in value and hence sell at a higher price than the price they purchased the shares. They can choose to invest from any company listed in ASX index. In order to make good decision, it is important that they visit a stock broker to get advice and know which companies are performing better as well as which shares present an opportunity for growth in value (Worthington, 2006). On the other hand, investing in direct investment will present them with an attractive opportunity to get fixed income. In direct investment, they will be in direct control of the portfolio; this means that they will be responsible of making decisions about the investment. In this investment, they will be able to mix different types of bonds in order to suit their own investment criteria. They will also have the opportunity to choose between floating rate notes and fixed rate bonds. I would recommend they choose a fixed rate bond. This will give them an opportunity to receive fixed predetermined distributions during the life of the bond. This will be especially good when the interest rate keeps fluctuating. They will also be able to re-invest the distributions and plan for the future income as they will know in advance what they will receive from the investment (Taylor et al., 2005). Importantly, they will be able to match future commencements of some allocated pension with the distributions from the maturing bond. They will also have the opportunity to choose when to sell the bonds as part of their tax planning. Essentially, investing in various investments will make them reduce risks. This is especially for high risk assets included in the portfolio. The Australian bond market is highly correlated and there is very low risk of default. The diversification will serve them well especially because of increase of credit risk of the bond (Altfest, 2007). 6.0 Superannuation and Retirement Issues Besides the employer contribution to superannuation fund, Brad and Angelina should have their own managed superannuation fund whereby they will be making contributions as indicated above. This managed super fund will be outside the superannuation environment. This is a very effective tax strategy. This fund will be earning an interest rate of 6% per annum. They will have full control of this self-managed super fund and therefore direct their retirement savings. It is important that they use the savings of $180,000 to make a deposit for home. The deposit should be $80,000; they will finance the home by mortgage for the remaining amount. In addition, they should use $20,000 to make a deposit for purchase of car. The remaining amount will be financed by car loan of which they will finance through their income. They will set aside $10,000 as emergency fund. They will then maintain the remaining $70,000 in their bank account, this account should be earning interest but it should not be a fixed deposit account. They will get their holiday expenses in this account for the first year and then they will include the holiday expenses from as part of their living expenses. 7.0 Tax Planning The investment in shares offers Brad and Angelina an opportunity to improve tax effectiveness. They will not inherit embedded capital gains when investing. In addition, transfer of assets will not be subject to capital gains tax. In addition, they will receive dividends and franking credits as they earn. In case they make loss, they will receive capital gains tax discount and hence offset the loss against future income. Funding of retirement will also produce tax savings of up to $345 annually. The investment and retirement savings will have a balance of $180,000 in ten years’ time. Base on the above planning, it is determined that effective use of term life insurance will provide protection gap until they reach the balances. I would recommend that Brad and Angelina to refinance their mortgage after 12 years, this will provide them with a tax saving of $290. After twelve years, they will have additional income sources and therefore they can refinance the mortgage (Harrison, 2005). Essentially, the savings and the investment programs will offset the costs and expenses thereby ensuring stability of their finances. 8.0 Estate Planning Recommended use of the surplus cash Amount Shares $8,000 Government bonds or corporate bonds $12,000 Property $5,000 Self-managed superannuation fund $4,676 Total cash surplus $29,676 9.0 Salary Packaging I advise Brad and Angelina to make salary sacrifice of 5%. This salary sacrifice of 5% of their salary will go towards savings and their managed superannuation fund. This will not only increase contributions but also future earnings. 10.0 Conclusion This financial plan provides Brad and Angelina with clear goals and outlines of how to manage their income, to make investments and to plan for their retirement. This financial plan will help them not only in the current financial period but for many years to come. If they keep track of the recommendations as outlined, they will boost their income by earning more from investments. They will have stable and healthy finances. 11.0 References Altfest, L. J. (2007). Personal financial planning: McGraw-Hill Irwin. Fox, J., Bartholomae, S, & Lee, J, (2005). Building the case for financial education:  Journal of consumer affairs, 39 (1), 195-214. Gitman, L., & Joehnk, M, (2007). Personal financial planning: Cengage Learning. Hanna, S. D., & Lindamood, S. (2010). Quantifying the economic benefits of personal financial planning:  Financial Services Review, 19 (2), 111. Harrison, D. (2005). Personal Financial Planning: Theory and Practice: Pearson Education. Hershey, D. A., Jacobs-Lawson, J. M., McArdle, J. J., & Hamagami, F, (2007). Psychological foundations of financial planning for retirement: Journal of Adult Development, 14(1-2), 26-36. Lusardi, A., & Mitchell, O, S, (2007). Baby boomer retirement security: The roles of planning, financial literacy, and housing wealth: Journal of monetary Economics, 54(1), 205-224. Lusardi, A., & Mitchell, O, S, (2011). Financial literacy and planning: Implications for retirement wellbeing (No. w17078); National Bureau of Economic Research. Murphy, D. S., & Yetmar, S. (2010). Personal financial planning attitudes: a preliminary study of graduate students: Management Research Review, 33(8), 811-817. Taylor, S. M., Juchau, R, H., Houterman, B, McDonald, T, & Bus, B, (2005). Financial planning in Australia: LexisNexis Butterworths. Worthington, A. C. (2006). Predicting financial literacy in Australia. Read More