5 Cases Assignment for personal financial planning PDF

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This was a personal financial planning assignment done for 5 cases. It is a quick and better guide to understand financial disciple...

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IM4210 - Personal Financial Planning Mr. Shenal Rajakarunanayake

Group Assignment

By T.D.N De Meraal - 176013F H.W.A Hansamali - 176027C D.N Hendahewa - 176029J I.K.P.H Indikadulle – 176033P A.A.D.S.N.A Perera - 176069F

FOB/7sem

2021

Contents Case 01 ....................................................................................................................................... 3 Case 02 ....................................................................................................................................... 5 Case 03 ....................................................................................................................................... 8 Case 04 ......................................................................................................................................11 Case 05 ......................................................................................................................................13

Case 01 1. Given her current situation, list various personal financial decisions that Shelby may be considering at this point in her life. Shelby Johnson used her credit card in a continual manner and piled up credit card debt. She should begin to set a manageable budget and assess her financial situation. She should take appropriate actions to mitigate her financial risks. Within that situational analysis, she may focus on ways of getting out of credit card debt and saving money for future possible business ideas. Contingency actions like setting a separated deposit to pay off credit card debt can be a wise decision to address the debt situation. In order to take this decision to the action level, she is required to identify income sources. She can look for another part-time job to make additional money with her current parttime job at the local pet shop. She can utilize her existing photography gig with the help of her laptop and camera. Also, she can reduce her daily expenditures such as, by using public transport instead of her personal car to commute. She can use her savings to pay off the interest of credit card debt. That will minimize the interest issues and will make a favorable situation to pay the debt.

2. Describe what short-term, intermediate and long-term goals Shelby should develop using “Setting Personal Financial Goals”. Financial goals must be attainable, Shelby can set her financial goals in a time-based manner shown as below, 1. Short-term goals [less than 1 year] ● Set a manageable budget. ● Pay off the credit card interest and bills for the term. ● Begin paying off student loan debt. ● Practicing a regular savings habit.

2. Intermediate goals [1-5 years] ● Establish a dedicated fund for her own business. ● Saving for down payment to buy a house.

3. Long-term goals [over 5 years] ● Owning her own business. ● Owning her own house. ●

Establish a retirement plan.

3. What types of time value of money calculations would be helpful for Shelby? Future value of an annuity – The amount to which current savings will increase based on a certain interest rate and a certain time period. ● Savings for initial investment in her own business. ● Savings for a down payment to buy a house. ● Savings for retirement. Present value of an annuity – The current value for a future amount based on a certain interest rate and a certain time period. ● Determine monthly loan payments for credit card debt. ● Determine monthly loan payments for student loan.

Case 02 1. Since a budget is made up of fixed expenses and variable expenses, identify which of Shelby’s expenses fall into each category. Then total each category and compare it to her monthly income to determine if she has a surplus or deficit.

Categorization of cost Shelby incurs per month

Type of cost

Category

Amount in LKR

Fixed

80,000

Variable

15,000

Fixed

20,000

Variable

10,000

Credit card payments

Fixed

8,000

Gas / Car maintenance

Variable

20,000

Fixed

9,000

Groceries

Variable

60,000

Clothing

Variable

10,000

Gifts and donations

Variable

1,000

Rent Utilities Car insurance Cell Phone

Cable / Internet

Monthly costs and the revenue is compared

Fixed costs

LKR 117,000

Variable costs

LKR 116,000

Total monthly costs

LKR 233,000

Monthly income

LKR 290,000

Surplus

LKR 57,000

According to the financial data of Shelby she is having a monthly surplus of LKR 57,000. However the given information lacks data about the student loan repayments and correct information about the credit card debt. The given credit card payment is assumed to be the monthly changes by the credit card, not the debt repayment.

2. Based on the information above, how much should Shelby have in an emergency fund? What steps should she take to reach this amount?

Emergency fund To find the amount available for her to create an emergency fund, her assets and debts are compared. Student loan

LKR 600,000

Credit card debt

LKR 480,000

Savings

LKR 400,000

Personal assets

LKR 1,460,000

Amount available (With personal assets )

LKR 780,000

Amount available (Without personal assets )

-LKR 680,000

When the personal assets are disregarded and considered monetary items only, Shelby has a net debt of LKR 680,000. When her personal assets that might include her investments as well as her physical properties such as her phone and laptop, is also considered she has a net asset of LKR 780,000. An emergency fund must be able to cover at least 3 months of living expenses. Currently she is having LKR 233,000 as her monthly cost so her emergency fund must contain LKR 699,000 as the minimum amount. Currently with personal assets she has a net asset of LKR 780,000 which is higher than the amount required for the emergency fund. However the personal assets such as phone, car and laptop are required for daily operations as a student so she cannot use the personal assets to create the emergency fund, so the personal assets must be disregarded when calculating the net assets. If so with the net debt she has (LKR 680,000), she has to find LKR 1,379,000 to create an emergency fund while occurring as a net asset. To reach this amount she has to direct some of the monthly surplus to the emergency fund. To create the emergency fund in 12 months she has to direct LKR 58,250 per month to the fund. To create the fund in 24 months she has to direct LKR 29,125 per month. As she has only a surplus of LKR 57,000 and she has to spend part of it on some other situation and put in savings, she has to create an emergency fund by 24 months even though it is risky. To create the emergency fund in 24 months she has to dedicate 51.1% of her monthly surplus to the emergency fund. The remaining 48.9% can be used as savings, investments or purchasing of new assets.

3. Describe how Shelby might use personal financial techniques such as creating a Personal Balance Sheet, Personal Cash Flow Statement, and developing a Personal Budget for assessing her financial condition Ways to improve Shelby's situation are as follows; ● Use budgeting techniques to identify the correct amount of costs with in depth descriptions ● Add the debt repayments to the monthly expense to pay them in shortest possible time without changing large amount of budget ● Prepare the budget up to an year ● Develop a personal balance sheet and try to minimize the debt ● Use a cash flow statement to track how much cash in hand

● Compare the cash in hand with the personal balance sheet to check how much cash she has as surplus ● Cut on unnecessary expenses and use the savings to create the emergency fund.

Case 03

1. Given her current situation, list some suggestions on what Shelby should do to increase her emergency fund. Shelby is a 21 year old college student working at a Pet store to save money and start her very own business someday. Due to an illness she had to spend her savings to fund her emergency requirement. Shelby earns a monthly income of 350,000LKR; spends 242,000LKR for living and rest 108,000LKR is used for savings and repayment of debt. It is observed that she is a high spender and there is no proper understanding of how to have a balance between Savings, Spendings, Investment and Debt. Before creating an Emergency fund, she needs to identify the common emergency situations she can face based on past events and calculate an average cost. Based on the scenario the most recent emergency situation was her illness. If we estimate the cost as 100,000LKR, we need to make sure she at least has 100,000LKR in her emergency fund. Considering other future unexpected events such as, unforeseen living expenses, death of a family member etc. She will have to at least have a fund of 300,000LKR. General Rule in setting up an emergency fund is “Save enough to cover three to six months’ worth of expenses”. But under Shelby’s case, as her only source of income is the Pet store, she will have to cut down her living expenses to create the fund.

To achieve her target of 300,000LKR in her emergency fund, she can; ● Manage her cash flows. Referring to the given data, she has a total debt of 1,080,000LKR that needs to be repaid over the years. If she struggles to pay off her debts, her repayment amount will be charged extra for unpaid dues and she will be recorded in the CRIB as not financially worthy. This can affect her future as she is still in her young age. Thus, if she managers her

cash flows she can use emergency fund savings to repay loan requirements if needed during unexpected situations. ● She can also work part time at another Pet store, else she can visit houses during her leisure time and earn extra from pet grooming. These can be used by her to save up in the emergency fund and rest can be used for her personal savings. Another additional advantage in doing so is, she can create a customer base for her someday very own business. This helps her to reduce cost on advertising and promotion as she has already invested in word of mouth.

2. Based on her current and future life situation, what other money management and financial planning activities would you recommend for Shelby? Shelby is an undergraduate nearing graduation, once graduated she will be needing money for expenses such as, house building, wedding, higher living expenses for a family, spend on elderly parents etc. Top of these she also has student loan and credit card debts too to be repaid over the years. Thus, she has to focus on various other money management and financial planning activities.

● Firstly, she should create a personal financial statement recording all her cash inflows and outflows. Doing so, she can identify all her unnecessary spendings and know how to spend wisely. ● She can also plan her expenses beginning of the month so that she can eliminate insignificant spending after identifying her “Needs” and “Wants”. ● She should also plan for the emergency situations and either maintain the current level of emergency fund target else, increase to set goal based on the identified upcoming spending. ● As she needs a house for living, she can also try saving by creating a fund called “Housing Fund”. This would help her reduce rent expenses or housing loan borrowing debt. ● She can also insure herself so that during an emergency she can get help in repaying her medical bills with the support of the insurance company. Having a clear understanding of her savings, fixed and variable expenses, emergency requirements and debt due would allow her to record and review her patterns of spending and savings. She should also make sure her budget is flexible, well planned, easy to access and well communicated

3. Describe how Shelby might use personal financial planning techniques.

It is always said that “Without a proper financial plan, it is difficult to reach financial goals”. Thus, Shelby should follow the following steps in financial planning to make sure she achieves her set goals at the right time. Shelby needs to establish her financial goals, she needs to identify both her short term and long term financial requirements. Once identified she needs to fit them into the baskets as savings, spending, debt and investment. Next, she needs to set a time frame as to when she will be meeting the goals and also motinorily valuing the goals. In doing so it will be easy for her to achieve her financial goals. Next, she needs to consider all the alternative courses of action in achieving her goals. For example, if she sets a goal to save 1,000,000LKR in 5 years, she needs to decide how much she needs to save each month and how she meets the saving requirements, will it only be from her pet shop employment or whether she will be part-time working at another pet grooming shop too. Then, as she is all set with her achieving of the four baskets, Savings, spending, debt and investment then she can also try to save for her emergency fund to finance emergency situations. For example, during the Covid-19 pandemic, many individuals lost jobs and had to use their personal savings to meet the unexpected situation. If an emergency fund was managed, then they would have spent from the emergency fund savings. Lastly, creating the baskets and achieving the set goals for the set period isn’t advisable. Shelby should either monthly or yearly review and revise her plan. In doing so she can identify her unnecessary spending and the debt she needs to get rid of over the short term to better live with a great financial health. She can track her monthly or yearly spending, savings, debt and investments by maintaining personal financial statements. She can either maintain it in books or on an excel spreadsheet that can be accessed anywhere anytime. Therefore, the most recommended and feasible method of having a financial balance is to properly plan your own finances and to keep track of them.

Case 04

1. Given her current situation, list some suggestions on how Shelby can reduce her credit card debt. Shelby’s credit card debt is LKR 920,000, which is substantial, considering that her monthly surplus from her monthly income after accounting for living expenses is only LKR 108,000, and her other debts, the student loan further amounts to LKR 840,000. Carrying a significant amount as credit card debt, can have many adverse impacts on Shelby such as the obligation to pay high interest payments, a delay in achieving her financial goals and in certain situations, can even cause damage to her credit score. Therefore, following suggestions, can help Shelby to reduce her credit card debt. ● It’s important that she has a clear idea of her current financial situation, in terms of her income, expenses, savings, debt and investments, in order to properly manage her personal finances and reduce her credit card debt. ● Shelby should create a monthly budget allocating her income towards expenses, savings and debt repayments and try to use the credit card only in times of necessity. She should also actively track her monthly purchases on the credit card and try to stick to her monthly budget. ● Although Shelby makes her credit card payments on time, she is unable to pay more than the minimum balance every month. Therefore, she should attempt to pay her full or higher than minimum balance each month by limiting her credit card purchases to the amount she can afford to repay from her income, in a single month. ● Having access to credit seems to tempt Shelby to make impulse purchases such as the recent beach vacation. She tries to justify such purchases with the reward programs it offers. A better habit would be to save up for such purchases and using the credit card only for purchases that Shelby can afford to repay immediately. ● Limiting the number of credit cards that Shelby owns, can reduce the possibility to get into more debt while enabling her to manage her debt payments more easily. ● Understanding the terms of the credit card, such as the interest rate charged, can effectively help Shelby to reduce and avoid credit card debt. Furthermore, she can also negotiate with the bank for a lower interest rate.

2. What is the best way for Shelby and Mark to become more aware of the effect of credit card debt on their current and long-term financial situation? Shelby and Mark should be more aware of the effect of credit card debt on their current and longterm financial situation as this directly impacts their personal financial goals of buying a condo and starting Shelby’s pet salon. Thereby, the best way to become aware of this situation is to start pursuing their goals now. That is, they can start applying for loan facilities to finance the business and condo. The banks or other lenders will assess their credit worthiness and current financial position. Considering their current financial position with an increasing credit card debt balance, that reflects poor management of personal finances, they will be definitely turned down or offered a loan with a higher than market interest rate. Therefore, they will have to improve and properly manage their personal finances in order to obtain financing with favorable conditions.

3. Explain how the personal financial techniques might be useful for Shelby and Mark. A personal finance budget that allocates their income towards expenses, savings and debt payments, should be devised. This personal financial data can be recorded and further analysis can be carried out by calculating ratios such as debt to equity ratios, in order to have an clear idea of their current financial position and credit card debt balances. This ensures that Shelby and Mark are living within their means and managing finances towards achieving their long-term financial goals. Furthermore, this budget should be regularly reviewed and revised to reflect current short term and long term personal financial goals.

Case 05

1. Given their current situation, list some suggestions on how Shelby and Mark can reduce the cost of using credit.

According to the available financial data, we can see that Shelby and Mark have obtained two resources of credit. Where one is the student loan and the other being a credit card. Both of them consists with following outstanding balances as at reporting time: ●

Student loan $4,200

●

Credit card debt $4,600

In the process of tracking down and reducing the cost of using credit, it’s good to see that these individuals do practice ‘budgeting’ where that would help both of them to feel more in control about their finances and would lead the path for them to save money for their respective future goals. As at now, they both have a monthly income of $1750 and living expenses count about $1210. Also, they are hoping to spend money on different things (buying a condo and opening a pet salon) in the near future. At this time it would be ideal for them to overestimate the expenses and underestimate income where that would push them to be prepared and maintain flexibility in a worst case scenario. Since interest rates would multiply when there are late payments it is always good to avoid them. Paying the relevant credit amount on time would help them to get rid of penalties and protect their credit rating. Moreover, having a healthy credit history would be beneficial for them to negotiate for lower interest rates from their credit card issuer. Both of them are planning to get married and get a condominium for thems...