Wendy And Keith: Financial Analysis
Introduction
Creating a financial structure can improve your capacity to organise your finances (Australian Securities and Investments Commission [ASIC], 2009). The structure will necessarily include the different elements of your whole financial profile such as income sources; ongoing expenditures such as mortgage, credit card payments and living expenses; savings objectives; and fun money such as for holidays or special occasions (ASIC, 2009). This paper will identify the nature of the financial problems being experienced by Wendy and Keith. It will then discuss how creating a budgetary plan and establishing a balance between short-, medium- and long-term goals that are realistic and potentially achievable is required. The discussion will …show more content…
also include the priority action required to address high interest debt sources which currently place great pressure on their monthly expenditures, as well as how to improve their income revenue streams. The recommendations being made throughout this paper are designed to underpin the efforts of the couple to improve their immediate financial situation while also working towards achieving longer term financial goals.
The problem
A broad overview shows the couple have a combined income of approximately $200, 000 (at around $16,500 per month). They currently have monthly expenses of approximately $20,000 per month which include school fees, health fund payments, mortgage repayments, care loan repayments, general living expenses, etc. Other sources of drain on the couples’ combined income include added contributions to superannuation funds, private family debt, miscellaneous costs associated with their three children (e.g. sports fees), increasingly living expenses, and a safety net account for Keith’s business. On the positive side, the couple has access to addition income by way of a share portfolio, listed debentures, a joint bank account for emergencies, and the possibility that Wendy will receive a substantial bonus form work. Keith and Wendy are experiencing difficulties trying to balance their expenditures against their income. In terms of their current problem, the couple appear to be “losing control” of their financial situation as they struggle to meet their monthly expenses.
What appears to be immediately evident is that Keith and Wendy do not have a structured approach to the management of their finances. The couple do have financial goals to protect some aspects of their present financial situation (e.g. emergency savings account) as well as their future security (e.g., extra superannuation payments). However, these strategies are not framed within a broader set of financial goals that addresses current contingencies.
Working out the finer details of your financial situation (the overall tax implications of superannuation contributions, off-setting interest rates etc.) can be complicated. Therefore, it is advisable for Wendy and Keith to seek free and independent financial counselling service (ASIC, 2007). The service can offer the couple insights on how the perceive their financial situation overall as well as guidance and tips on the best strategies to undertake to pay off their debts and manage their budget (ASIC, 2007).
Having a plan
Budget formulation and setting goals
The first step for Keith and Wendy to take to repair their financial stress is to create a half-yearly budget.
This will allow the couple to gain a holistic and ongoing picture of their financial situation and to identify areas of most financial concern (ASIC, 2009). In order to formulate a budget profile that will support financial goal setting and change initiatives into the future, the couple will need to include estimates of their half-yearly combined income, half-yearly expenses, and the main expenses contributing to the shortfall (ASIC, 2009).
The second step Wendy and Keith need to take to improve their capacity to balance the books is to formulate a realistic (achievable) financial management plan to implement over a designated time frame (ASIC, 2009). The plan should include financial goals to be achieved over the short-term (0-1 year) medium-term (1-5 years), and long-term (5+ years) that will support the couple’s attempts to reposition their financial state (ASIC, 2009). The short-, medium- and long-term goals should be supported with a clear link established between the target to be achieved, the timeframe for the target to be achieved, and regular financial adjustments required to meet the targeted performance goals ASIC, …show more content…
2009).
Indeed, this approach is supported by theory which suggests effective goal setting can be undertaken by following the SMART formula (Specific, Measureable, Attainable, Relevant and Time-bound) (ASIC, 2011a). By being precise and realistic about the target to be achieved is fundamental to the ability of the couple to adhere to the financial goals they set themselves. Moreover, it will allow them to identify more easily how the goals are interconnected and therefore what strategies will best support their overall achievement (ASIC, 2011a). Importantly, the short- to medium-term goals must be small to increase the likelihood of their being achieved. As the couple begin to change their financial habits to achieve their short-term goals the goals can be gradually increases to generate more savings over the long-term (ASIC, 2009).
Short-term goals
School fees
The couple have an immediate debt problem of approximately $16,000 in school fees to be paid at the beginning of the term. To resolve this problem Wendy should not place the entire expected bonus of $23,000 into her superannuation fund as she intends. The money from this bonus can be used to pay the school fees for the immediate term and to reduce overall credit card debt. The couple should then include clear strategies in their financial plan to budget achievable amounts for future school fee repayments.
Family debt
Another short-term financial goal for the couple is to repay Wendy’s father the money he is owed. This is an immediate objective because of the father’s financial difficulty due to heavy medical bills. To resolve this problem Wendy should access money from her share portfolio. Wendy’s share portfolio is valued at $47,500. She should look to sell-off shares to the value of $15,000 in order to pay the debt of the same amount owed to her father. This will leave her with a share portfolio value of approximately $32000. Although this is approximately 25% down on the value when she inherited the shares, she still has the opportunity to build the value back up. More importantly, it will provide Wendy and Keith with more peace of mind and a clearer head to meet their medium to longer-terms goals.
Medium-term goals
Credit card debt
Reducing or eliminating credit card debt is a priority medium-term goal for the couple as it is a source of ongoing strain on their capacity to meet their financial obligations. This is the debt with the highest amount of interest incurred and should therefore be a top priority for repayment (ASIC, 2009). At approximately $1500 per month in interest payments alone, this is money that is not contributing to a reduction of overall capital debt over the long-term. In turn, to solve the most burdensome financial problems it is sometimes necessary to strategically access funds designated for long-term financial goals (ASIC, 2007).
In terms of prioritising in financial goal setting, it is generally recommended that the goal to pay off high-interest loans is set as the top priority. Once this goal has been realised it is then financially advantageous to channel the extra funds available into achieving longer-term goals (ASIC, 2009). It was suggested above that Wendy should allocate $7,000 of her bonus towards reducing the couple’s credit card debt. In addition, the couple have available $20,000 in an emergency fund. They should withdraw $13,000 from this account to pay off credit card debt. This will significantly reduce monthly repayments (approximately $1,000). In turn, this money can then be used to increase the couple’s monthly credit card repayment to increase the rate at which the overall debt is reduced.
Care loans
Similarly, the interest rates on the care loans are greater than the returns either Wendy or Keith are receiving from their share portfolio or personal savings account. For instance, the interest accrued on the personal savings accounts held by the couple is approximately 4% per annum; whereas the interest being on their credit card debt is approximately 18% and car loans approximately 8.5%. Therefore, it is more financially prudent for Wendy and Keith to reduce their high-interest high-debt sources utilising available money. Wendy should therefore reduce her salary sacrifice payments by $5,000 and commit these funds to reducing her car loan repayments. She should also consider selling her car in order to purchase a cheaper vehicle.
Living expenses
Wendy and Keith have flagged their desire to reduce household living expenses (currently at $2500 per month). A potentially achievable medium-term goal is to reduce this amount by $500 (20%). To support the achievement of the medium-term goals it will be necessary for the couple to request a nominal payment of board from Wendy’s younger step brother. A nominal payment of $75 per week from Wendy’s brother as a contribution to living expenses will help Wendy and Keith reduce their household living expenses by $300 per month. The additional $200 required to achieve and even exceed their goal to reduce living monthly expenses by $500 can come from each partner sacrificing something to the value of $25 per week currently included in the weekly shopping budget. This savings measure can be achieved by formulating a shopping list prior to shopping to identify where cost-cutting can be achieved (e.g., by not purchasing the item or purchasing a less expensive brand).
Longer-term initiatives
Mortgage repayments
As previously stated planning for retirement is an important long-term goal. The main financial pathways Keith and Wendy are travelling to achieve security in retirement are through their mortgage repayments and superannuation contributions. To increase the long-term return on their mortgage payment without having to increase payments the couple should negotiate with their bank to make fortnightly (or weekly if possible) payments rather than their current arrangement of monthly payments. By changing the structure to make more frequent mortgage payments the couple can save thousands of dollars over the long term by reducing more quickly the amount of interest they have to pay on the principle loan amount. In fact, fortnightly payments can reduce a 20-year home loan by up to four years (ASIC, 2009).
Superannuation
In regards to superannuation, this is undoubtedly an investment into your future (ASIC, 2009).
The couple should factor their superannuation strategy into their long-term financial goals. They should set a 5+-year goal to restructure their superannuation management to maintain goals for retirement period, but which also help them to meet current financial burdens. It has already been suggested that Wendy should allocate her bonus to other debt rather than as a contribution to her superannuation. Wendy should also reduce her current $10,000 salary sacrifice superannuation payment to $5,000 use the saved $5,000 to reduce her car loan
debt.
Wendy and Keith should also speak to a free and independent financial advice about how their superannuation might be better invested to improve their long-term return. Importantly, it is crucial to set goals superannuation investment goals that are positioned ‘between the flags’ (ASIC, 2009).That is, goals that have minimal unexpected risks and uncertainties. Superannuation is a long-term investment and so the couple are inevitably going to experience ups and downs in the health of their respective funds (ASIC, 2011b).
Feeling secure
An important aspect of financial management is to have mechanisms in place to manage risks and uncertainties in the most effective way. Therefore, it is important for Keith and Wendy to continue with their health insurance and other loan insurance payments. However, in relation to their Private Health Fund, the couple may be able to reduce the costs from $312 per month by assessing whether they need all of the benefits they are paying to receive. If the couple are not making use of supplementary benefits (e.g. massage therapy or optical care, etc.) then they should change to a lower level of health care where they are not required to pay for these options. This decision will still allow the couple to protect themselves with hospital cover etc. is required, will help to reduce their health fund expenditures by approximately $500 per year.
Similarly, Keith should also aim to have a sense of security about his business. He should therefore maintain his $10,000 bank deposit as a safety net against any problems that may arise with the business that required an immediate short term cash payment.
Conclusion
This paper has identified the first priority for Keith and Wendy is to develop a budget which includes setting achievable short-, medium- and long-term goals. This will offer them a structured approach to regaining control of their finances. The second priority was for the couple to undertake immediate action and to also set achievable medium term goals to eliminate their high interest bearing debt. Lastly, restructuring current loan and superannuation payments was also identified as integral to Wendy and Keith’s ability to establish good money management practices and re-take control of their finances into the long-term.
References
Australian Securities and Investments Commission (2007). Dealing with debt: Your rights and responsibilities. ASIC.
Australian Securities and Investments Commission (2011a). Investing between the flags: A practical guide to investing. ASIC.
Australian Securities and Investments Commission (2011b). Super decisions. ASIC.
Australian Securities and Investments Commission (2009). Your money. ASIC.
Creating a financial structure can improve your capacity to organise your finances (Australian Securities and Investments Commission [ASIC], 2009). The structure will necessarily include the different elements of your whole financial profile such as income sources; ongoing expenditures such as mortgage, credit card payments and living expenses; savings objectives; and fun money such as for holidays or special occasions (ASIC, 2009). This paper will identify the nature of the financial problems being experienced by Wendy and Keith. It will then discuss how creating a budgetary plan and establishing a balance between short-, medium- and long-term goals that are realistic and potentially achievable is required. The discussion will …show more content…
also include the priority action required to address high interest debt sources which currently place great pressure on their monthly expenditures, as well as how to improve their income revenue streams. The recommendations being made throughout this paper are designed to underpin the efforts of the couple to improve their immediate financial situation while also working towards achieving longer term financial goals.
The problem
A broad overview shows the couple have a combined income of approximately $200, 000 (at around $16,500 per month). They currently have monthly expenses of approximately $20,000 per month which include school fees, health fund payments, mortgage repayments, care loan repayments, general living expenses, etc. Other sources of drain on the couples’ combined income include added contributions to superannuation funds, private family debt, miscellaneous costs associated with their three children (e.g. sports fees), increasingly living expenses, and a safety net account for Keith’s business. On the positive side, the couple has access to addition income by way of a share portfolio, listed debentures, a joint bank account for emergencies, and the possibility that Wendy will receive a substantial bonus form work. Keith and Wendy are experiencing difficulties trying to balance their expenditures against their income. In terms of their current problem, the couple appear to be “losing control” of their financial situation as they struggle to meet their monthly expenses.
What appears to be immediately evident is that Keith and Wendy do not have a structured approach to the management of their finances. The couple do have financial goals to protect some aspects of their present financial situation (e.g. emergency savings account) as well as their future security (e.g., extra superannuation payments). However, these strategies are not framed within a broader set of financial goals that addresses current contingencies.
Working out the finer details of your financial situation (the overall tax implications of superannuation contributions, off-setting interest rates etc.) can be complicated. Therefore, it is advisable for Wendy and Keith to seek free and independent financial counselling service (ASIC, 2007). The service can offer the couple insights on how the perceive their financial situation overall as well as guidance and tips on the best strategies to undertake to pay off their debts and manage their budget (ASIC, 2007).
Having a plan
Budget formulation and setting goals
The first step for Keith and Wendy to take to repair their financial stress is to create a half-yearly budget.
This will allow the couple to gain a holistic and ongoing picture of their financial situation and to identify areas of most financial concern (ASIC, 2009). In order to formulate a budget profile that will support financial goal setting and change initiatives into the future, the couple will need to include estimates of their half-yearly combined income, half-yearly expenses, and the main expenses contributing to the shortfall (ASIC, 2009).
The second step Wendy and Keith need to take to improve their capacity to balance the books is to formulate a realistic (achievable) financial management plan to implement over a designated time frame (ASIC, 2009). The plan should include financial goals to be achieved over the short-term (0-1 year) medium-term (1-5 years), and long-term (5+ years) that will support the couple’s attempts to reposition their financial state (ASIC, 2009). The short-, medium- and long-term goals should be supported with a clear link established between the target to be achieved, the timeframe for the target to be achieved, and regular financial adjustments required to meet the targeted performance goals ASIC, …show more content…
2009).
Indeed, this approach is supported by theory which suggests effective goal setting can be undertaken by following the SMART formula (Specific, Measureable, Attainable, Relevant and Time-bound) (ASIC, 2011a). By being precise and realistic about the target to be achieved is fundamental to the ability of the couple to adhere to the financial goals they set themselves. Moreover, it will allow them to identify more easily how the goals are interconnected and therefore what strategies will best support their overall achievement (ASIC, 2011a). Importantly, the short- to medium-term goals must be small to increase the likelihood of their being achieved. As the couple begin to change their financial habits to achieve their short-term goals the goals can be gradually increases to generate more savings over the long-term (ASIC, 2009).
Short-term goals
School fees
The couple have an immediate debt problem of approximately $16,000 in school fees to be paid at the beginning of the term. To resolve this problem Wendy should not place the entire expected bonus of $23,000 into her superannuation fund as she intends. The money from this bonus can be used to pay the school fees for the immediate term and to reduce overall credit card debt. The couple should then include clear strategies in their financial plan to budget achievable amounts for future school fee repayments.
Family debt
Another short-term financial goal for the couple is to repay Wendy’s father the money he is owed. This is an immediate objective because of the father’s financial difficulty due to heavy medical bills. To resolve this problem Wendy should access money from her share portfolio. Wendy’s share portfolio is valued at $47,500. She should look to sell-off shares to the value of $15,000 in order to pay the debt of the same amount owed to her father. This will leave her with a share portfolio value of approximately $32000. Although this is approximately 25% down on the value when she inherited the shares, she still has the opportunity to build the value back up. More importantly, it will provide Wendy and Keith with more peace of mind and a clearer head to meet their medium to longer-terms goals.
Medium-term goals
Credit card debt
Reducing or eliminating credit card debt is a priority medium-term goal for the couple as it is a source of ongoing strain on their capacity to meet their financial obligations. This is the debt with the highest amount of interest incurred and should therefore be a top priority for repayment (ASIC, 2009). At approximately $1500 per month in interest payments alone, this is money that is not contributing to a reduction of overall capital debt over the long-term. In turn, to solve the most burdensome financial problems it is sometimes necessary to strategically access funds designated for long-term financial goals (ASIC, 2007).
In terms of prioritising in financial goal setting, it is generally recommended that the goal to pay off high-interest loans is set as the top priority. Once this goal has been realised it is then financially advantageous to channel the extra funds available into achieving longer-term goals (ASIC, 2009). It was suggested above that Wendy should allocate $7,000 of her bonus towards reducing the couple’s credit card debt. In addition, the couple have available $20,000 in an emergency fund. They should withdraw $13,000 from this account to pay off credit card debt. This will significantly reduce monthly repayments (approximately $1,000). In turn, this money can then be used to increase the couple’s monthly credit card repayment to increase the rate at which the overall debt is reduced.
Care loans
Similarly, the interest rates on the care loans are greater than the returns either Wendy or Keith are receiving from their share portfolio or personal savings account. For instance, the interest accrued on the personal savings accounts held by the couple is approximately 4% per annum; whereas the interest being on their credit card debt is approximately 18% and car loans approximately 8.5%. Therefore, it is more financially prudent for Wendy and Keith to reduce their high-interest high-debt sources utilising available money. Wendy should therefore reduce her salary sacrifice payments by $5,000 and commit these funds to reducing her car loan repayments. She should also consider selling her car in order to purchase a cheaper vehicle.
Living expenses
Wendy and Keith have flagged their desire to reduce household living expenses (currently at $2500 per month). A potentially achievable medium-term goal is to reduce this amount by $500 (20%). To support the achievement of the medium-term goals it will be necessary for the couple to request a nominal payment of board from Wendy’s younger step brother. A nominal payment of $75 per week from Wendy’s brother as a contribution to living expenses will help Wendy and Keith reduce their household living expenses by $300 per month. The additional $200 required to achieve and even exceed their goal to reduce living monthly expenses by $500 can come from each partner sacrificing something to the value of $25 per week currently included in the weekly shopping budget. This savings measure can be achieved by formulating a shopping list prior to shopping to identify where cost-cutting can be achieved (e.g., by not purchasing the item or purchasing a less expensive brand).
Longer-term initiatives
Mortgage repayments
As previously stated planning for retirement is an important long-term goal. The main financial pathways Keith and Wendy are travelling to achieve security in retirement are through their mortgage repayments and superannuation contributions. To increase the long-term return on their mortgage payment without having to increase payments the couple should negotiate with their bank to make fortnightly (or weekly if possible) payments rather than their current arrangement of monthly payments. By changing the structure to make more frequent mortgage payments the couple can save thousands of dollars over the long term by reducing more quickly the amount of interest they have to pay on the principle loan amount. In fact, fortnightly payments can reduce a 20-year home loan by up to four years (ASIC, 2009).
Superannuation
In regards to superannuation, this is undoubtedly an investment into your future (ASIC, 2009).
The couple should factor their superannuation strategy into their long-term financial goals. They should set a 5+-year goal to restructure their superannuation management to maintain goals for retirement period, but which also help them to meet current financial burdens. It has already been suggested that Wendy should allocate her bonus to other debt rather than as a contribution to her superannuation. Wendy should also reduce her current $10,000 salary sacrifice superannuation payment to $5,000 use the saved $5,000 to reduce her car loan
debt.
Wendy and Keith should also speak to a free and independent financial advice about how their superannuation might be better invested to improve their long-term return. Importantly, it is crucial to set goals superannuation investment goals that are positioned ‘between the flags’ (ASIC, 2009).That is, goals that have minimal unexpected risks and uncertainties. Superannuation is a long-term investment and so the couple are inevitably going to experience ups and downs in the health of their respective funds (ASIC, 2011b).
Feeling secure
An important aspect of financial management is to have mechanisms in place to manage risks and uncertainties in the most effective way. Therefore, it is important for Keith and Wendy to continue with their health insurance and other loan insurance payments. However, in relation to their Private Health Fund, the couple may be able to reduce the costs from $312 per month by assessing whether they need all of the benefits they are paying to receive. If the couple are not making use of supplementary benefits (e.g. massage therapy or optical care, etc.) then they should change to a lower level of health care where they are not required to pay for these options. This decision will still allow the couple to protect themselves with hospital cover etc. is required, will help to reduce their health fund expenditures by approximately $500 per year.
Similarly, Keith should also aim to have a sense of security about his business. He should therefore maintain his $10,000 bank deposit as a safety net against any problems that may arise with the business that required an immediate short term cash payment.
Conclusion
This paper has identified the first priority for Keith and Wendy is to develop a budget which includes setting achievable short-, medium- and long-term goals. This will offer them a structured approach to regaining control of their finances. The second priority was for the couple to undertake immediate action and to also set achievable medium term goals to eliminate their high interest bearing debt. Lastly, restructuring current loan and superannuation payments was also identified as integral to Wendy and Keith’s ability to establish good money management practices and re-take control of their finances into the long-term.
References
Australian Securities and Investments Commission (2007). Dealing with debt: Your rights and responsibilities. ASIC.
Australian Securities and Investments Commission (2011a). Investing between the flags: A practical guide to investing. ASIC.
Australian Securities and Investments Commission (2011b). Super decisions. ASIC.
Australian Securities and Investments Commission (2009). Your money. ASIC.