Case Study
The first two things the couple should do are:
• Take stock and fully analyze their financial situation to fully understand their financial position. This is the only the couple is able to understand their income as well as take stock of their expenses, both long term and short term, those things they can do without and those that absolutely necessary.
• The second thing they need to start immediately is to isolate all the expenses that they have to pay , and formulate ways in which they pay these bills in away that most saves their money in terms of saved interests as getting rid of all unnecessary expenditure.
Couple’s Current Financial Position
An examination of the couple’s finances reveals severe cash flow problems. The couple earns a combined gross income of $203,300 per annum which mainly consists of income from Mary’s salary, income from John’s gardening business and local club earnings. They have a multitude of expenses which come to almost $140,000 every year. After their income undergoes taxation, the funds remaining only barely cover the expenses. A significantly large sum of the couple’s finances go towards servicing loans and credit that they have acquired which impacts their cash flow in a negative way.
The Couple’s Current budget
The couple yearly spends an average of $30792 on their mortgage, $ 56,575 on daycare for the children,$18,672 servicing Mary’s car loan and $11196 servicing John’s utility loan. They also spend $466 per month paying for their credit card debt which amounts to $5592 per year. They pay a combined amount of $ 9168servicing both their personal loans. A total sum of $3900 needs to be paid every year for the home entertainment system purchased on credit. Total expenditure budgets per year therefore come up to roughly $136,375 per annum.
Assumptions Made
That the couple’s business and salaried income remains the same. This means that Mary’s $120,000 p.a and John’s $ 55,000gross earnings p.a. remain the same during the period of the intervention.
The assumption is also made that expenses for daycare for the couple’s children are incurred for daycare provided on everyday of the week. Weekends are also included in the expenses and so they come to about $56,575 per year.
It is also assumed that the credit card debt in the amount of $15,565 remains relatively the same throughout the proposed intervention.
The share value for the inherited share portfolio remains relatively stable so that the figure $28,300 remains more or less the same.
It is assumed that there are other expenses or income streams other than those mentioned.
An assumption is also made that the monthly amounts being paid for the home entertainment system are not incremental.
An assumption is also made that both or at least of them (Mary or John) is able to take care of the children during the weekends so as to make it possible to do away with day care services at his time.
Steps to be taken
For the financial standing of the couple to get better the income has to be increased while the expenses have to be decreased. This means that all unnecessary expenses have to be cut out.
Expensive non-basic items should be eliminated. Since the home entertainment system has not yet been paid for at all, the couple could return it back to the store since it is not a necessity. The rational is that the couple should not be striving to acquire more expenses since they already have many debts to service. They should instead be trying to live within their means.
The two should put in effort to pay off their car loans with large lump sums of money so as to quickly clear that debt. This is because the loans ultimately attract higher interests rates with increasing period of payment. Mary’s car loan for instance has an outstanding balance of $25,500. However, in her 4 year monthly installments, she will end up paying $74,688 by the time the four years are over. In the same way, John will, in the running three years of monthly installments end up paying $33588 for his loan, a difference of $15,588 from his outastnding$18,000.Quick payments in lump sums eventually will save the couple a lot of cash in loan interests.
Funds going into the superannuation as well as the super fund should temporarily be halted and instead channeled into the payment of outstanding loans and the mortgage.
The couple should reduce the amount of money they pay for day care by reducing the number of hours of daycare, by possibly eliminating day care during the weekends. Alternative solutions should be found day care during weekends. This would save the couple about $19,375.
John’s younger brother who lives with the couple may also be requested to contribute to the budgetary needs of the household. He may do this by handling some normal household expenses, which would help reduce the money expended on those requirements. This would free up more money to service debt and therefore stabilize cash flow.
The couple could take advantage of the share portfolio to grow and strategically diversify y so as to increase chances of income from different shares. dividends should be used to help offset outstanding loans to help liberate the couple from debt and therefore stabilize their cash flow.
Reasons for taking the necessary steps
• The need to eliminate all non-basic items ensures that the couple is able to live within their means and therefore will be able to better handle their expenses. Money previously spent on non-basic items will now be able to be channeled into the payment of basic items as well as assets such as the house .Entertainment goods should be purchased with extra cash left over after the payment of all important and basic needs items.
• Effort put into the payment of outstanding loans that accrue more interest with increased periods of payment should be a priority so as to save money. Money that would have been accrued and payable as interest in loans is saved and the couple in this case would essentially be able to use that saved money to offset other pending bills.
• Funds deviate from superannuation and super funds are able to be diverted into the offsetting of outstanding loans which are the couple’s biggest expenditures and budgetary liabilities. The rationale is that it makes better financial sense to pay outstanding and constantly accruing debt so as to prevent it from growing even bigger, as opposed to just storing the money away in a fund.
• Since daycare is one of the largest items in expenditure in the couple’s budget, any effort towards improving the cash flow should involve the reduction of this cost. The couple is able to take care of their children themselves during the weekends and therefore save money.
• Growing the share portfolio and diversifying it as well as having John’s brother contribute to the budget is for the basic purpose of increasing the couple’s income flows so as to better handle their expenses.
Effects of Proposed Actions
The overall and targeted effect of the proposed changes is to increase income and to decrease expenses so as to form a relatively stable cash flow.
With increased payment on their major loans, the couple will find that their loan interests will decrease and lesser minimum payments per month will be required. This will give the family financial flexibility to be able to better meet their expenditures without as much strain as before. The deliberate efforts towards increasing their income will also enable the family to
be able to have more money with which to handle its expenditures therefore decreasing financial strain.
