Financial Planning Process For Steve And Crystal

Question 1a

Question 1(a)

Steve and Crystal Riley (client) are husband and wife residing in a rented house in a small community. The financial situation of Steve is not strong as he is not so rich. Steve does a job of horticulturist while his wife works for a library. They are living a lower middle class life earnings just over what is needed to meet out the livelihood expenses. However, they are able to save a little amount every month to accumulate in a deposit. The objective of this deposit is to buy a house for them so that they could live in a permanent house.

Question 1(b) (i)

The client wanted to invest in property by means of buying a house. Presently, the client is residing in a rented house, for which he is paying monthly rent. Now, the client is looking to buy the house in which he is residing with his family. The subject matter of the advice sought by the client is the arrangement of finance to buy the house in a most beneficial way.

Question 1(b) (ii)

The client is currently residing in a rented house for which he is paying monthly rental. Now, he is looking to buy a house by taking mortgage loan from a bank and some private loan from his parents. In these circumstances, the client may ask the analyst to find out a bank loan having EMI equal to the monthly rental.

Question 1(c)

The primary issues connected with any investment analysis are the return and risk. The investor would always want to earn as high as possible keeping the risk as low as possible. However, the risk and return run in parallel, if return goes high, the risk also increases and vise a versa. In the current case, the investment in property is under analysis, critical issues in respect of which have been identified as under:

• The occupation of the client is not convincing. It may pose difficulties in paying the loan back to the bankers as well as to the parents.
• The client has newly born twins. The expenses of the client would further increase in the upcoming years.
• Total current net worth of the client amounts to $54200. The house that is sought to be purchased is priced at $280,000. This depicts that client does not have enough backup assets.
• The aggregate annual income of the client is $71,288, which leaves only $6,323 after meeting the annual expenses of $64,965.
• Important point to note is that rent amounts to $15,600, which will get eliminated after buying the house.

In the light of the above mentioned issues, six objectives of the client have been identified as follows:

1. Arranging money to buy a house
2. Obtaining a permanent and high paid occupation
3. Arrangement for expenses on caretaking of the twins
4. Increasing the net worth
5. Reducing the expenses
6. Earning high returns from the property in the long run

Question 1(d)

• If your purpose is investment, do you have any alternative preferences other than investment in property, for example, investment in shares, bonds, and mutual funds for long term?
• Lease is also an alternative to mortgage loan. So, will you prefer to take the house on lease from the landlord rather than going for mortgage loan from a bank?
• The banks require security against the mortgage loan, so, if you are going for mortgage loan, do you have adequate security to cover up the loan amount?
• Do you want the house in this locality only, or you can go for a house in some other locality if available on cheaper rates compared to the current one?
• Considering your current financial situation, what amount will you be able to pay monthly towards the loan repayment? And have you consulted bank in this regard?

Question 2 (a)

The centrelink payments that Crystal will receive have been shown in the chart presented below:

From the computations shown in the chart presented above, it can be observed that Crystal will receive an amount of $413.03 fortnightly as assistance from centrelink. However, as per the guidelines of the Australian government in respect of centrelink payments, Crystal is not eligible for pension payments as these are available to the person aged 60 years or more while Crystal is only 24 years old (Australian Government, 2016). Therefore, considering these guidelines, the net payment which Crystal is eligible for will be $363.93 ($413.03-$49.10) per fortnight. The centrelink payments computed per annum basis arrive at $9,462.18 for Crystal. Thus, $9,462.18 is the amount which can be received by Crystal and used for the purpose of caretaking of her family.

Question 2a and 2b

In regard to the computation made above, it is important to note that the calculations for centrelink payment have been made using the online calculator. The estimate made by the online calculator also shows that Crystal’s partner (Steve) is also eligible for centrelink payments amounting to $1,720.78 per fortnight.     

Question 2 (b) (i)

Analyzing the current position of the client, the statements of tax, cash flows, and net worth are presented below:

Statement of Tax
Tax calculation	Steve Riley	Crystal Riley	Notes
Income from employment
Salary	$48,000	5000
Salary sacrifice	$0	0
Salary after salary sacrifice	$48,000	$5,000
Other income
Bank account interest	$394	0
Interest from other investments	$0	0
Other income liable for tax (e.g. rental income)	$0	0
Assessable capital gains	$0	0
Total assessable income	$48,394	$5,000
Deductable expenses (e.g. MEDICAL BILLS)	$1,500	0
Donations	$0	0
Taxable income	$46,894	$5,000
Income tax on taxable income	$6,787	0	FY 2015/16, income $37001-$80000, tax $3572+$0.325*($80000-37001)                                       up to $18000 tax nil
less tax offsets (e.g. LITO/SAPTO)	$0	0
plus Medicare levy	$0	0
plus Medicare levy surcharge	$0	0
less Imputation credits	$0	0
less refundable tax offsets	$0	0
Net tax payable	$6,787	$0

Statement of Cash Flows
Family cash flow	Steve Riley	Crystal Riley	Combined	Comment
Cash flow calculation:
Salary less any salary sacrificed amount	$48,000	$5,000	$53,000
Non-taxable income (e.g. income from a superannuation pension for a person aged over 60, Family Tax Benefits, etc.)	$0	0	$0
Interest income	$394		$394
Dividends received (excluding franking credits)	$0		$0
Assistance from centrelink (Crystal)	0	$17,500
Other income	$0		$0
Total income received before tax	$48,394	$22,500	$70,894
Investment expenses	$0		$0
Deb Repayment	$3,765		$3,765
Living expenses	$43,100		$43,100
Rent	$15,600		$15,600	$300 weekly
Car insurance	$0		$0
Home contents Insurance	$0		$0
Health insurance	$0		$0
Other expenses	$2,500		$2,500	Gift, holidays, and mobile phone
Total expenses	$64,965	0	$64,965
Total income received before tax less expenses	($16,571)	$22,500	$5,929
Net tax payable from tax table above	$6,787	$0	$6,787
Total net cash flow	($23,358)	$22,500	($858)

Statement of Net Worth
Particulars	Steve Riley	Crystal Riley	Combined	Comment
Assets
Everyday bank account	250.00	250.00	500.00
Steve’s ute	4,000.00	–	4,000.00
Crystal’s sedan	–	12,000.00	12,000.00
Home contents	3,500.00	3,500.00	7,000.00
Bonus saving account	11,250.00	11,250.00	22,500.00
Superannuation-SunSuper	16,300.00		16,300.00
Superannuation-Council Super		11,800.00	11,800.00
Total (A)	35,300.00	38,800.00	74,100.00
Liabilities
Credit card	1,250.00	1,250.00	2,500.00
Car loan	–	5,400.00	5,400.00
HECS debt	6,000.00	6,000.00	12,000.00
Total (B)	7,250.00	12,650.00	19,900.00
Net Worth (A-B)	28,050.00	26,150.00	54,200.00

Question 2 (b) (ii)

The statement of taxes shows net tax payments of $6,787. The amount of tax comprises of only tax on the salary income of Steve as the income of Crystal is not below the minimum table limit of $18,000 (Australia Taxation Office, 2016). The statement of cash flow shows current net cash position of the family. It can be observed from the statement that the family is currently having shortage of cash by $8,58 per annum. This implies that the annual expenses are in excess of the receipts of the family. The negative cash position depicts that the family needs financial assistance so that the cash receipts could be increased. However, the net worth position as shown in the statement of net worth is positive. The total net worth of the family as depicted in the statement is $54,200.   

Question 2 (c)

Loan Option-1: Unsecured	Loan Option-2: HSBC Secured	Loan Option-3: IMB secured
Loan Amount	224,000	Loan Amount	224,000	Loan Amount	224,000
Interest rate p.a.	5.00%	Interest rate p.a.	3.55%	Interest rate p.a.	3.87%
Terms years	25	Terms years	25	Terms years	25
EMI		EMI		EMI
Monthly	1309.48	Monthly	1127.41	Monthly	1166.34
Weekly	301.95	Weekly	259.99	Weekly	268.96

In the current case, the client wants to buy a house by taking mortgage loan. Total cost of house is estimated to be $280,000 out of which the client ha to deposit $56,000 and the remaining amount of $224,000 could be taken on loan. For this purpose an analysis has been conducted in the table presented above, which shows comparison of three best available loan options. The first loan option offers loan at 5% without any further security and surety from the client. In this offer, the client will have to repay $1309.48 monthly and $301.95 weekly. There is another offer from HSBC at lower interest rate 3.55% with monthly repayments of $1127.41 or $259.99 weekly. The third offer from IBM is also available at 3.87%, with monthly payments of $1166.34 or weekly $268.96 (Yourmortgage.com, 2016). Considering the cash position of the client, second loan offer providing for $259.99 weekly repayments is advisable.  

Question 2 (d) (i)

Statement of Cash Flows
Family cash flow	Steve Riley	Crystal Riley	Combined	Comment
Cash flow calculation:
Salary less any salary sacrificed amount	$48,000	$5,000	$53,000
Non-taxable income (e.g. income from a superannuation pension for a person aged over 60, Family Tax Benefits, etc.)	$0	0	$0
Interest income	$394	0	$394
Dividends received (excluding franking credits)	$0		$0
Assistance from centrelink (Crystal)		$26,962
Private assistance from parents	56000
Other income	$0		$0
Total income received before tax	$104,394	$31,962	$136,356
Investment expenses	$0		$0
Down payment	$56,000
Deb Repayment	$17,284		$17,284
Living expenses	$43,100		$43,100
Rent	$0		$0	$300 weekly
Loan sanction expenses (10% of loan amount)	$2,400
Other expenses	$2,500		$2,500	Gift, holidays, and mobile phone
Total expenses	$121,284	0	$121,284
Total income received before tax less expenses	($16,890)	$31,962	$15,072
Net tax payable from tax table above	$0	$0	$0
Total net cash flow	($16,890)	$31,962	$15,072

Question 2 (d) (ii)

From the cash flow statement depicted in 2 (d) (i) above, it can be observed that the net cash position of the client turns in to surplus from deficit if Steve and its family decide to buy the house. Decision of buying the house will eliminate the rental payments, which amounts to $15,600 yearly. Further, the parents of Steve are willing to give him a cash assistance of $56,000 to pay the down-payment to buy the house. Although, it will not have any impact on the net cash position, but the inflows and outflows of cash will be increased. Further, new centrelink payment will also be enhanced from existing $17,500 to $26,962 yearly. Since the new house will be bought by way of a mortgage loan, therefore, $13,520 will be added to the debt repayment. Further, a cost of $2,400 will also be incurred in getting the loan sanctioned, which involves processing fee, paper fees, and miscellaneous charges.

Question 2c

Question 3 (a) (i)

The current net worth of the client is $54,200, and the loan needed is $22,4000. This indicates that the debt repayment capacity of the client is very low. However, assistance from the centrelink could rise up the income level of the client making him capable to repay the loan amount. Further, it is also crucial to take into consideration that currently client is paying $300 as rent for the house use. This amount could be diverted to loan repayment easily. Therefore, it is advised that the client chooses weekly repayment plan for 25 years from HSBC, which is offering loan of $22,4000 at 3.55% with weekly repayments at $259.99 for 25 years.

Question 3 (a) (ii)

The current debt possessed by the client amounts to $19,900, which comprises of credit card outstanding of $2,500, car loan of $5,400, and HECS debt of $12,000. In respect of the credit card debt it has been observed that the client’s major spending is on rearrangement of the house each month. After, buying a permanent house, the credit debt would be eliminated or be reduced to a significant level. Further, car loan and HECS debt could be paid back by claiming the payments due in superannuation account.   

Question 4 (a)

There are two major risks to the client’s financial position in respect of loan repayment such as low net worth and low household income. Currently, the total household income per annum of the client is $53,000 and the annual expenses amounts to $64,965, which leaves nothing to payback the proposed debt. Therefore, the support from centrelink is very crucial in strengthening the client’s financial position. Further, the fact that the client has twins at a very young age as of now also increases the risk. The client’s spending would go higher in the future years as compared to the current position due to the increased burden of caretaking of the kids.

Further, it is also essential to note that the type of occupation of Steve (Client) is risky. Steve is engaged in horticulture as salaried employee, which is not permanent. However, Crystal (Client’s wife) is a librarian, who seems to be permanently employed. There is a risk of Crystal setting apart in future. If Crystal goes for separation, the risk of reduction in the house hold income will increase.

Question 4 (b)

Presently, Steve and Crystal are aged 26 and 24 respectively. They have newly born twins in their family. They have been living in a rented house but now they plan to buy a new house. Although, buying a new house would be beneficial for them from financial view point and it will also fix the problems of stay, but it also has certain risks. The fact that Steve and Crystal have newly born twins gives rise to certain risks in relation to investment in property. The most prominent risk is the risk of death of Steve and or Crystal. If Steve and or Crystal die at early age, the burden to repay the loan would lie on their children. Further, the risk of caretaking of the property also arises in case Steve and or Crystal die at the early age because their children are so young.

Question 2d

In order to mitigate these risks, it is recommended to Steve to take life (death) insurance cover for himself and his wife. In the case of his or his wife’s death, the money could be received from insurers to arrange for the repayment of the mortgage debt (Brammall, Tyson, Griswold, 2013). Further, it is also recommended to create a will providing that in case of his or his wife’s death, the property be vested in the trust and will be maintained by that trust till his children attain majority (Brammall, Tyson, Griswold, 2013).      

Question 5

The recommendations for each objective have been set out as follows:

Objective-1: Arranging money to buy a house

Recommendations: The primary objective of the client is to buy a house. However, the financial condition of the client is not good; therefore, he will have to make arrangements for finance to purchase the house. In this regard, two alternatives are recommended to the client, one is to take mortgage loan and buy the house and another is to take the house on lease from the landlord. In the leasing option, the client will have to pay yearly lease to the landlord while in the mortgage debt, monthly/weekly repayment are to be made to the banker.

Objective-2: Obtaining a permanent and high paid occupation

Recommendations: Currently, Steve’s occupation is horticulture, which pays him a $48,000 yearly and his wife earns $5,000 per year. It is recommended to Steve to change the occupation so that the income could be increased. Further, since his wife Crystal can not work for a few months, he should strive to increase his earning beyond $48,000.

Objective-3: Arrangement for expenses on caretaking of the twins

Recommendations: The expenses of caretaking of the twins are going to be increased in future, thus, it is recommended to start making arrangements from now. Steve and his wife are concerned by the increasing expenses on the household due to twins. Further, the expenses on their education will also increase as the time passes. Therefore, thinking of the future, Steve is advised to make deposits with the bank so that money enough to take care of his children is accumulated.

Objective-4: Increasing the net worth

Recommendations: The net worth is one of the major financial indicators that the banks consider in sanctioning the loans. Steve is in need of a bank loan to purchase the house. Thus, it is recommended to maintain high net worth so that higher amount of loan could be sanctioned. Currently, Steve has a net worth of $54,200, while, the loan needed is for $280,000. Steve is should reduce the debt liabilities to increase the net worth.     

Question 3a

Objective-5: Reducing the expenses

Recommendations: One way to improve the financial condition is to increase the income and another is to reduce the expenses. In the current situation, the financial condition of Steve is not good and he is seeking to buy a house. In order to achieve this objective, he should reduce the expenses as much as possible.  

Objective-6: Earning high returns from the property in the long run

Recommendations: Though, Initially, the purchased house will be used for self residence by Steve, however, as the time passes, he should think of letting out a part of the property. Letting a part of the house will help him arranging finance to repay the mortgage debt easily. Further, it is also recommended to hold the house for long term so that higher returns could be realized from its sell.       

Question 6

The first issue that could arise pertaining to the recommendations made to the client is that the client may not accept to pay off the existing debt. As the cash position of the client is not good, therefore, the client may not agree to the advice of paying off the existing debt immediately. However, in order to enhance the net worth, it is crucial to reduce the level of debt. In this situation, the adviser should demonstrate the actual benefits of paying off the existing debt by taking new mortgage debt and buying the house property. Another issue in regard to the recommendations made could be of letting out the house property after purchasing it. Immediately, it may not be possible for the client to find out good tenants. In order to tackle this issue, the adviser may provide additional services to help them find good tenants.

Question 7

The four specific issues related to the financial circumstances of Steve and its family that would be discussed in the review meeting, are as follows:

Issue-1: Cash position

Your, current cash position is -$858, which means that your yearly expenses are exceeding the yearly receipts. It is essential to have positive cash position to buy the house. So, for this purpose, cash receipts will have been increased, which, in the present circumstances, is possible through centrelink grant.   

Issue-2: Income level

The level of household income is very low due to your wife being on maternity leaves. Thus, the gap will have to be filled up either by you working additional hours or by applying for centrelink payments. The centrelink payments, which your wife will be eligible for are estimated to be around $9462 yearly. However, centrelink receipts are not big but are enough to make arrangements for repayment of the mortgage debt.  

Issue-3: Arrangement to buy the house

In respect of the financial arrangement to buy the house, it can be asserted that there two equally valid options such lease and mortgage debt. Either you can take the house on lease from your landlord or alternatively you can borrow from bankers to buy the house. As per our evaluation, the bank loan from HSBC @3.55% with weekly repayment of $259.99 suits best.   

Issue-4: Risk insurance   

Since your children are very young, therefore, it will be essential for to cover the risk of any casualty with the insurance.

Reference

Australia Taxation Office. (2016). Individual Income Tax Rates for Prior Years. Retrieved October 10, 2016, from https://www.ato.gov.au/Rates/Individual-income-tax-for-prior-years/

Brammall, B., Tyson, E., Griswold. (2013). Property Investing For Dummies – Australia. John Wiley & Sons.

Yourmortgage.com. (2016). Best Home Loans. Retrieved October 10, 2016, from https://www.yourmortgage.com.au/best-home-loans/

Australian Government. (2016). Families. Retrieved October 10, 2016, from https://www.humanservices.gov.au/customer/themes/families