Financial Planning Fundamentals

Table of Contents

Scope of advice (Introduction).

Summary of Advice (Executive Summary).

What my advice does not cover

What information are missing about the client

Where to find more information.

SMART Goals and Objectives.

Current Situations: personal and financial circumstances of the client

Risk Profile of the Client

Cash Flow, Net Worth, Investment strategy.

Comparison of product

Budgeting & Savings Plan – Advice.

Strategic Area.

a) What is it 

b) How it works.

c) Comparison of products.

d) Advantages & Drawbacks.

e) Why.

f) Outcome.

Finance Debt Management – Advice.

Strategic Area.

a) What is it

b) How it works.

c) Comparison of products.

d) Advantages & Drawbacks.

e) Why.

f) Outcome.

Cash Flow Projection.

Statement of financial Position.

Conclusion.

Recommendation.

The Cost of my Advice.

How Am I Paid.

Other Benefits.

Other important Information.

Forward Illustrations.

Tax.

References.

Scope of Advice (Introduction)

In this financial planning report, There has been confirmation about the current economic situation of Mr. Travis and project his future cash flow, net worth taking into consideration bis current location, salary growth factor, and inflation rate. The scope of advice includes debt management, cash flow projection, analysis of SMART goals and objectives, preparing statements of financial position.

Summary of Advice (Executive Summary)

This financial planning report considers Mr. Travis's current financial situation and identifies his business goals. After a thorough understanding, the advice to Mr. Travis, which goals are short term, long term, and medium-term targets and whether each of the goals is achievable or not. Suggestions and analyze a suitable risk profile and suggest an investment strategy. After that, there has been a projection of his future cash flow statement and financial position for five years. Finally, The advise him on the grounds of better debt management.

What My Advice Does Not Cover

This financial planning report does not include credit card future estimates or projection as the client's exact amount of credit card loan and spending is not provided. The report also does not cover and mentions the exact financial product that the client should invest. Only essential guidance is given.

What Information Are Missing About the Client

The client has not disclosed the exact amount of spending of the amount credit card bill and the credit card loan. It is difficult to make estimates related to the credit card.

Where to Find More Information

The advice is certainly based on incorporates information from the documents listed below and should be read in conjunction with them

Document Name

Version

Date

Loan details

V1.1

1 January 2019

Income & expense details

V1.1

1 January 2019

Superannuation Fund

V1.1

1 January 2019

SMART Goals and Objectives

Mr. Travis has addressed the following goals and objectives that he wishes to achieve. We bifurcate each goal as to whether it is long term, short term, medium-term, and whether those goals and achievable or not.

  1. Maintain a net income of at least $65,000 p.a. This is both a short term and a long term goal. This goal is nearly impossible to achieve, considering the liabilities Mr. Travis must pay and other expenses.
  2. Establish and maintain a cash reserve of $10,000. This is a medium- and long-term goal. It is possible to achieve this goal by increasing the savings and cutting down the expenses
  3. Reduce debt as soon as possible. This is a long term goal. As Mr. Travis pays off the outstanding debt each year, the debt gets reduced and will be free from the debt by the end of FY2021 – FY2022
  4. it Would like to propose to his girlfriend in 6 months and fund for engagement rings for approximately $8,000. This is a short term goal, and it is possible to achieve this goal from the cash surplus he has each year

Current Situations: Personal and Financial Circumstances of The Client

Mr. Travis Bronson is a civil engineer who is full time employed at Wollongong Council. He earns an annual gross salary of $101,000. The applicable tax rate of 24.60%. The net or after-tax per annum salary he receives is $76,133. As of 2019, he has a total asset value of $71,300, which includes Home worth $40,000, Car worth of $25,000, Savings account has $1,000, and Share portfolio value of $5,300. Mr. Travis has total liabilities worth $33,000, including a Car loan of $15,000, a financial loan of $10,000, and a credit card loan of $8000. Mr. Travis has ongoing two loans worth $25,000 to repay and wishes to buy a new car and house in the long term. His current financial situation is moderate, where he had a net income of $38,300 In 2019. He needs to cut down his expenditure to a considerable extent.

Risk Profile of the Client

Mr. Travis is 32-year-old (as per 2019) Australian Civil Engineer earning a gross annual salary of $101,000. He is not yet married, and no member of his family is dependent on him. As of 2019, his total asset base is worth $71,300 and total prevalent liabilities of $33,000. He holds two insurance policies: a Comprehensive Car insurance policy that has a benefit value of $20,000 and Life and a total permanent disability insurance policy that has a benefit value of $20,000. Moreover, he holds two superannuation namely Local government Super – conservative which is currently valued at $50,000 that provides life and total permanent disability cost cover of $100,000 , the second superannuation "Perpetual Wealth Focus Super – Balanced," that is currently valued at $40,000 which provides life and total permanent disability cover of $25,000. He conducts a risk analysis and finds out that he holds a strong financial asset base, decent Salary, and the coverage is under life insurance. He has both the ability to take risks and the willingness to take risks. He is a risk-seeking investor with a risk tolerance of growth strategy.

Cash Flow, Net Worth, Investment Strategy

 The calculation of cash flow analysis, net worth assessment and will suggest the investment strategy. As of 2019, the cash inflows are Salary (gross) of $101,000, Bank Interest $10, and Dividends of $30, but it is reinvested. The total cash inflow is $101,310. The cash outflows range from expenses in the form of rent, electricity/gas/water, telephone, insurance, food, different types of loans, income tax, etc. The total cash flow is $92,967, with a cash surplus or savings of $8343. The Net worth of Mr. Travis is $38,300 after considering the entire asset base of $71,300 and total liabilities of $33,000. As there has been noticing from his declaration of income, expenses, and other details, he has a share portfolio of $5000, he also has two superannuation and two insurance policies. As being financially dependent with no dependent members, he has the appetite and the willingness to take risks by investing in growth generating avenues or financial products. This could be possible when he limits his unnecessary spending as his credit card bill is remarkably high.

Comparison of Product

Mr. Travis is already invested in two superannuation funds: "Local government Super" and "Perpetual Wealth Focus." The local government super fund is a conservative fund with a current value of $50,000 and gives him a life and total permanent disability cover of $100,000. The Perpetual Wealth focus fund is a balanced fund with a current value of $40,000 and gives him a life and total permanent disability cover of $25,000. His risk-bearing ability and risk appetite are high, which allows him to take risks and invest in a growth fund an aggressive growth, which will earn him a higher return. At the end of 2019 and as early as 2020, unfolded entire globe has witnessed the outbreak of pandemic “COVID -19”. To be financially prepared to tackle any such unforeseen emergencies, it is always especially important that the asset and wealth grow from time to time. Higher the wealth better w are. It provided us with a safety net during those crucial times. If the comparison of these two funds as there has been a recommendation that he can invest in a Growth fund, which will increase his life cover and also increase in investment in a share portfolio, curb down his lavish expenditure. 

Mr. Travis has an insurance cover for his house worth $20,000, which he plans to buy a new one in the next five years. The current value of this insurance coverage is considerably less. He also has car insurance, which has a benefit value of $20,000. This benefit value is the same as that of house insurance. He should ideally get a better insurance cover for his house. 

Budgeting & Savings Plan – Advice

Mr. Travis, for him to be able to fulfill both long term and short-term financial goals and objectives, it is particularly important to focus and follow a rigorous budgeting and savings plan. The current savings plan and a budget and have also forecasted it for the next five years. This will allow Mr. Travis to stick to this plan and form a habit of saving more and spending less.

Strategic Area

Now addressing the following in our advice plan

a) What is it

This savings and budget plan is for fulling the objective of being able to establish and maintain a cash reserve of $10,000, ready to replace the car in 5 years, save for a deposit on a first home in the next five years.

b) How it works

The cash surplus or the excess cash (savings at the end of each year) should be put into the savings account where the bank pays an annual interest of $10. This savings balance will grow each year as his ability to save each year increases. It can also be seen as the savings account balance in 2019 was $8433.00, in 2020 it was $29,404.99, and finally, by the end of our projected year, which is 2024, the savings account is likely is increase to $50,093.94. They are not considering any withdraws of cash in these years.

c) Comparison of products

It is doubtful and not advisable to compare cash with any other financial assets or commodities. Money is the king and capital is a highly liquid asset and serves as the only barometer in the extreme worsening economic situation, i.e., during a recession or any emergency

d) Advantages & Drawbacks

The advantage of having a high cash balance is that it ensures liquidity during a crisis and can be withdrawn during a difficult time without a loss in value, i.e., there is no liquidity risk. The disadvantage of having too much cash is that there is a situation that where forgoing of excellent investment opportunities and interest rate is generally low for a savings account as compared to other assets or investment products.

e) Why

A savings and a budget plan are needed, so there is no divergence or unnecessary spending. It keeps a person stay honest in achieving his/her financial goals and objectives.

f) Outcome

The outcome of a saving and budget plan is that financial objectives and goals could be met without facing difficulties. It teaches a habit of saving and budgeting our monthly expenses and keeping a record for the same.

Finance Debt Management – Advice

Mr. Travis, any outstanding finance loan of $10,000 with a remaining term of 1.5 years. The preparation of a debt schedule or amortization schedule where there is a need to calculate the monthly payment, interest component, repayment of principal, and outstanding principal at the end of each period. It is essential to advise Mr. Travis accordingly

Strategic Area

Addressing of the following in our advice plan

a) What is it

Mr. Travis has an outstanding finance loan with a remaining balance that needs to be paid is $10,000 from GE @ 16.1% p.a. He spends a monthly repayment amount of $660 and had 1.5 years to maturity of the loan 

b) How it works

The debt amortization schedule has been prepared is a monthly amortization schedule, where the remaining periods are (1.5 * 12 = 18 period or months). The monthly interest rate is = 0.1601/12 = 0.013341, monthly payment = $660, out of which interest component is 0.013341% of the beginning of the periodic principal and repayment of principal is = monthly payment – interest component.

As it is seen that Mr. Travis would be fully able to repay the entire loan in 18 months, so in FY2020 he needs to pay $7920, and in FY2021 he needs to pay $3960, after which there is no outstanding finance loan

c) Comparison of products

The loan is taken from GE with an interest rate of 16.01% p.a. can be compared with the loan products offered by other lenders and financial institutions. Since he has already taken this loan before there is no point to compare it now but in coming years, any products should be analyzed by doing a cost-benefit analysis

d) Advantages & Drawbacks

The advantage of preparing a debt schedule is that it clarifies how much more of the outstanding loan needs to be paid and is remaining. The other benefit is that it helps us understand whether the person will be able to service his debt for the loan's remaining periods. There are no disadvantages in preparing a debt schedule at all.

e) Why

A debt schedule is needed for us to understand our future liquidity and solvency problem. It also helps understand and compare our existing and future financial debt burden

f) Outcome

A debt schedule helps us understand whether the ongoing loan is serving any advantage to us, or is there any value addition after taking this loan.

Cash Flow Projection

The base year is the current year, i.e., FY2019 and projection of Mr. Travis's cash flow for five years, i.e., from FY2020 till FY2024. The assumptions of the salary increases by 3% p.a., use the current year rate going forward as well, all expenses are adjusted to inflation of 2.5% p.a. The cash inflows are Salary, bank interest, and cash outflows are all the cash expenses.

Cash Flow Statement

2019A

2020E

2021E

2022E

2023E

2024E

Cash Inflows

Salary (gross)

101000

104030

107150.9

110365.43

113676.3898

117086.68

Bank Interest

10

10

10

10

10

10

Dividends (reinvested)

300

300

300

300

300

300

Total Cash Inflows

101310

104340

107460.9

110675.43

113986.3898

117396.68

Cash Outflows

Rent

13000.00

13325.00

13658.13

13999.58

14349.57

14708.31

Electricity/Water/Gas

1130.00

1158.25

1187.21

1216.89

1247.31

1278.49

Telephone/Mobile/Internet

1250.00

1281.25

1313.28

1346.11

1379.77

1414.26

Insurance - home & contents

800.00

800.00

800.00

800.00

800.00

800.00

Insurance - car

1000.00

1000.00

1000.00

1000.00

1000.00

1000.00

Private health Insurance

1000.00

1000.00

1000.00

1000.00

1000.00

1000.00

Petrol/maintenance

4500.00

4612.50

4727.81

4846.01

4967.16

5091.34

Car registration

1000.00

0.00

0.00

0.00

0.00

0.00

Food

6200.00

6355.00

6513.88

6676.72

6843.64

7014.73

Grooming

300.00

307.50

315.19

323.07

331.14

339.42

Credit card

15000.00

0.00

0.00

0.00

0.00

0.00

Other loans

15120.00

13920.00

9960.00

4500.00

0.00

0.00

Medical/Dental

1000.00

0.00

0.00

0.00

0.00

0.00

Entertainment/Dinners

2500.00

2562.50

2626.56

2692.23

2759.53

2828.52

Clubs/Prof. Membership

1300.00

0.00

0.00

0.00

0.00

0.00

Holidays

3000.00

3000.00

3000.00

3000.00

3000.00

3000.00

Tax

24867

25613.01

26381.40

27172.84

27988.03

28827.67

Total Cash Outflows

92967.00

74935.01

72483.45

68573.44

65666.14

67302.74

Cash Surplus

8343.00

29404.99

34977.45

42101.98

48320.25

50093.94

Table 1 – Cash Flow statement

The projections given are estimates only and are intended as a guide only

Statement of Financial Position

The base year is the current year, i.e. FY2019 and the project the balance sheet of Mr. Travis for five years, i.e. from FY2020 till FY2024. There has been an assumption that home value remains the same, car is depreciated each year, and the cash surplus or savings are invested into the savings account where the bank pays interest each year. The liabilities are repaid each year, taking into consideration the respective debt schedule.

Net Worth

2019A

2020E

2021E

2022E

2023E

2024E

Assets

Home

40000

40000

40000

40000

40000

40000

Car

25000

20000

15000

10000

5000

0

Savings Account

1000

9353.00

38767.99

73755.44

115867.42

164197.67

Share Portfolio

5300

5300

5300

5300

5300

5300

Total Assets

71300

74653

99067.99

129055.44

166167.42

209497.67

Liabilities

Car Loan

15000

9821.25

4296.23

0

0

0

Finance Loan

10000

3196.06

0

0

0

0

Credit Card Loan

8000

0

0

0

0

0

Total Liabilities

33000

13017.32

4296.23

0

0

0

Net Worth

38300

61635.68

94771.76

129055.44

166167.42

209497.67

Table 2 – Net Worth

The projections given are estimates only and are intended as a guide only.

Conclusion on Financial Planning Fundamentals

Looking at the current situation and the projected financial condition of Mr. Travis, it can be concluded by saying as he pays off his existing loans and debt, he is in a better position to focus on fulfilling his long term goals and objective. As a risk-seeking investor, he should also focus on investing in an opportunity that will yield him higher return 

Recommendation on Financial Planning Fundamentals

The client's current and projected financial situation, it is to be advised to the client that he has an appetite to take risks. He focuses on increasing investment in share portfolios and investing in growth funds rather than balanced funds that will fetch him higher return

The Cost of my Advice

The initial fees for designing the client financial plan were 1% of annual client income, and cost would vary on a per hour basis after that at a mutually agreed amount.

How Am I Paid

The initial fees for designing the client financial plan is 1% of annual client income and $500 per hour and consultation 

Other Benefits

There are no other benefits attacked directly or indirectly, and there is no sharing of any additional client profit, client income whatsoever.

Other important Information

Forward Illustrations

Any forward illustrations are intended as a guide only. They are purely estimates, not guaranteed, and may vary with changing circumstances

Tax

Sydney Financial Planning Pvt Ltd is registered with the Tax Practitioners’ Board as a registered tax (financial) adviser under the Tax Agent Services Act 2009 (“TASA”). However, Sydney Financial Planning Pvt Ltd is not a designated tax agent. The nature of the tax services that Sydney Financial Planning Pvt Ltd is authorized to provide is limited under TASA.

References for Financial Planning Fundamentals

Damodaran, A. (2015). In A. Damodaran, Country Risk : Determinants, Measures and Implications.

Fabozzi, F. J. (Third Edition). Foundations of Financial Markets ans Institutions. Pearson.

H., M. (1952). Portfolio Selection. Journal of Finance, vol 7(1), 77-79.

Hull, J. (2014). Measures of Financial Risk. In Options, Futures, and Other Drivatives. New York: Pearson.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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