The paper 'Tax Problems in the Future' is a wonderful example of a financial and accounting case study. The couple has high credit card bills amounting to a minimum of $1,275.77yet they are expected to pay for next terms' school fees for their children. The school fee for both their children is $65,000.The couple is feeling strained because they have to pay the total amount due for the entire year. This is a total of earnings from both David's business and Jennifer's salary. However, tax is totaling $42,238. This leaves the couple with a net income of $177,762.
This is income exclusive of other sources, such as savings and savings accounts. This shows that the level of tax is high enough to consume 19% of their income. Unfortunately, the couple has little or no control over the tax rate because it is determined by the government. The couple should worry that their income is still insufficient to cater for their expenses. For example, the couple's expenses, including mortgage, school fees, salary sacrifices, agent salary, lines of credit, and loans amount to $269,291. This is against an income of $190,002.
This leaves the couple with a negative income of $79,289. Although the couple has term deposits and savings accounts that can be used on emergencies, they are straining to make contributions to these savings accounts. Some of the problems that the couple will have in the future are: In the future, the couple may have to worry about rising interest rates. Currently, they are only incurring 5.60% in mortgage interest rates, yet they have only paid it for three years. This interest rate is expected to have doubled by the time that the loan is cleared. The couple has three loans, excluding the credit card and the mortgage.
The credit card is already posing a long term problem of a payment default. Also, the loans are subject to changing interest rates and unmanageable monthly payments. For example, the current total annual loan repayments are $11,328.91. The couple is already living above their means, and therefore, in the long term, it may prove difficult to manage the three loans. The couple is also risking to be listed in the Credit Reference Bureau if they continue to have high outstanding credit card bills (A Recipe for Right-Sizing Credit Facilities 2013). The couple should also worry about David's younger brother, who lives with them.
The younger brother may pose a future problem, especially because he does not contribute to the household expenses. Also, the couple does not include his earnings as part of their income. It can become burdensome for the couple to be able to keep up with his expenses in the future. That is if he is unable to keep his source of income (Lewis, 2013). The necessary steps the couple needs to take to improve and better their situationThe couple can improve and better the situation by: They are taking their children to a cheaper school.
For example, they are spending $65,000 p. a. on school fees while they could pay less in public schools. They should reduce their credit facilities. The couple should refrain from undertaking any other loans after they finish repaying their first loan. The couple should also manage their credit card bills in order to reduce the current outstanding bill of $36,450.55.
They should do this by increasing their monthly repayment amounts. The couple should also reduce the amount of salary that they sacrifice. For example, both David and Jennifer sacrifice $15,000. If they reduced this figure to $10,000, then they can use $5,000 to clear their credit card bill. They should also consider coming to an agreement with David's younger brother so that he can be assisting them with household expenses. Considering that he is not paying rent and he is earning $21,500, then he is in a position to assist in miscellaneous expenses. The couple should budget their monthly account payments.
They should ensure that they distribute their income in a manner that would satisfy all their bills and expenses. Therefore, they should avoid contributing too much on one bill and neglecting the other. For example, it has been observed that the couple has been neglecting their credit card payments, yet they pay huge amounts of school fees (Managing your debt: Personal loans & Overdrafts 2013). The couple should ensure that there is money in their accounts to cater for debit orders, stop orders, and cheques.
This can reduce instances whereby they get charged or penalized for unpaid effects. They should ensure that the credit facilities do not exceed the allowable or the arranged limit. For example, they have three loans, a credit card, and a mortgage. Therefore, instead of adding more credit facilities, they should consider reducing the ones that are already in place. Before acquiring the credit facilities, the couple should ensure that it makes calculations on the estimated cost of the credit. The calculation should include the number of payments that are expected to be made during the life of the facility and the monthly repayments.
They should then compare the cost of the loan to the cash price of the product. Such a comparison would enable the couple to make a rational decision on the best method of acquiring a given product. In doing so, it is important to consider the interest rate being applied to the credit facilities in comparison with other financial institutions (Barclays: Debt management 2013).
A Recipe for Right-Sizing Credit Facilities: Use these 5 steps to avoid the pitfalls when reducing credit facilities 2013, viewed 14 May 2013, www.fico.com
Barclays: Debt management 2013, viewed 14 May 2013, file:///C:/Users/victoria/Desktop/bluetooth_content_share.html
How you can benefit from sorting out your money 2013, viewed 14 May 2013, file:///C:/Users/victoria/Desktop/bluetooth_content_share.html
Lewis, M 2013, Debt Problems, viewed 14 May 2013, file:///C:/Users/victoria/Desktop/bluetooth_content_share.html
Managing your debt: Personal loans & Overdrafts 2013, viewed 14 May 2013, file:///C:/Users/victoria/Desktop/bluetooth_content_share.html