Budget and Net Worth Analysis - Coursework Example

Executive summery Financial planning has been one of the intriguing matters that a lot of people have to deal with. Good financial planning renders a bright future with hope. Mismanagement of income and funds in general will come with its consequences. Mismanagement of money is mismanagement of one’s life. It is therefore wise for a person to manage their finances well avoiding spendthrift behaviors’ and living beyond ones means. Good personal financial management will secure your future together with that of your family. Early planning is also important as one will not struggle to educate his/her children and provide for his family with all the necessary requirements including basic needs. Table of Contents Table of Contents 1 1.0 Introduction 2 2.0 Financial planning 3 The following information relates to Mark James and his wife Sarah who have provided us with their information. 6 2.1 Personal Details and Financial Information 6 2.2 Budget information 6 2.3 Net worth information of information 8 3.0 Budget and Net worth Analysis 9 Emergency fund 10 3.2 Budget 11 3.3 Statement of Net Worth 11 4.0 Recommendations 13 5.0 References 15 1.0 Introduction A lot of people are faced with a challenge of how to manage their funds. This problem is however common to many who are remunerated that is they earn income. This report will look to provide an overview of how a person can manage his/her finances. An example is provided of a budget and a net worth of Mark and his wife Sarah. This will go a long way in providing an insight of how one can successfully manage his/her finances to a greater extent. This will help achieve financial objectives provided towards the conclusion of this report. Good financial planning starts with analyzing the income that one is earning, analyzing the expenditures to know how much money you spend. This is followed by preparing a budget. Budget is as important as it guides on how to allocate on all matters that need to be catered for. Observing strict adherence to the budget should be observed else it becomes of no use. Seeking for financial advice is important as the providers of these services have a broad knowledge and experience in financial planning. 2.0 Financial planning Financial planning is the process setting, planning, achieving and reviewing ones objectives through the proper use of the finances. Ones objectives may but not limited to; buying a home, making investments, having children as well as planning for their education, insuring the property and self, securing the future, estate Brath (2008). Ones objectives may involve starting a venture. Financial planning starts with setting the path of where one want to be in future that is setting goals. To strategies how one will achieve these goals is still important. Goals can be short-term for instant, paying for a credit card; medium-term for example saving to buy a house or saving for one’s children education. Writing these goals down with their amount and date is very important. One may keep them near sight for motivation. After setting them it’s to start working on them. Getting ones picture of the finances one have is crucial. Calculating the value of the debts one have and the assets to help in financing the goals and to pay debt to avoid accumulating which will add to costs. Tracking ones income and how he/she spend the money is important (Iuculano 2010). Financial pot holes might come on the way for example the bad prices of stocks, economic recessions, losing a job, an accident and medical expenses. One may not avoid them all but they can be minimized. Insurance helps in such cases, it prevents financial backlash, getting it is good. Insuring what one cannot be able to replace. To avoid these one may have the following insurance policies: motor vehicle, property, liability, medical, inability and life assurance. Insurance offered at work place can help in a great deal. Buying the cheapest but of the best quality from the best companies offering the services. Controlling ones debt is good. Debt puts one to a financial risk. Living beyond ones means is very bad, budget plugs the spending leaks and avoids them and paying of the credit card should be made apriority. If debt is of large amount getting help is wise, one can get help from organizations that offers financial help. Finding the way to ones financial objectives being fired one can’t control the economy or a company retrenchment, but one can invest in education by enrolling in colleges and or university, this is like investment for the future. Being aware of the tax deductions or the amount of tax that one pays is very important. In complex cases, one may one may involve the services of a tax or financial professional who can suggest tax strategies and make sure one is getting all of the credits and deductions due to him. It is important to have the following documents: will general kept well, medical power and a living will. A financial expert can help somebody and refer him to an estate planning attorney to draft these documents. Ones goals likely will need some money to implement. If one can save the money one needs Instead of getting a debt. That’s how one can become financially stable. Having a habit of saving, setting aside some money for example a certain percentage of pay check into a savings or investment account. Some banks often offer low interest rates; the bank is insured by the Deposit Insurance Corporation (DIC). Having an emergency fund is good. Most advisers recommend that one of the objectives should be a separate savings account to cater for emergencies, such as losing a job or having an unplanned medical bill. Saving for emergency is very important. Savings account at a bank. For a person with a property like a home getting a home equity line of credit for emergency purposes only. Funding the retirement plans is also good. If one has a retirement plan in place, taking advantage of it or setting up own Individual Retirement Account. The earlier one start the better because, the more time one has for money to compound. If one can’t save in the maximum amount allowed every year, at least funding the plan up to what the employer will match. Those matching money are like free money and immediately doubling the retirement savings. If one leaves his job, avoiding the temptation to cash in to retirement fund. Saving more for retirement and investing the rest is important. After one takes care of the said objectives, one implements an investment strategy. To start with, taking time to educate oneself about investing, including the risks involved in investment, ones risk tolerance, expenses and the importance of investing in many ways. Avoiding investing in something one does not understand. Acquiring a house with care is crucial. One of the goals may be to purchase a house, and that could be the largest financial investment one will make in life. To gauge if one is financially ready to buy a home, it’s good to ask the following questions: Is my credit in good shape so I will get the best financing terms? Do I have a secured job history so the lender will have confidence that I can repay a home loan? Can I afford to pay the monthly mortgage payments along with my other expenses and bills? Have I saved for a deposit payment? If one can’t afford those things, there is still an alternative. Giving oneself some more time to get ready is also good. Starting a college fund is investing in future. Some may want to save for their children’s college education. That’s a wise objective, but making sure of one’s financial security first. Remembering, there is help available to pay for the children’s college in the form of scholarships and student loans, but they will have many years to repay those loans. One doesn’t have the same time to save for the retirement or reach for other goals. For a person to plan finances properly one needs a budget. The following information relates to Mark James and his wife Sarah who have provided us with their information. 2.1 Personal Details and Financial Information Client 1 name: Mark James Birth place: Bolton, Date of Birth: 6/19/1948 Country: United Kingdom Client 2 name: Sarah James Birth place: Sussex, Date of Birth: 5/19/1950 Citizenship: UK Social Security #: 333-44-5555 Place married: Bolton Year married: 1964 Children – names and date of birth. Sally 03-19-83 Single Sam 10-16-89 Single The following is a budget and net worth. This will also help in planning for the finances for a better living. 2.2 Budget information Monthly Yearly Employment income; salary $10,000 $120,000 Other incomes: Dividends and interest Rent income Total income $500 $400 $10,900 $6,000 $4,800 $130,800 Income taxes: income tax :Social security $2040 $467 $24,480 $5,600 Expenditures Debt repayment Housing (mortgage/rent) Property and liability insurance Real estate taxes Utilities and telephone Clothing and cleaning current school expense food, groceries housing supplies/maintenance life insurance medical expenses transport $300 $500 $250 $167 $350 $400 $1,333 $600 $200 $300 $100 $208 $3,600 $6,000 $3,000 $2,000 $4,200 $4,800 $16,000 $7,200 $2,400 $3,600 $1,200 $2,500 Contributions Contributions/gifts Household furnishings Investments Entertainment Savings Vacations $1,250 $100 $200 $300 $500 $333 $15,000 $1,200 $2,400 $3,600 $6,000 $4,000 Total expenses $9,898 $118,780 Available for savings / investment $1,002 $12,020 2.3 Net worth information of information Jonathan Sarah Joint Total Liquid Assets Cash (Checking, Savings Accts) $0 $0 $10,000 $10,000 Cash Value of Life Insurance $22,600 $0 $0 $22,600 Money Market Funds $0 $0 $10,000 $10,000 Savings Certificates $1,200 $600 $0 $1,800 Treasury Bills $2,000 $0 $0 $2,000 Savings Bonds $10,100 $5,836 $116 $16,052 Total Liquid Assets $35,900 $6,436 $20,116 $62,452 Investment Assets Marketable Security: Stocks $0 $0 $20,000 $20,000 Mortgage Receivable $0 $0 $70,000 $70,000 Other Investment Assets $1,200 $0 $0 $1,200 Real Estate (Investment) $0 $0 $50,000 $50,000 Retirement Funds $48,000 $0 $0 $48,000 Star Manufacturing Co. $0 $0 $328,000 $328,000 Total Investment Assets $49,200 $0 $468,000 $517,200 Personal Assets Boats $0 $0 $12,000 $12,000 Household Furnishings $0 $0 $30,000 $30,000 Residence $0 $30,000 $100,000 $130,000 Vacation Home-1/4 Int. $0 $0 $20,000 $20,000 Vehicles-2 $0 $0 $35,000 $35,000 Total Personal Assets $0 $30,000 $197,000 $227,000 Total Assets $85,100 $36,436 $685,116 $806,652 Short-Term Obligations Consumer Credit Obligations $0 $0 $3,000 $3,000 Installment Loans-Auto $0 $0 $10,000 $10,000 Total Short-Term Obligations $0 $0 $13,000 $13,000 Long-Term Obligations Mortgage on Personal Residence $0 $0 $30,000 $30,000 Mortgage-Vacation Home Total Long-Term Obligations Total Liabilities Net Worth $0 $0 $5,000 $5,000 $0 $0 $35,000 $35,000 $0 $0 $48,000 $48,000 $85,100 $36,436 $637,116 758,652 This leaves mark and Sarah with $1,002 per month and $12,020 of savings. They can use this to boast their savings or put it in their retirement. This will increase their net worth by time and by the time they are going for retirement they will have enough. 3.0 Budget and Net worth Analysis The following points provide good evaluation on personal financial planning. Closely monitoring the basic things In financial planning, there are usually four main points of a personal financial plan. These elements are as follows: 1. The income source. 2. Residential home. 3. An emergency fund 4. A whole insurance program The source of income is very important as one cannot be able to implement any life objective without finances, one needs to have a source of income so that to be able to undertake the goals. a person with a stable income will go a long way in making a lot of investments. One can also afford to buy and own a home. The other is the family residence. If one can be able to acquire a home it is very important. This will avoid paying rent every month which is costly in the long run. Emergency fund Emergency fund is set out from the savings one have. Emergency fund should not be confused with savings. They serve two very different roles. Emergency fund is not used unless the defined emergency occurs. This type of fund should not be used in any other way. A good way to handle this fund is setting aside certain amount of money every month in a certain account with a local bank, depositing this amount will eventually create the emergency fund. This money should be accessible incase of am short notice. This will enable one to account all the excess cash and use it in debt payment. The account for emergency can be earning some interest while in the account. One can also establish a line of redit. The use of this line of credit should also be very little because the line of credit incurs extra expenses which one has to pay; therefore it is important to avoid default. At such point in time when the debt reduction plans have been effective, this personal line of credit could hopefully be replaced with a home equity line of credit that would have tax deductible interest. If the personal credit line is not available, one may look to other sources to create an emergency fund. 3.2 Budget The most important part of a financial plan is the budget. Having discipline on how one spends his own money is very important. A budget provides a good way to plan and implement a personal financial plan. Following the budget to the letter will help in achieving the desired goals. Looking at the table above, the amount available as additional can be used to reduce the debt. If one can stay on the above mentioned budget and allocate the money to debt reduction, significant progress can be made in a very short period of time. Significant steps in achieving the objectives if one can follow the budget example above. 3.3 Statement of Net Worth The statement of net worth represents the assets and the liabilities of a person. It he1lps in knowing what one has to the assets to help aid his investments and also the liabilities one is expected to pay. The liabilities reduce the assets and amount available for investments. It is good to account the assets and the liabilities in the fair market value. This will avoid overstating the assets and underestimating the liabilities. The statement shows a balance of $758,652. As indicated, net worth of $758,652 is enough to initiate investments. This places one in a strong financial position to achieve the goals One needs to ask him/herself some questions before buying a property. This will help in ascertaining commitment of finances to other things and ability to pay. Also not to default in other engagements which are equally important? Some of the questions one should ask are like; 1. Have all dependents been taken into account? 2. Is the fair market value of the residence net worth? 3. How much equity is in the house? 4. What are the terms of the mortgage? 5. Should refinancing be suggested? 6. Is the title to real estate in accord with the rest of our planning? 7. Do I anticipate moving in the near future? 8. Do I have dependent relatives (i.e., parents, uncles, aunts, etc.)? 9. Am I taking full advantage of corporate benefits (i.e. cafeteria plans)? 10. Does tax bracket dictate a change in investment strategy? 11. Do I have questions regarding when to take Social Security benefits? 12. Should retirement benefits be accelerated or deferred? 13. Should itemized deductions be analyzed to accelerate or defer and take advantage of standard deductions in off years? 14. Do I have donatives intent? Can I utilize appreciated property to achieve tax benefits? 15. Do I have any questionable investments where a tax advantage could be obtained through abandonment? 16. Have I managed passive losses and utilized them properly? 4.0 Recommendations Tracking monthly spending is being wise. Many people do not know how much they spend each month on food, clothing, housing, or entertaining themselves. Whether one is paying by cash, a debit card or using credit card, total the expenditures at the end the month to gain a better picture of how one is spending his/her income. Developing a household budget that one can follow. Using the data one have compiled by tracking the monthly expenses, develop a realistic budget so that it’s easier to live with. Tracking how well one follows it each month –that means continuing to track ones monthly expenses. Budgeting for savings is good. Savings are a rainy day fund, which is important when unexpected expenses or emergencies arise. Budgeting part of one’s monthly income for deposit into a savings account. Extra savings should also be put to savings account. Paying monthly bills on time and avoiding late charges; late charges will add avoidable expenses which would have otherwise been used for investment or as savings for a unexpected issues. Taking stock of one’s monthly bills and not forgetting when they are due. That way one can avoid costly late fees, which can also damage ones credit score. The best way is to pay bills as they arrive. The details of the credit report can have a big impact on ones financial future. Obtaining a report once a year to check it for accuracy is important. Checking any errors to know where to correct the mistakes is good. Obtain ones credit score. Higher number shows good usage of credit card and therefore better chance one has of obtaining credit at a better rate. One can purchase the credit score through any of the nationwide credit reporting agencies after receiving a free annual credit report. Elimination of credit card debt to save, one may be living beyond his/her means. Avoiding using the credit cards and paying off existing balances –the sooner one does the less one will pay in interest. Remembering: not all debt is bad; taking on loans for higher education or to buy a home is really an investment in ones future. Taking advantage of free money is equally important. If ones employer offers a contribution match for retirement savings or health savings accounts, in contributing enough to obtain the maximum match amount. Otherwise, one is missing an opportunity for free money. Maximizing the contributions can lower ones taxable income. Assessing the insurance policies is good. Insurance is as beneficial aspect in protecting against financial backlogs, and also the insurance premiums ones pays can be one of the expenses. Using legitimate financial institutions is good. Many people do not rely on banks or financial institutions to manage their money. Being sure that money is really the issue. Making a conscious decision about joint and separate bank accounts is important. Keep clear responsibility for financial housekeeping, balancing accounts, choosing and tracking investments. Trying to divide tasks as evenly as possible is good. Realize that whoever earns the money does not necessarily have the right to say how it will be spent. Agree on reasonable spending allowances. Discuss and compare objectives on a frequently. Negotiate. Compromise and come up with a viable solution. By this way one would achieve personal financial objectives. This provides a good financial planning example. 5.0 References Brath, E (2008, February) Managing the world, one project at a time. Certification Magazine, from Business Source Complete database. Brown, C., 1991. Personal financial strategies Dermatology nursing Dermatology Nurses Association 3(4), p.233-238. 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