Running head: GARNERS INVESTMENT PLAN Garners’ Investment Planning The Garners’ financial position before the air-conditioner broke down was unsustainable and very risky (Anon. , Case study, n.d. ). It speaks of living on a day-to-day basis, with no forward planning at all to take care of emergencies or meeting expenses for college education of their child or for post-retirement needs. The only asset of any realizable value is the home, even though they have still to pay about $110,000 on it, not even considering the current slump in housing sector. 2. Ideally, the Garners should strive to save 20 to 25% of their take-home pay i. e., say, about $1000 as against their current savings of $220 each month.
This would work out to a cutback on expenses to the tune of $780 each month. Fixed expenses of $1385/m are reasonable and practically untouchable, while the variable expenses of $ 2915/m are disproportionately high with good scope for reduction of recreation and entertainment expenses, gifts/donations, and family clothing allowance, together accounting for $ 1280/m. Of this category, the Garners should cut down and save $780/m which is not all difficult, given the nature of these expenses. 3.
The Garners have about 30 years of service life in front of them. Of this, the child’s education expenses would continue for about 10 to 12 years, after which student loan facility may be availed by the child directly and pay for it. In the subsequent 18 to 20 years, net monthly savings should increase. Hence, from the investment point of view, the goals should be separate for the near-term i. e., next 5 to 10 years, and for longer-term i. e., 10 to 30 years and beyond.
Near-term investments should take care of replacing the car, child’s education, house repairs/maintenance and vacation expenses. Longer-term investments should insure financial security, clearing of home loan by the time Joe reaches the age of 50, healthcare needs and vacation expenses. 4. Time impacts the value of money for reasons of inflation and exchange rate fluctuations. Inflation eats into the value of savings. Exchange rate variations can make foreign vacations and foreign goods costlier or cheaper. It is the net return on investment, after adjusting for inflation, which determines whether an investment is building or eroding capital.
For the longer-term, the need to reduce/eliminate risk of capital loss takes precedence over income generation. Capital loss can occur due to inflation and/or due to poor performance of investments. Keeping in mind the long-term goals of clearing home loan, healthcare needs and financial security after retirement, asset allocation should shift from risky high income generation to safe and stable income generation opportunities that can give a net positive return. 5. For the near-term, the Garners should invest about 70% of their savings in good quality stocks/mutual funds that would yield decent dividends to enhance income, and potentially give capital appreciation.
Systematic monthly investments in mutual funds with a time horizon of at least 5 years would ensure evening out ups and downs of the stock market and give good returns. To take care of untimely death, Joe may also take additional life insurance for about 20 years term. The balance 30% should be invested in fixed income instruments like pension plans/annuity schemes, bonds or bank deposits.
For the longer-term, the Garners should gradually sell out stocks/mutual funds and shift the emphasis to investments that yield steady monthly income such that by the time they retire, all their investments are practically in bonds, deposits and pension plans only. Reference Anon. , (n. d.). “Case study: First budget, Then invest for success! ”, …… pp. 457-458.