The paper 'The Importance of Saving and Financial Planning' is a great example of a Finance and Accounting Case Study. It is always in the best interest of an individual to save and plan their income and expenditure from a young age. A dollar invested today is worth more than a dollar invested tomorrow. The sooner an individual starts saving, the greater the benefits. One of the important reasons for saving and planning finances early is the power of compounding because the longer the period spent in saving, the higher the returns.
This allows earning of extra money on the interest earned from investments. Accordingly, when an individual starts saving early and maintains this for a substantial amount of time, the individual earns more in the form of interest. Importantly, this gives a person the cushion to save in lesser amounts (Van Rooij et al. , 2012). Conversely, a person gets to manage investment risk better through financial planning and saving at an early age. The financial markets are very uncertain; this is the only certain thing about markets. The capital markets favor investors with long-term investment prospects, thus setting continued investment plans would be of great advantage.
The advantage with long term investment prospects is that it ensures the effects of the inevitable market volatility is minimized. As such, by saving and investing early gives your money additional time to mitigate the market risks and hence come out a winner. Another importance of saving and financial planning is that it teaches a person financial discipline and one learns to focus on the plan always when trying to spend some money to avoid misuse.
For example, investing a certain amount of salary upfront one knows exactly how much one is left with. Therefore, in the process of spending, one develops a habit of spending less to ensure adherence to the budget. A person differentiates a want and a need; this brings the much needed financial discipline in life because one does what is necessary and avoids inefficient financial issues (Lusardi & Mitchell 2013). Additionally, Jorgensen & Savla (2010) assert that saving and financial planning, especially at a young age, helps someone to mitigate risks of life in a better way, which helps in future development.
A person is able to avoid accumulating and taking additional debts but repays the earlier debts first. This is because one would have enough financial support in the form of emergency funds to counter any eventualities of life. This helps a lot as it makes a person feel secure and away from financial distress (3685 TISA Fact Sheet, 2014). Short Term Actions for Jenny Jones to Address Debt and Cash Flow One of the actions she should take is to cut on her spending as Gitman et al. , (2010) reports, she should avoid the overspent activities like payment of rent and look for a house where she can pay the very little amount by herself.
Jenny Jones should be able to differentiate between a want and a need. She should cut on the wants and use that amount to settle the debts (True Potential 2015). For instance, Jones should cut on entertainment costs because they are things that she can postpone and do later after being well financially. Currently, she is spending $80 monthly on entertainment, which would be taken to her debts first.
She can be able to live with reduced or no entertainment to sacrifice for the future. As such, she should cut the entertainment cost to $20 per month or less. The extra $60 and above should be channeled towards repaying the credit card. This would avoid her being charged the exorbitant interest on the credit card repayment and reduce the period of repaying her debts. Moreover, she should cut on the amount spent on clothes by putting on old clothes for some time (The Scottish Widows Savings Report, 2014).
She can be buying new clothes every three months instead of every month and save the rest. The amount should be used to cater for the student loan or any other debt. Besides, Jones should avoid using the car every time and take public transport when possible to cut down the associated cost. It is paramount that she uses the car when it is essential, this would cut the costs of running the car such as repair and petrol.
Basically, cutting on her spending will enable her to repay the debts, avoid take additional debts and hence be in a better financial position as Chandra (2011) recommends.
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Chandra, P., 2011, financial management: Tata McGraw-Hill Education.
Gitman, L.J., Juchau, R. & Flanagan, J., 2010, Principles of managerial finance: Pearson Higher Education AU.
Jorgensen, B.L. & Savla, J., 2010, Financial literacy of young adults: The importance of parental socialization: Family Relations, 59(4), pp.465-478.
Lumpkin, G.T. & Brigham, K.H., 2011, Long‐Term Orientation and Intertemporal Choice in Family Firms; Entrepreneurship Theory and Practice,35(6), pp.1149-1169.
Lusardi, A. & Mitchell, O.S., 2013, The economic importance of financial literacy: Theory and evidence (No. w18952), National Bureau of Economic Research.
Remund, D.L., 2010, Financial literacy explicated: The case for a clearer definition in an increasingly complex economy. Journal of Consumer Affairs,44(2), pp.276-295.
Van Rooij, M.C., Lusardi, A. & Alessie, R.J., 2012, Financial literacy, retirement planning and household wealth; The Economic Journal, 122(560), pp449-478.
3685 TISA Fact Sheet http://www.tisa.uk.com/downloads/3685%20TISA%20Factsheet%20(FINAL%20SCREEN).pdf
CFA 2013. Credit Crunched. http://www.cfa-uk.co.uk/Credit%20Crunch_full%20report.pdf
Joseph Rowntree Foundation. 2014. Assets, savings and wealth, and poverty: A review of the evidence. http://www.bristol.ac.uk/media-library/sites/geography/pfrc/pfrc1405-assets-savings-wealth-poverty.pdf
Open University, 2015. Saving us from ourselves – how can we make the UK more financially resilient? http://www.open.ac.uk/business-school-research/pufin/sites/www.open.ac.uk.business-school-research.pufin/files/files/PUFin-Green-Paper-saving-us-from-ourselves-13July2015(2).pdf
The Scottish Widows Savings Report 2014 http://www.scottishwidows.co.uk/about_us/media_centre/reports_sandi.html
True Potential 2015. Tackling the Savings Gap. http://www.tpllp.com/tackling-the-savings-gap/