PART A

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The University of Western Australia *

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1109

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Finance

Date

Apr 26, 2024

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pdf

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3

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Student no. 23319193 FINA1109 Managing Your Personal Finances Assignment PART A Assessing Financial Vulnerability 1. Before tax income: $62,750 First $18,200 Nil Next $26,800 taxed 19% = $5092 Next $17,750 taxed 32.5% = 5768.75 Plus 2% Medicare Levy on $62,750 = 1255 5092 + 5768.75 + 1255 = $12115.75 Average tax rate = 12,115.75/62,750 =19.3% Effective Marginal Tax Rate = Every extra dollar she pays 32.5% + 2% = 34.5% tax After tax income = $62,750 $12,115.75 = $50,634.25 2. One way Beth may be able to increase her after tax income is through investing in shares of EFTs. Qualified dividends, together with long-term realized capital gains on stocks or from ETFs, are considered as “preferred income” and are taxed at a lower rate than ordinary income (Golden, 2019). Beth can only afford to invest small amounts, however if she does this regularly and starts early, she may be able to increase her savings. Investments do come with some degree of risk, so Beth should only invest what she can afford to lose. 3. Monthly Liabilities = 800 + 400 + 200 + 60 = $1460 Cash Savings =$3500 Basic Liquidity Ratio = $3500/$1460 = 2.4 Savings Ratio = $3500/48,000 x 100 = 7.29 Beth can roughly cover her expenses for two and a half months without income, this means her ability to maintain her current standard of living is extremely vulnerable if she were to lose her income for four months. If Beth was unable to meet her spending commitments, late payments may incur a late fee and/or show on her credit report, affecting Beth’s credit score. For example, if she was late paying her rent by over 60 days, this would show on Beth’s credit report. Late payments on your credit report can be damaging to your credit reputation, as it can stay on your credit file for up to 5 years, making you less attractive to lenders if it remains on your file.
Student no. 23319193 (CreditSavvy, 2018) . Failure to repay a car loan will result in the seizure of the vehicle. The inability to repay loans and day-to-day financial commitments will result in the lender auctioning off the property after the legal process has been completed, and it will likely result in a damaged reputation. Beth also has a low savings ratio of 7.29. A low savings ratio is not uncommon for young people who have just gotten into the workforce as they have not had time to accumulate a lot of savings. 4. Income protection through superannuation does not cover loss of income due to reduced hours or job loss, Beth’s income protection insurance will provide cover if she becomes temporarily disabled through illness or injury and is unable to work. Superannuation income protection can pay 75% of your income if illness or injury prevents you from working. (Daniel Herborn, 2020)This greatly reduces her financial vulnerability to loss of income, as without income protection she would not be able to cover her expenses for very long. 5. Debt diversification across time refers to “the tendency of consumers to hold and deposit income dollars in a low-interest (taxable) bank account rather than using the funds to reduce outstanding debt balances immediately, in which the interest charge accumulates at higher (“non -tax- deductible”) rates.” (Milevsky, 2010) Beth’s liquid assets and current liabilities reflect this idea of debt diversification across time as most of her liquid assets are held in her savings account which is a low interest taxable account and she is not paying off her outstanding debts immediately, for example, she could be paying off her HECS debt more regularly. Liquidity Ratio Liquid assets = $3500 + $9000 + $8800 = $21300 Monthly Liabilities = 800 + 400 + 200 + 60 = $1460 Liquidity ratio = 21300/1460 x 100 = 14.59 Debt ratio Total debt = 21000 + 3000 = 24000 Disposable income = 48000 Debt ratio = 24000/48000 = 0.5 6. Beth should aim to increase the savings in her bank account by setting a specific goal over a certain time frame. By increasing her savings, she can improve her basic liquidity ratio. This will lessen her vulnerability to the risk of losing income over a period of time. In her current financial position, if Beth were to lose her main source
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