FNCE 627 – team assignment no

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University Canada West *

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Course

FNCE 627

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Finance

Date

Apr 3, 2024

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pdf

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Uploaded by CoachFoxMaster120

Team Assignment No. 1: Study case of Alex and Morgan. Team members: Melany Beatriz Torres Perez. (2120311) Silvia Querevalu (2127670) Vedant Abhay Karulkar (2208619) Ramandeep Kaur Dosanj (2224385) Tejesh Sighadia (2219024) Md Rabbi Mrida (2210195) Rachit Hindocha (2227882) University Canada West FNCE 627 – 02: Personal Financial Planning Instructor: William Arambula. February 25 th , 2024

Case Study The following comprehensive analysis will showcase a personal finance strategy for Alex and Morgan, which will be about reflecting on different aspects of their life, including their financial future and how Alex and Morgan can optimize their purchase habits in order to have a balance in entertainment and savings and also how they can execute some strategies that can help them to achieve their financial goals. Assumptions and Key Considerations • The assumptions considered to develop this report are listed below: • Alex and Morgan have government health insurance, and their jobs offer them life, dental, and vision insurance and paid sick leave. • Alex and Morgan's annual mutual income is 140k. • The inflation was considered in the calculations. • Assuming they start a business five years from now with their savings, • Alex and Morgan can roll over their sale proceeds from their business and invest in another similar business’s stocks to earn a regular income in their retirement phase. Key considerations that may impact the financial plan's development: 1. Debt Management: Handling and managing the debts, particularly the existing ones with the giants, like the purchase of a mortgage, is the key point for one to meet the set goals and stay financially stable. 2. Emergency Fund: Making sure the existence of their emergency fund is of an appropriate level to face unexpected expenses or financial problems without breaking their financial plan is the main thing. 3. Tax Implications: Keep in mind that tax issues, such as the relevant income tax, capital gains tax, and appropriate tax deferral options, are very critical for improving their decisions related to finances and reducing their tax burden. 4. Insurance Coverage: Understanding their insurance coverage of health, life, home, and vehicle is what is required for them to manage the risks, take care of their assets, and stay financially secure for their family and themselves. 5. Major Purchases and Investments : Purchasing big orders like a house, business or financial assets need to be reviewed to identify the opportunity costs, the risks taken, and the effects of those decisions on their financial situation. 6. Business Planning: When starting a business, planning for such aspects as raising the capital, managing cash flow, exiting the business, and considering the taxation matters will go a long way towards realizing the entrepreneurial goals. 7. Estate Planning: Establishing or updating estate planning documents such as wills, trusts, asset distribution, and also tax minimization strategies is very critical in managing and transferring assets in the manner they desire and in providing financial security for the heirs. The core recommendations and financial strategies: Based on the case study of Alex and Morgan, the core recommendations and financial strategies are: 1. Budget Optimization and Debt Management: ✓ Evaluate and sanitize existing budget that could enable for balancing lifestyle and savings. ✓ Prioritize basic expenditures and curtail the entertainment spending. ✓ Manage debts to be able to maintain a desirable debt-to-income ratio.

2. Emergency Fund and Insurance Coverage: ✓ Put in your emergency fund three to six months of living. ✓ Review and revise insurance coverage for health, home, life, and car. 3. Investment and Retirement Planning: ✓ Determine long-term goals and establish a diverse asset allocation plan. ✓ The ultimate goal should be a nest egg for retirement of $3.5 million, with RRSPs and CPP as secondary vehicles to increase your savings further. 4. Education Planning: ✓ Estimate education costs and check savings possibilities like RESPs. ✓ Create several hold-back savings for education and think about remittances into it. 5. Major Purchase and Business Planning: ✓ Evaluate key purchases thoughtfully, paying attention to their liquidity and alternative investments. ✓ Develop a plan for starting a business within five years and put the following strategies in place: save something from the income and eliminate unnecessary expenses. 6. Tax Planning Strategies: ✓ Adopt a tax-deferred exchange strategy with different sale structures for business sales. ✓ Find out additional opportunities for smaller businesses classification in order to minimize tax burden. Financial Analysis Financial analysis is assessing an individual's or couple's current cash flows, including income, investments, fixed and variable expenses, commitments, and net worth, to aid in budget planning and the fulfillment of both long- and short-term objectives. Let us consider that Alex and Morgan earn a stable income of $140,000 annually and savings of $240,000. Assuming they reside in British Columbia, their annual revenue in 2024, when the 14.7% tax brackets are accounted for, amounts to $119,420 (BC, 2024). This will generate $9,951.67 per month for them. To better comprehend their present financial situation, we examined their monthly income and fixed and variable expenditures. They contain both immediate and long-term financial objectives. Financial analysis is the process of assessing an individual's or couple's current cash flow. We examined their monthly income and fixed and variable expenditures to better comprehend their present financial situation We examined their monthly income and fixed and variable expenditures to comprehend better their present financial situation, including income, investments, fixed and variable expenses, commitments, and net worth, to aid in budget planning and the fulfillment of both long- and short-term objectives.

Table 1: Monthly Budget In addition to housing expenses (rent), they pay for their monthly grocery bills, entertainment, transportation, and an emergency fund on a monthly basis. Each month, they spend $5,795 and retain $4,156.50. Without long-term liabilities, their current net income amounts to $4,156.50. Net worth is the difference between one's assets and liabilities. This figure evaluates wealth since it indicates what a person possesses after paying off their debts. Considering the information, Alex and Morgan have a positive net worth since their assets exceed their liabilities (MORAH, 2023). As per Santarelli (2024), the average home price in Metro Vancouver is $1.2 million, so if the couple opts for a home loan, their monthly payments will increase from the average mortgage in an urban area, around $6000. Consequently, they allocate $8,795 toward their monthly expenses, leaving them a net surplus of $1,156.50. Figure 1: Mortgage Calculation Source : https://www.ratehub.ca/british-columbia-mortgage-calculator On the contrary, the debt-to-equity ratio in this scenario stands at 60.29% because nearly 60% of their monthly income is allocated towards their mortgage payment. This is significantly exceeding the lenders’ preferred debt-to-income ratio of 35% (MURPHY, 2023). The debt-to-income (DTI) ratio is the percentage of your gross monthly income that goes toward debt payments, and lenders use it to assess your borrowing risk (MURPHY, 2023). Per their financial objectives, Alex

and Morgan must determine which tasks are most critical and how long they must be completed. For the home loan plan, they must carefully assess the impact on their financial stability and cash flows. They must also carefully consider strategies to reduce debt by allocating more funds towards savings, assessing a diversified investment plan to spread the risks, and increasing their income and returns. Additionally, it is essential to ensure that sufficient emergency funds are available to cover three to six months of living expenses just in case something unforeseen occurs. Net Worth Figure 3 Net Worth: In the above scenario, the total value of assets and liabilities is $240,000. As a result, their total net worth is $240,000. Their assets and debts are currently equal, indicating a financial equilibrium. This shows that instead of dropping, their wealth is increasing. Although the couple hasn't made any formal commitments, if they decide to buy a property, they may face liabilities such as a mortgage. This long-term commitment will influence their entire financial situation, including their debt-to-equity ratio. The monthly payments required to add a mortgage will impact their cash flow and discretionary income. The additional costs associated with home ownership include insurance, maintenance, and property taxes, so they will have to be prepared for these. Cash Flow Cash flow refers to the actual inflow and outflow of cash during a period (Kapoor J. R. et al., 2018). The difference between inflows and outflows can result in a surplus or deficit of cash (Kapoor J. R. et al., 2018). As cash inflow, we can assume they have stable jobs and consider both incomes, a sum of 140k per year. In addition, we can consider other investments they might have, or interest earned on investments (Kapoor J. R. et al., 2018). As cash outflows, we can consider fixed expenses such as rent/mortgage, utilities, insurance, loan repayments, and subscription services or recurring payments. Also, variable expenses can include groceries, dining out, entertainment, etc (Kapoor J. R. et al., 2018). After making a record of their cash inflows and outflows, preferably if there is a surplus, this amount should go to savings, investing, or paying debts. In order to analyze cash flow patterns, they should make a personal cash flow statement; this will be helpful for comparison with future cash flow statements and revise deficit or surplus. Also, define a detailed budget to track and control expenses and set realistic timelines for achieving their goals. If they plan to have a family, they should take into consideration approximately 20% of their family budget; this would be approximately 28k (National Bank, 2022). Similarly, they should allocate approximately 10 or 20 percent of their budget to savings and set aside an equivalent of three to six months' worth of expenses rather than income to an emergency fund; this will give a

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