PERSONAL FINANCIAL PLAN
Economics of Personal finance
By: Jasmin Linthicum
Part 1: Foundation of the Plan
In this case we will prepare a financial plan for Calvin, who is a middle-aged person and is aiming to achieve his goals of having enough savings in order to allow him to retire. The savings will eventually cater for his needs in his time of retirement. At this time, Calvin has made a couple investments which he is unsure of whether or not will go through well. Calvin is also not certain whether he has sufficient resources as far as finances are concerned to take him through the rest of his life. (Murphy & Yetmar, 2010). Failure to plan is planning to fail in one way or the other. The amount of finance that is there and what he prospects to have must ne planned for, for future use and generations to come. We hope that the personal financial plan will address all the necessary challenges and offer a solution to the client in the best of our ability.
Part 2: Managing Assets
In this part we will do a calculation of Calvin’s total net worth as far as his assets are concerned. This will be achieved by taking a sum of all his assets and then deducting all of his liabilities. Once we find out that Calvin has a negative net worth, this will mean that he has to focus more on reducing his debts to cover for it. In asset management we will look at things such as cash and other equivalents of cash, accounts connected to brokerage, the value of his home etc. Each of these assets will be added up and balanced with his liabilities. (Murphy & Yetmar, 2010). By managing the assets Calvin will be able to identify and manage the risks that may be associated with ownership of certain assets. It will also aid in the traceability of all the assets owned by the client, remove worn out, obsolete and stolen assets from his record also referred to as ghost assets to avoid tracking them in future. To perform as strategic asset management, we look forward applying the best asset management software that will easily enable traceability of all assets that belong to Calvin. The software will ease in developing the asset inventory, computation of life cycle costs, determining the level of services offered by the assets while at the same time enable the client to establish long term financial planning. With a well-established financial plan, Calvin will be able to develop long term financial plans by identifying the most feasible objectives and the ones that need to be given priority. The information will aid in explaining how Calvin acquired and used the assets as the information will be available in a database.
Part 3: Managing Liabilities
Once we are done calculating Calvin’s personal net worth, checking out the real value of his liabilities will be the next thing, with an aim of working to bring it down. Working on reducing the debts with high interests such as those of credit cards as well as personal loans will be key. Elimination of most if not all debts always comes in handy. In this case we will take a good look at all debts that are under Calvin’s name and get those ones cleared. (Gitman, Joehnk & Billingsley, 2013).
The primary goal of liability management is to maximize earnings and returns on assets within acceptable levels of risks. The management of liabilities will enable Calvin from running into bad debts. That may result into business failure and worse of all government interventions that may lead to closure of his investments. A good accounting software is projected to be used to keep an eye of his outstanding debts. We advise Calvin to talk to all his creditor about his loan terms ad this will enable him prevent increment of monthly repayments and interest payments. A good payment plan should be over a long period of time and this will enhance conveniences in the payment process. Discussing with the creditors about payment terms is encouraged as it shows the willingness to pay the debts and this is also encouraged for Calvin to do.
Part 4: Managing Risk
In this part we will have a look at how to better manage risks by determining how much Calvin needs to be able to cover them through insurance. Some of the risks that Calvin needs to take a closer look at include but are not limited to insurance on auto, health insurance, and insurance on life as well as a homeowner’s insurance cover. Different people have different needs as far as insurance is concerned and thus Calvin’s insurance needs are also different from other people’s. Factors that will definitely affect these choices of insurance will include profession, age, status of economy, health as well as family status. (Gitman, Joehnk & Billingsley, 2013).
After identifying the risks, efficient strategies must be put in place in order to mitigate the risk. We advise Calvin to keep adequate emergency funds in case of any uncertainty that may arise. Diversification of investments is another step in risk management. This step will prevent Calvin from being overly dependent on one source of capital and also enable him minimize risks by spreading out his investment across a wide range of portfolios preventing him from big losses. We advise Calvin to have am alternative source of income in case the main investment fails. We advise our client to always read the fine print as it always favor the other party in case of a business crisis.
Part 5. Investment Strategy
Calvin will need to determine how much of conservancy he needs in regards to investment; all this based on the initial financial projections. If Calvin manages to use an asset allocation of about 45%, this will keep his risks at par with the already set overall goals. This will also be able to provide returns sufficient enough to cover the set goals. (Altfest, 2004). The investment strategy that reduces risk and maximizes the return is the one that we will adopt for Calvin. We encourage Calvin to invest in what he understands and what is interesting to him in that he can easily make decision pertaining the investment. At his middle age, it’s a high time that he starts investing because the longer the money is invested the higher the returns. Since these are his working years, Calvin should set up and stick with a determined cash flow management. He can only achieve this by automatically achieving a certain percentage of his salary monthly.
Part 6: Retirement and Estate Planning
The transition from young to old age is inevitable. Retirement and estate planning will enable Calvin decide how he wants his assets distributed after he dies. In this personal financial plan, Calvin will be required to get the services of a lawyer in order to help him with getting documents for planning an estate. The same lawyer will be in a position to help with coming up with a will as well. (Altfest, 2004). Retirement planning will enable to decide what they want to have in future as a house, a company or even a spouse. To achieve this Calvin is mandated to have a pre-retirement budget, goals on savings, determine the best investment strategy as well as having a will a patient decree already prepared by his lawyer.
Other retirement plans will be investing in a divided portfolio or bonds which will eventually give Calvin a constant cash flow in addition to his pension and other benefits of retirement. (Altfest, 2004)
Worksheet on Calvin’s assets:
Cash & equivalents of cash – $100,000
Brokerage account – $315,000 with a current valuation of = $200,000
Retirement Annuity ($250,000 with a current valuation of = $130,000
Calvin’s account = $520,000), with an employer match of = 3%
Value of home = $388,000 with staggering = $120,000 mortgage rated at 4.5% on interest
Calvin’s three-year-old car is valued at = $27,000. With a balance on loan = $9,500.
Worksheet on Calvin’s liabilities:
Vehicle loan = $9,500
Mortgage = $120,000
Altfest, L. (2004). Personal financial planning: Origins, developments and a plan for future direction. The American Economist, 48(2), 53-60.
Corlett, J. B., Corlett, P. G., Maree, J. W., & MacDougall, B. H. (2001). U.S. Patent No. 6,253,192. Washington, DC: U.S. Patent and Trademark Office.
Gitman, L. J., Joehnk, M. D., & Billingsley, R. (2013). Personal financial planning. Cengage Learning.
Murphy, D. S., & Yetmar, S. (2010). Personal financial planning attitudes: a preliminary study of graduate students. Management Research Review.