1. Jan and Bill Smith are developing a familiar financial plan for the future. They have plans to change and old and paid car with a new one, sell the current house to a new house. All the decisions they want to make require studying the current and future financial conditions of the family to avoid a bankruptcy risk.
There is not enough information about the finances of the couple, but with the current assets of the family, it is possible to find valuable information. Table 1 shows the balance sheet of the family considering current assets and liabilities.
The Current Ratio measures the relation between the current assets and current liabilities. Considering the case of Jan and Bill Smith:
Current_ratio = Current_assets / Current_liabilities
Current_ratio = 4,000 / 5,000
Current_ratio = 0.8
A current ratio lower than 1 put in risk the family to have insolvency in the short term because they don't have resources to pay the short-term liabilities with the available cash.
The other source of financial information to evaluate the family is the relation between income and outcome of the family. There is not enough information about the finances of the couple, but it is possible to show in Table 2 a partial financial statement of Jan and Bill Smith.
The available information did not include the expenses of food, education, home expenses and leisure, but it is possible to consider half of the net value, as the final net income for the family, that is 20,400 USD.
Strengths of Jan and Bill's current scenario.
■ They have a positive net income per year. A positive net income per year allows the family to assume more financial compromises without the acquisition of new short-term debt.
■ The family has an own house and car with a mortgage and car expenses that are below the 30% of the total family income. The reason to acquire a new car may reduce the monthly car expenses.
Weaknesses of Jan and Bill's current scenario.
■ The current ratio of Jan and Bill are below1. That put at risk the ability of the family to pay the short term liabilities (credit card) with the available savings in cash and bank.
■ The income of the family is fixed, that is, it depends on of the salaries of the couple. The salaries did not vary from one year to another, but the expenses may vary by the inflation, home and car expenses and the change in the interest rates affecting the credit card and mortgage payment (Reeves, 2005).
2. Financial goals for Jan and Bill Smith.
■ Financial education for Jan and Bill Smith. It is necessary that the couple works together to acquire new knowledge in personal and enterprise finances. With financial education, they will make better financial decisions and will increase their assets and income. At least one of them must take a one-year course in accountability, tax laws, entrepreneurship, and administration.
■ Create a new source of income for the couple. Direct marketing, online selling, transport services, cooking or other part-time works help to the couple to increase the income. In one year they must have a new income of 10,000 USD per year.
■ Create a corporation in the first year. The corporation, no matter the configuration (Inc., LLC or other) will be the tool to register the income of the family. In the United States of America legislation, similar to other countries in the world, the corporations pay fewer taxes than the individuals, because the corporations pay taxes on the net income in the fiscal year although the individuals pay taxes over the gross income. The previous situation gives advantages to the corporations to reduce the tax to pay using different tools as depreciation, amortization, interests, and production costs to reduce the net income. The individuals do not have those advantages. The corporation must be founded by Jan and Bill.
■ Pay promptly the mortgage and credit card each month: There is no need to pay all the capital and interests of the family liabilities. The surplus money must be used to invest in the new corporation and other assets that generate a positive cash flow for the family. The total payment of the credit card and mortgage will eliminate the link with the bank, link that it is necessary to acquire new debt with the bank; new debt with better interests and conditions than the credit card.
■ Increase the savings with a value of the current liabilities. It is necessary for the family to have current assets with a higher value of the current liabilities. That is, to have a current ratio over 1. That economic condition will give security and confidence to the family to execute a financial plan without the risk to be insolvent at any time.
■ Substitute the car in three years. The car is an asset that generates monthly expenses, and it is necessary to delay the purchase after the increase of income of the family. The new car must be hybrid and will be purchased after the first car is sold. There is no need for the family to have two cars due to the monthly expenses of each car.
■ Buy a new house in five years. The house is an asset that generates monthly expenses, and it is necessary to delay the purchase after the increase of income of the family (BOSTOCK, et al., 2015). The new house must fit the space requirements of Jan, Bill, and sons; location and the monthly expenses. The best moment to buy the house is when the overall economy is in depression when the interest rates are lower, and the price of the houses is below the average. The plan is to collect in a saving account more than 100,000 USD for the initial payment of the house.
3. The decision to buy a car depends on of the transport necessities of the family. It is assumed for this exercise that the car is not a status or a mandatory requirement for the family, only a transport tool for the family. The family has today one car; they must evaluate the real necessity to have a second car and its contribution to the family mobility and evaluate the use of the car in the year. Today there are offers of leasing cars in the most important cities in the country. There are companies that lease cars per week with an initial value of 75 USD. If the family rationalizes the use of the car, there is no need to have a second car or even to have a "first" car. The property of a car includes the monthly expenses in gas; maintenance and insurance besides the "leased" car only have a weekly fixed lease and gas.
The decision to buy a new home starts with the requirement to have more space or more comfortable conditions than the current house. If Jan and Bill live in a small house, and they need a house with more space, they must consider to sell the current house and buy a new one. They must consider the best moment to buy a house. The economy is cyclical, and an asset may vary its real value in an economic cycle of four or ten years. The interest rates are an important consideration at the moment to buy a new home, especially when the mortgage has a maturity of 10 or 30 years. The family must consult Rent and Mortgage calculators to consider buying a new home. The best moment to buy a new home will be when the rent value of a property is higher than the mortgage payment.
4. The first method is using car finance agreement with the car dealer; there is car dealer that offer zero initial payment and forty-eight or sixty months to pay. It is convenient to evaluate the inclusion of accessories of gas station bonuses to reduce future expenses in the car use.
The second is a personal contract purchase with the car dealer when the purchaser pays a deposit of 10% and later pays every month for four or six years the 90% of the car value with certain conditions of mileage (Griffin, 2016).
References
BOSTOCK, M., CARTER, S., & TSE, A. (2015). Is It Better to Rent or Buy? Retrieved July 23, 2016, from http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html
Griffin, R. (2016). The cheapest way to buy a new car. Retrieved July 23, 2016, from http://www.confused.com/buying-selling/buying/the-most-cost-effective-way-to-buy-a-new-car
Reeves, S. (2005). Family (Financial) Planning. Retrieved July 23, 2016, from http://www.forbes.com/2005/04/15/cx_sr_0415married.html
