The Financial Planning Process
The Financial Planning Process
The financial plan to improve the financing problem must be made according to the inflows and the outflows of the cash. Financial problems, either commercial or personal, can be managed or resolved by implementing a financial plan correctly. In the given scenario, Jan and Bill Smith are facing financial problems such as mortgage and credit card payments. The financial plan for this family must cover at least five to six months, so that Jane and Bill don’t face tough financial circumstances. ("Manage money by,")
The current financial position of Jane and Bill is not very bad because they are earning five thousand dollars per month as the household income. The total expenses are sixteen hundred dollars in terms of mortgage, car installments and credit card payments. Therefore, the current scenario is favoring Jane and Bill Smith on the basis of inflows and outflows of the cash. However, the weak point of this financial scenario is that they are facing problems in maximizing their income and savings. The overall savings are less than four thousand dollars, which is very low as compare to the per month income. Therefore, it is very important to align the expenses of Jane and Bill Smith to increase the savings for future potential investments. The fundamental financial step that Jane and Bill Smith must adopt is, to minimize the debt of the family and reinvest that savings into a bank or other financial institutes to create another income. Moreover, Jane and Bill Smith must reduce their day to day expenses and increase the level of their savings. They must keep their savings in the bank so that they can get interest income from bank. Furthermore, Jane and Bill Smith’s house are under mortgage, and they are paying one thousand dollars every month. This mortgage is a huge expense for a family that cannot be settled in the current level of household income and savings. Therefore, Jane and Bill Smith must not consider to sell their home without proper financing or financial assistance. ("Manage money by,")
It is very important to create and implement measurable and achievable financial goals for Jane and Bill Smith. The first step is to decide which expense of Jane and Bill must be paid. In the current scenario, the payments by credit card are the most expensive for Jane and Bill because the debt from bank also charges interest or mark-up expense which increases the actual amount of money to be paid. Therefore, it is very important to make short term payment plans for credit card settlement. Jane and Bill Smith must be given a plan of six months to settle the loan from the bank. They must pay at least one thousand dollars every month to settle the loan from a bank. By doing this, they will become eligible for taking new loan in case of buying or financing new home or a car. The payment of one thousand dollars a month to the bank is not a massive amount for the Jane and Bill Smith because; monthly household income is five thousand dollars. Moreover, they also have savings of around four thousand dollars, which can be used for settlement of debt. After the settlement of debt, Jane and Bill Smith must sell their old car which is already paid-off. This sale will create some cash, and they must utilize that cash for the lease of a new car. The expected per month installment of the new will be around four hundred dollars because the other car family is creating expense of four hundred dollars a month which is affordable for the Jane and Bill Smith. As far as mortgage of one thousand dollars is concerned, it is advised to keep paying it at the current rate because there is not much detail given in the current scenario. (Fowles)
The decision making regarding car is easy to make because the sale of one old car will create cash inflow for the family and that cash can be used for the down payment of a new car. As compared to the income of households, the installments of the car will be around four hundred dollars only, which is affordable for the family. Therefore, once the credit card loan is settled, Jane and Bill Smith can lease a car in the effective financial way. Moreover, the old cars create more running cost as compared to the new cars. By purchasing or leasing a new car will reduce the running cost of the car and ultimately benefits the Jane and Bill Smith. Therefore, the new car will benefit in two ways by reducing the running costs and increasing the productivity and performance. (Fowles)
Buying a new house is current financial positions is not the best idea for Jane and Bill Smith. The reason behind this idea is that their current home is under mortgage of one thousand dollars per month. This means that they took a loan in the past by mortgaging their home. In these circumstances, it is highly probable that they will not get enough money to buy a new home after the settlement of the entire mortgage. There are not enough savings and household income to buy a new home effectively. Therefore, in these circumstances, it is recommended that Jane and Bill Smith must pay one thousand dollars per month as a mortgage and stay in current home. However, there is a possibility that Jane and Bill Smith move to their new small and cheaper home after selling their current home and settling the mortgage. With the current income, it is easy to pay mortgage expense as compared to buying a new home. Therefore, Jane and Bill Smith must not buy a new home because it will drain all of their savings and may create more debts from banks. (Fowles)
The other technique for a new car can be the financing technique. In this financial technique, Jane and Bill Smith will have to pay 10 to 15 percent of the total asset’s cost to the bank or leasing or financing company. Then the bank or company will pay the remaining amount of the car to the car company or any car dealer and impose their legitimate interest or markup rate in the total price of the car. This financing technique will also assist Jane and Bill Smith to manage the financial expenses as compared to buying a new car which will generate a huge amount of money. These days the financing technique is a more favorable technique among the household income customers. Therefore, it is highly recommended that Jane and Bill Smith must adopt the financing technique for a new car to minimize the risks. Financing for a new car will give ownership to Jane and Bill Smith as compared to the leasing of cars. In this case, Jane and Bill Smith can sell their car to generate cash for a new car or other asset in the future. (Bird, 2013)
This financial plan for the Jane and Bill Smith will assist in improving their financial position. It is very important to implement this financial plan step by step to achieve the required goals. Moreover, Jane and Bill Smith must reduce their day to day expenses to maximize the savings during this financial plan so that they can eliminate a maximum portion of debts from banks in time. The purchase of new home must be considered after the settlement of credit card loan and mortgage.
References
Manage money by setting smart financial goals. Retrieved from
http://www.accionusa.org/home/small-business-loans/financial-education/basic-money-management/setting-smart-financial-goals.aspx
Fowles, D. Setting financial goals. Retrieved from
http://financialplan.about.com/cs/personalfinance/a/FinancialGoals.htm
Bird, C. (2013, May 13). Should i pay cash, lease or finance my new car?. Retrieved from
http://www.cars.com/go/advice/Story.jsp?section=fin&story=should-i-pay-cash&subject=loan-quick-start&referer=
