In simple terms, financial planning is the means through which one can wisely plan and manage one’s finances so as to achieve his or her goals and dreams. This is the process through which most individuals and firms use in order to develop through the various stages of life without straining their finances (Banks, 2011). Financial planning hence is a process that needs to be practiced over a long period of time in order for the desirable effects to be achieved.
For Bill and Jan, it can be noted that they do not have a financial plan as they are not sure of what they want. For this reason, they should consider implementing a good financial plan. A financial plan can be well implemented through the following steps: Establishing goals; gathering data; evaluation and analyzing of their financial status; Developing a sound plan; implementing the plan; monitoring the plan and making necessary adjustments (Smith & Koken, 2012).
Bill and Jan should first establish sound goals in relation to their finances and establish where they want to be in a period of nearly five years. The plan will help the two establish their objectives that will guide them in the way they will use their finances. This involves the determining of which loans to clear first, whether to buy a house or a car and whether to save. With such questions in mind, they would be in a position to determine the best course of action once they decide what is of importance. Once a plan is formulated, the can gather information regarding the current environment they operate. These include the going interest rates, the mortgage rates available, the house prices in the markets, car prices and their current wages and their past. With this information, they can be in a better position to understand what is suites them best with their current financial position in place.
The next step Jan and Bill should take should be to evaluate and analyze their financial status. They should take into consideration the bills they are paying and their income at the current period. They are supposed to list all their credit payments monthly and for how long and compare them against their income monthly. It can be noted that they have debts accruing interest of up to 1600 dollars per month and income of 5000 dollars. With these, it can be seen that they are in a tight financial position as their deductions are almost half their income. With the evaluating of their financial status, they can know the best way forward.
With this in mind, they should create a plan. The plan will involve ways of how to reduce their debts and also ways to advance them at a better pace. A good example of a financial plan of their own includes increasing of savings to buy a better car after selling the one they have. The plans they will make will determine their future hence should be made with respect to the near future and not just the present.
Once a plan has been established highlighting all areas of interest, strict implementation should be maintained all through in order to make it effective. The plan should be followed strictly over the period of years since deviation will ruin the flow of the plan (Banks, 2011). Finally, they should be monitoring the plan once in a while, let us say after every three months. With this, they will be able to note if the plan is effective or not and establish a better to accomplish it in case of any shortcomings. As there are many variables involved, once in a while adjustments would be needed. These variables that may affect the financial planning process include: salary increase, birth of a child and demotion from work. Finally, the plan should not be rigid but flexible to allow for future changes.
Jan and Bill’s financial position could be described in a number of ways. It could be seen to be having both advantages and disadvantages. Starting with the advantages, they could be seen to have saved nearly 4000 dollars over a period of time. This money when well invested could reap positive returns in the near future. Another advantage is that it can be seen that they have their financials in theory hence in a position to determine their future spending. It can also be noted that Jan and Bill do have a car that is paid off. This means that they could sell if off and reap full profitability since the car is fully theirs.
Though there are advantages associated with their financial plan, disadvantages do exist also. It could be noted that considering their income, they $5000 is too high. This means that measures should be taken to reduce their credit and not increase as they are planning to. Their savings is low as compared to their overall spending hence another disadvantage. Their budget can be noted not to be too stable as it can be noted that they are not sure of what to want, whether a car or a house. With these, Jan and Bill do need a relevant financial plan, a proper budget and the need to reduce the amount they spend on credit.
The major financial goals for Jan and Bill smith would be to clear the $1000 house mortgage and to sell their old car and add the sales proceeds to the kitty for buying a new car. This could be termed as a major financial goal as buying another house is not of importance since they have not cleared the debt of their current house. This plan should be implemented through a clear formulated plan. This plan should involve; selling the old car and using the proceeds to clear their house mortgage, once the house mortgage is cleared, an addition loan will be taken and a new vehicle to be bought. This means that in the end, they should be focusing of minimizing their credit through the use of the assets they have and buying one asset at a time. Excessive spending should also be minimized hence avoiding excessive use of the credit card they possess, keeping cost low.
It could be seen that Jan and Bill Smith do already own two automobiles and a house. One of the automobile and house’s debts is still being re-paid. As their credit is already too early, it would be advisable that they do not buy new ones. They should focus on ways that they will reduce the amount of credit they have. A new car and house is not necessary as they already have old ones that are perfectly functioning. With these two reasons, it could be noted that the purchasing of an automobile and a new house is just but excessive spending as it is not of any importance. The only time they could purchase one is when they sell the old automobile, clear one of their loans and acquire a new one as a source of finance. This means that their main objective should always be to minimize their amount of credit at all times.
Jan and Jill could use various methods in order to own a new automobile. Since it is said that they own two, and one is not functioning well, they could sell it and use the proceeds to add up to the savings they have and buy a new car (Smith & Koken, 2012). Another method would be to take an entirely new loan and buy an automobile and service it slowly. Both ways can be seen to be effective as they result in the couple owning an automobile. However, they come with different cost implication to the couples. The first method is better off, since it tries to minimize on their credit amount as compared to the second that focuses on the easiest way to own an automobile. As an automobile is not of much importance at the time, it will not be of importance to buy immediately. They could make use of their savings and buy a new one and minimize the credit cost they already have. Though both have their own disadvantages, the use of savings is better as compared to the acquiring of a loan as their credit capability is far too stretched already.
References
Banks, E. (2011). Finance. New York, NY: Routledge.
Hallman, G. V., & Rosenbloom, J. S. (2008). Personal financial planning. New York: McGraw-Hill.
Smith, B., & Koken, E. (2012). D-I-Y financial planning: Creating wealth through careful financial planning. Milton, Qld: Wrightbooks.
