Financial planning encompasses processes and various steps leading to the proper management of available income and expenditure. Managing personal and family finances demands thorough estimation of the incoming revenue and outgoing expenses on a daily basis.
Personal financial plan on the other hand is a plan that specifies one’s financial goals and describes the spending, financing, and investing plans that are intended to achieve those goals. A well defined personal or family financial calls for budgeting and tax planning, managing liquidity, financing one’s large purchases, protecting one’s assets and income (insurance), investing money, as well as planning his/her retirement and estate.
For this case, the strengths of this family’s financial planning are better insurance planning and participation in the Public Employees Retirement System (PERS). This is a defined benefit pension plan, resulting from sound retirement planning. In addition, the plan to close down credit card accounts shall cut down cash outflows hence reducing expenses. Investing the excess of money from life insurance is a good idea. Life insurance policy cover is strength since it shows how wisely the family invested in health care. However, the weaknesses of financial planning include poor planning for retirement which is evident by a diminishing individual retirement account and a low credit score. This shows poor credit management. Besides, there is lack of future forecasting of future expenses and savings. Generally, Berka’s financial planning is better off as there is more of investment than spending.
The family is misinformed on the benefits of early retirement. Even though Berka shall have gained larger financial returns when he retires at 80 than at 55, he will not live to eternity and this will leave him with no time to enjoy his retirement and investment benefits. He ha s a good financial focus of expanding his part time family business but retiring at 80 will give him limited opportunity to expand his part-time business after his retirement. Berka’s lack of whom to dedicate his will be a misinformation that needs correction as he can write the will and transfer $250,000 term life policy that still names his deceased wife as sole beneficiary to his 17 year old son from his former marriage. He is also misinformed about the benefits of having a budgeted expenditure. For instance, he should be able to know his total annual expenses drawn from the budget. He is not sure whether this totals $4000.
A cash flow is a statement that measures individual’s cash inflows (like salaries, interest and dividends) and cash outflows which includes all the expenses, both large and small. The major cash inflows for Berka are his salary from his employment which totals $ 62000 annually and family part time business earnings of $ 12000. Major cash outflows are the repayment of a mortgage of $1,228 per month, a $529 car payment, and $420 in child support for a 17-year child from this expenses and revenue, Berka has a positive net cash inflows standing at $26000. i.e. $ (62000 + 12000) less $ (4000 X 12)
For more than one year now, Berka has been the sole member of his family after the death of her wife. Even though he misses the wife, his financial power has greatly increased as a result of the wife’s life insurance benefits. 56.53% of his net worth is from the wife’s life insurance benefits. This is something to be proud of, especially in financial terms. With this benefit, Berka has managed to settle most of his financial problems and foresees a brighter future, given that he is 49 now. Being the sole member of the family, Berka has found it difficult to prepare a will and to name the beneficiary for his $250,000 term life policy.
Another emotional issue affecting Berka’s financial position is his previous marriage. From this marriage, he has a 17-year old child whom he must support. It is sensible that Berka names this child as the beneficiary of his life insurance benefits other than his late wife; given that this child is the only living member of his family, even though they stay apart.
Calculations of the savings required to reach financial goals
Apparently, both the long-term and short-term financial goals of the individual discussed herein are not clearly elaborated. The major ones specified are the business, which he plans to expand after retirement, the 403(b) deposits which are equally invested three stock funds and two bond funds, and the CDs which already give returns of 4.9%. However, with the business as the major retirement plan, the available savings to realize the expansion of the business can be considered as the direct savings, which amounts to $4,050. Other savings, which can be used to realize the same, include checking at $1,200; CDs at $5,000; three growth mutual funds at $15,028; and the IRA at $26,482. This gives a total of $51,760. Berka’s assets totals to $398,760 while the liabilities sum up to $45,000. This is a positive networth of $ (398,760 – 45,000) = $353,760.
Future benefits = (years of service/60) X Highest Average Annual Salary
The annual salary = $62,000
Earnings from the business = $12, 000
Total annual earnings = $74,000
Average annual expenses = $48,000.
If he retires at 80, he shall have served for 56 years as compared to 31 years of service if he retires at 55.
At 80, retirement benefits = (56/60) X $62,000 = $ 57,867.
At 55, retirement benefits = (31/60) X $62,000 = $ 32,033
Recommended action steps to improve financial situation
First, Berka should develop interest in budget planning to help him forecast in his future savings and expenses. He should asses the total assets and liabilities to help determine his networth. Credit management is wanting for Berka. He must have clear decisions regarding how much credit to obtain to support his spending and which sources of credit to use for effective liquidity management.
Secondly, to improve this financial situation, Berka should have well established financial goals. He should write down his goals to be achieved, whether on Car, home, college, wealth, or charity. This can then be clustered either as short term, medium term or long term. Timing is essential good financial planning. Besides these, he as well should close all the credit cards as these only increases his monthly total expenses.
A retirement at 80 would limit Berka’s chances of expanding the business, which currently constitutes 16.22% of his total earnings. If he retires and fully engages in the business, which he currently engages as part-time, the earnings must surely be great.
Recommended financial products
i. Medical insurance plan.
The type and amount of insurance one needs is a good starting point for making a detailed financial plan. Since the family depends on two major sources of income to cover daily expenses, having insurance policy to cover medical costs and to replace at least a portion of the lost income which was generated by the wife is recommended. He can also take a Group life insurance. It is generally lower than typical premiums that are available to people within a defined group.
ii. Committing to money market investment
Berka needs to commit his life insurance benefits to money market investments. Besides benefiting from high interest rates, this mutual fund allows a limited number of checks to be written each month. He can make use of money market funds- a form of mutual funds to help him invest securities that have shorter term maturity.
The greatest resource at Berka’s disposal is his business. If currently the business gives an income of 16%; then, a slight increase of investment in the business can greatly improve the owner’s earning especially after his retirement. Berka should opt for an early retirement so that he can invest his full time in the business. On the other hand, the salary he gets forms the bulk of his income. Proper management of this income is very crucial.
I therefore recommend that the most vital action that needs to be taken take is to start the savings plan as early as possible to obtain the full advantage of compounding. This is not difficult in the early years of one’s life while still single and free of family problems. The determining factor in the growth of savings is the length of time available. As a matter of fact, the time value of an investment is more crucial than your age or the size of your contribution to the savings account.
Barron's Finance, 4th edition, 2000, p.578
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