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Administrative Studies
ADMS 3541
Chris Robinson

York University Atkinson Faculty School ofAdministrative Studies AP/ADMS 3541.03 Personal Financial Planning SECTION M ASSIGNMENT 1 PROFESSOR CHRIS ROBINSON STUDENT NAME STUDENT NUMBER LIH TING JOYCE LI 211423803 RAM ENGLER 208460628 ASSIGNMENT I Answer 1. Part 1 of Question 1. Lehman Family Balance sheet as of ………. Assets Amount(S) Liabilities Amount (S) Financial assets: Credit card: Cash 1,500 Visa @ 18% 20,000 Term deposit 10,000 Master Card @ 16.5% 13,000 RRSP (Steve $12,000 ; Iris $7,000) 19,000 Department store card 6000 39,000 @ 22.5% Mutual fund 37,000 Furniture Loan @ 24% 10,000 Car Loans @ 5% 30,000 Personal Use: Mortgage on Home 350,000 Cars 43,000 Loan from parents (Interest free)80,000 Personal assets 24,000 House 440,000 Net worth 65,500 Total Assets 574,500 574,500 The Lehmans seem to have a pretty good financial status with a net worth of $65,500 and $1,500 in cash to spend. Over the years, they`ve managed to buy a house that have gained $10,000 in value. They also have good investments in term deposit, RRSP and mutual fund. Overall they seem to have a large amount of asset, nonetheless they`ve also managed to take up a lot of credits, loans and mortgages. The following are some of the recommendations with respect to their debt management issue: a. Steve and Iris may want to reduce or control their expenses , as their household consumer debt have exceeded 20% of their total take home pay of $90,000 by about almost 67.78% . Total consumer debt = credit cards + furniture loan + car loan = $39,000 + $10,000 + $30,000 = $79,000 which is 87.78% of $90,000 ( take home pay) b. The Lehman`s should pay off their consumer debt as soon as possible: Amix of controlled spending strategy may help in curbing consumer debt and not letting it grow exponentially. So, considering their interest in mutual funds, we would suggest that they keep their mutual fund , while selling off their cars or liquidating term deposit to pay off their credit cards and loans in a descending order of interest rates starting with furniture loans, department store card, Visa, Master Card and car loans. c. One of the most important strategy that the Lehman`s can employ is borrowing money for investment @ 4.5% and buy back investments that were liquidated for paying off consumer loans .In such a way, they can convert consumer loans to investment loans while switching it`s average interest rates to a lower investment loan rate of 4.5%. Interest saving = ${(20,000*0.18)+(13000*0.165)+(6000*0.225)+(10000*0.24) +( 20000*0.05)+(10000*0.05)}-$79000(0.045) =${3600+2145+1350+2400+1000+500}-$3555 = $7440 Tax savings = (79,000)(0.045)(0.25) = $888.75 d. However, the family should also look into it`s ability to pay off the debt overtime, by making a separate account to track expenses and manage their cash inflows and outflows. Part 2 of Question 1. Three personal financial planning recommendation for the Lehmans are as follows: a. Steve and Iris Lehman`s can create a TFSAaccount to which they can send a certain percentage of take home pay (say 10% or more) on a bi-weekly or monthly basis. This would act as a pay yourself system where $9000/12 = $750 is saved prior to monthly spending. b. They may also want to create an emergency fund in a TFSAor buy T-bills (any highly liquid investment )that would equal three to six months of take home pay ( roughly $22,500 to $45,000). Such a fund would be useful in the face of unanticipated or urgent requirements. c. Looking at their long term goal of having children, one would recommend them to have an immediate month to month budget and goals that they should follow very strictly. Answer 2 The following is a summary of their assets at different points in time: On the day of marriage At the time of separation John Two bedroom condominium 350,000 500,000 Two year old car 18,000 - Stock portfolio (inherited) 120,000 210,000 Personal Assets 3000 - New Car - 30,000 Secret bank account - 81,000 Janet One bedroom Condominium 120,000 150,000 11 Year old car 0 - Personal assets 5000 - RRSP - 45,000 New Car - 20,000 Joint Bank account - 4,000 John`s pension plan - 100,000 Furniture and paintings - 25,000 i. The two bedroom condominium is a matrimonial home and Janet is entitled to half of it , which is ½ of $500,000 = $250,000 . ii. The following items are excluded from the list of assets to be divided - John’s Two year old car which is assumed to be of negligible value or sold before separation. - John’s stock portfolio which was inherited from his grandfather - Personal assets of both John and Janet. - Janet’s 11 year old car which had a negligible value at the time of marriage iii. John’s new car and Janet’s new car, acquired before separation and during marriage , is known to be divided equally between the two : ½ of 30,000 = 15,000 ½ of 20,000 = 10,000 iv. The secret bank account of $81,000 must be divided equally between the two , since John had acquired the lump-sum of $78,000 while they were still together, it is assumed to be a family property and therefore subject to division. v. Janet’s condominium inAjax, Ontario is divided equally between them in the absence of exclusion clause explicitly stated in the marriage contract. If however , such an asset is excluded from all other assets, it would not be divided between the two. vi. Janet’s RRSP is a contribution from their combined savings and is therefore subject to equal division . vii. All assets under the joint account, including $4000 in TD bank account is divided equally or in the ratio of (60:40) as per their contribution of take home pay or (60:52) as per total income from all resources ( $60,000 John’s take home pay , Janet’s total income being a total of take home pay and $1000 monthly rent received). viii. Furniture and paintings if liquidated are split between the two equally. Asummarized statement showing the list of assets split between John and Janet are as follows: At the time of separation John Janet John Two bedroom condominium 500,000 250,000 250,000 Two year old car - - - Stock portfolio (inherited) 210,000 210,000 - Personal Assets - - - New Car 30,000 15,000 15,000 Secret bank account 81,000 40,500 40,500 Janet One bedroom Condominium 150,000 75,000 75,000 11 Year old car - - - Personal assets - - - RRSP 45,000 22,500 22,500 New Car 20,000 10,000 10,000 Joint Bank account** 4,000 2,400 1,600 John`s pension plan 100,000 50,000 50,000 Furnitures and paintings 25,000 12,500 12,500 ** note: we’ve assumed a ratio of 60:40 for splitting a contribution that was not pooled in equally with John’s income being $60,000 and that of Janet’s being $40,000.p.a. Answer 3. a. For 52 classes, if she always pays off her credit card on time and has already used up all her contribution room in her Tax Free SavingsAccount, her program would cost a total of 52*40=$2,080 if she pays it on a per class basis. Her full year membership would cost $1,999 Therefore it would be cheaper for her to get the full year membership for unlimited classes because her credit card has enough room to pay a onetime fee of 1,999, saving her $81. b. For 52 classes, if she has an overdue balance on her credit card of $5,000 and lots of contribution room in her TFSA, it would make sense not paying $1999 immediately as that would cross her credit limit and be charged an over limit fee and interest on the balance at 24%.p.a.She can instead put that amount in her TFSAearning 2% EAR on safe instruments in her regular investment account. Therefore, her ideal choice would be to pay for her yoga classes on a class to class basis. c. Sarah Qadhi should take the following factors into consideration when deciding her payment program:  She should look at her credit card balance and her TFSAbalance , to see whether she has enough room to save money and enough credit to pay for her classes.  She should consider if she can make it to all the classes every week. If she cannot, then it’s better to pay on a pay-per-class basis. If she’s determined to attend every class, then she should opt for the annual membership program.  She needs to consider her long term financial stability, whether she might get fired from her job in which case she might not be able to pay for her yoga classes. If she thinks that might happen, she might stick with a pay-per-class payment program. On the other hand, if she thinks she has a stable job, she can pay $1999 for a full year membership.  She also needs to consider whether she would be able to pay her credit card on time. That is, in the short run, would she be able to spend a part of her income on yoga classes. Answer 4. a Annual Annual savings Duration Value of savings in the 5 year (S) salary @5% of his salary At I/Y = 4% PV First year $50,000 $2,500 25 $6664.5908 Second year $55,000 $2,750 25- 1 = 24 $7049.0865 Third year $60,500
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