[Solution] Case Study 1

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Suggested Solutions for Case Study One

Fortnightly Income statement for Jack and Maggie

Income Jack 2286. 47

Expense House rent 900 Power 69. Internet and Phone 32. Cell Phones 36. Food 300 Clothing and Entertainment 300 Bus 55. Car Registration 11. WOF 4. Petrol 50 1760

Debt Repayment Expenses Car Loan 163. Personal loan 70. Hire Purchase Debt (3-yr) 150. 383.

Savings 143.

Currently they have savings of $143 per fortnight.

Balance Sheet for Jack and Maggie

Asset Liability

savings 3000

Car Loan 15000 Car 12000 Credit Card 7000 Household items 15000 Hire purchase 4600 KiwiSaver 1750 31750 26600

Net Worth 5150

Areas of concern:

This couple has a positive net worth of $5150 and a savings of $143 per fortnight.

However, they have a debt ratio = 83 and a solvency ratio stands at 16. These are alarming

figures as majority of their assets are owned by other financial institutions and they are also

facing a high likelihood of default (e. during job loss).

Based on the analyses in (i) and (ii),

If nothing were to change, assuming that they could earn 4% on money they save, it would

take at least 17 years to save $100,000 for the downpayment of their dream house.

(PMT =-143, FV=100,000, I/Y = 4%, PV = 3000, N=$450 fortnights)

On the other hand, the couple could consider the following suggestions:

Currently, this couple is spending $600 per fortnight on food and incidentals, a saving of 25%

on these two expenditures would improve their savings -&gt; new savings: $293 per fortnight.

Maggie can return to work, this will increase expenses by $1000 per fortnight, but will bring

in an additional $401 per fortnight. New savings-&gt; $694.

Jack and Maggie could use their non-interest bearing savings and the new fortnightly savings

to boost the repayment amount on the debt with the highest interest first -&gt; step by step.

High interest debt: 7000+ 4600 = 11600

Idle cash : 3000

8600

8600/694 = 12 fortnights to clear

Following the suggestions above, they would be able to settle their personal loan, the hire

purchase loan and finally their car loan within the next 12 months.

Financial Goals:

Short-term financial goals:

Settle debts with the highest interest by:

Repay the $11,600 personal and hire purchase debt within 6 months

Repay the $15,000 car loan within 12 months

Financial goal 2: buy a house

After settling all the debts (see above), the couple will have savings of $1,077 per fortnight

($694+$70+ $150 + $163) by the end of year 1. Assuming that they can earn 4% on the

money they save, then it will take them 86 fortnights or about 3years + 4 months to save the

$100,000 deposit for the house. Therefore goal two is: Save $100,000 for a house deposit