Financial Planning

Financial Planning


This report will analyze your financial position in a bid to provide viable recommendations for future fund management strategies. To this end, your cash flow statement and balance sheet are prepared in order to determine how well you spend your money and how your spending habits have contributed to your overall financial position as a family. Additionally, in order to determine whether your superannuation contributions will be sufficient for your retirement, two schedules are prepared to illustrate how much money you will have accumulated by the time you retire and how this sum will be distributed throughout the retirement period. It is concluded that your expenditure is unsustainable and as such, your family will be forced to adopt alternative fund management strategies in order to maximize your future cash flows. Consequently, the report elaborates five different strategies including the one you suggested (purchasing an investment property) highlighting their potential strengths and weaknesses. Adopting any of these strategies will go a long way in improving your future cash flows.



Q1. Cash flow statements for the 3 financial years ending 30 June 2015 – 2017, including detailed tax calculations (use current tax rates). Financial Planning

For the year ending 30th June 2015 2016 2017
(a) Jerry’s Gross Income 105,000.00 108,150.00 111,394.50
Less: Income Tax (26,797.00) (27,962.50) (29,163.00)
After Tax Income 78,203.00 80,187.50 82,231.50
(b) Jenny’s Salary 50,000.00 15,000.00 30,000.00
Less: Income Tax (7,797.00) 0.00 (2,242.00)
After Tax Income 42,203.00 15,000.00 27,758.00
Total After Tax Income 120,406.00 95,187.50 109,989.50
Other Deductions:
Medecare Levy (2%) (3,100.00) 2,163.00 (2,827.89)
Superannuation contributions (14,725.00) (10,274.25) (13,432.48)
Net Total Salary 102,581.00 87,076.25 93,729.13
(c) Return on Commonwealth Bank Shares 2,120.00 2,120.00 2,120.00
(d) Return on Bundoora Term deposit 128.00 269.00 400.54
(e) Superannuation Net Earning 17,297.07 18,611.59 20,017.97
2. TOTAL CASH RECEIPTS 122,126.07 108,076.84 116,267.64
(a) Mortgage and loan payments 29,500.00 29,500.00 29,500.00
(b) Work related expenses 2,500.00 1,500.00 2,000.00
(c) Insurance 3,000.00 3,090.00 3,182.70
(d) Household (e.g. food, clothes) 25,800.00 26,574.00 27,371.22
(e) Private education expenses 17,000.00 17,510.00 18,035.30
(f) Utilities 4,300.00 4,429.00 4,561.87
(g) Entertainment 8,000.00 5,000.00 5,000.00
(h) Travel and holidays 7,000.00 5,000.00 5,000.00
(i) Motor vehicle expenses 8,500.00 8,755.00 9,017.65
(j) Jack’s laptop 3,500.00
(k) Kitchen Renovation 35,000.00
4. TOTAL EXPENDITURE 109,100.00 136,358.00 103,668.74
Closing Balance 13,026.07 (28,281.16) 12,598.90



Q2. Balance sheets for the 3 financial years ended 30 June 2015-2017.

As at June 30 2015 2016 2017
Non-Current Assets
Family home 620,000 663,400 709,838
Boat 20,000 20,600 21,218
Cars 47,000 47,000 47,000
House contents 50,000 51,500 53,045
Total Non-Current Assets 737,000 782,500 831,101
Current Assets
Commonwealth Shares 53,000 55,650 58,433
Savings 40,054 12,042 39,899
Term deposit 165,000 165,000 165,000
Superannuation funds 330,000 359,813 387,158
Total Current Assets 588,054 592,505 650,490
Total Assets 1,325,054 1,375,005 1,481,591
Family Mortgage 250,000 211,573 175,375
Personal car loan 16,000 10,889 6,211
Credit Card 6,000 6,000 6,000
Jones family equity 1,053,054 1,146,544 1,294,004
Total Liability and Equity 1,325,054 1,375,005 1,481,591

According to the World Bank, the life expectancy in Australia is 82.1 years. As such, you will require a real income of $58,000 per annum for a period of at least 22 years that is from the age of 60 when you both retire   to the age of 82. Because your current income grows at the same rate as inflation, the inflation rate will be used   as the present value interest factor. The computation for the amount of the “real income” that you will require from your superannuation accounts at the time of retirement is shown below. This represents the approximate lump sum that you will required to have accumulated by the time you retire.

#Financial Planning

Q3. (i) An excel spreadsheet of accumulated superannuation for both Jerry and Jenny for each year from 1 July 2015 to their retirement in 30 June 2030.

Table 2: Accumulated Superannuation

Year Age Salary Opening Super Balance Add: Employer Super Contribution Less:15% Contributions tax Add: Net Earnings Closing Super Balance
2015 45 155,000.00 330,000.00 14,725.00 (2,208.75) 17,297.07 359,813.32
2016 46 108,150.00 359,813.32 10,274.25 (1,541.14) 18,611.59 387,158.03
2017 47 114,394.50 387,158.03 10,867.48 (1,630.12) 20,017.97 416,413.35
2018 48 117,826.34 416,413.35 11,193.50 (1,679.03) 21,509.36 447,437.18
2019 49 121,361.13 447,437.18 11,529.31 (1,729.40) 23,090.47 480,327.57
2020 50 125,001.96 480,327.57 11,875.19 (1,781.28) 24,766.28 515,187.76
2021 51 128,752.02 515,187.76 12,231.44 (1,834.72) 26,542.02 552,126.50
2022 52 132,614.58 552,126.50 12,598.38 (1,889.76) 28,423.17 591,258.30
2023 53 136,593.02 591,258.30 12,976.34 (1,946.45) 30,415.55 632,703.74
2024 54 140,690.81 632,703.74 13,365.63 (2,004.84) 32,525.26 676,589.78
2025 55 144,911.53 676,589.78 13,766.60 (2,064.99) 34,758.72 723,050.10
2026 56 149,258.88 723,050.10 14,179.59 (2,126.94) 37,122.69 772,225.45
2027 57 153,736.64 772,225.45 14,604.98 (2,190.75) 39,624.30 824,263.99
2028 58 158,348.74 824,263.99 15,043.13 (2,256.47) 42,271.06 879,321.70
2029 59 163,099.20 879,321.70 15,494.42 (2,324.16) 45,070.84 937,562.81
2030 60 167,992.18 937,562.81 15,959.26 (2,393.89) 13,565.37 964,693.55

The current combined income for both of you is $1550000 ($105,000 for Jerry and 30,000 for Jenny). It should however be noted that Jenny will not earn any income in 2016 and earn an approximate income of 30,000 thereafter. Your total combined income will be assumed to be growing at the same rate as inflation. While you will be contributing money every year towards your superannuation, the fund will also be generating an average interest of 5.2% for Jerry and 4.9% for Jenny after taxes and fees. This translates to a cumulative average interest rate of 5.05% for both of you. 5.05% will therefore be used as the effective interest rate for calculating your net earnings from the superannuation fund for every year. For instance, during the 2015/2016 financial year, the fund will accumulate $14,725, $2,208.75 of which will be deducted as contributions tax. Whatever is left over will be combined with the opening super balance to generate net earnings of $17,297.07, amounting to a closing super balance of $359,813.32.

(ii) An excel spread sheet of accumulated superannuation for both Jerry and Jenny from the commencement of their retirement on 1 July 2030 detailing how long their superannuation is likely to last.

Table 3: Retirement Plan

Year Age Opening Balance Less: Pension Withdrawal Add: Net Earnings Closing Balance
2031 61 964,693.55 (58,000.00) 48,717.02 955,410.57
2032 62 955,410.57 (59,740.00) 48,248.23 943,918.80
2033 63 943,918.80 (61,532.20) 47,667.90 930,054.50
2034 64 930,054.50 (63,378.17) 46,967.75 913,644.09
2035 65 913,644.09 (65,279.51) 46,139.03 894,503.61
2036 66 894,503.61 (67,237.90) 45,172.43 872,438.14
2037 67 872,438.14 (69,255.03) 44,058.13 847,241.23
2038 68 847,241.23 (71,332.68) 42,785.68 818,694.23
2039 69 818,694.23 (73,472.66) 41,344.06 786,565.63
2040 70 786,565.63 (75,676.84) 39,721.56 750,610.35
2041 71 750,610.35 (77,947.15) 37,905.82 710,569.02
2042 72 710,569.02 (80,285.56) 35,883.74 666,167.19
2043 73 666,167.19 (82,694.13) 33,641.44 617,114.50
2044 74 617,114.50 (85,174.96) 31,164.28 563,103.83
2045 75 563,103.83 (87,730.20) 28,436.74 503,810.37
2046 76 503,810.37 (90,362.11) 25,442.42 438,890.68
2047 77 438,890.68 (93,072.97) 22,163.98 367,981.69
2048 78 367,981.69 (95,865.16) 18,583.08 290,699.60
2049 79 290,699.60 (98,741.12) 14,680.33 206,638.81
2050 80 206,638.81 (101,703.35) 10,435.26 115,370.72
2051 81 115,370.72 (104,754.45) 5,826.22 16,442.49
2052 82 16,442.49 (17,272.83) 830.35 0.00


As aforementioned, the lump sum should amount to at least $924,341.16. Fortunately, your total combined superannuation contribution will amount to $964,693.55. This amount is more than enough to get you through retirement comfortably, without having to work a day in your life. Better still, the projected income of $58,000, which you will begin to get immediately after you retire has been adjusted for inflation so it will be growing by 3% every year. Provided that the rate of inflation will not have escalated by 2031, you should be able to maintain your lifestyle until the age of 82.

(iii) Determine what you believe the risk profile of the couple to be based on the information provided in this case study (ie. conservative, balanced, growth, highly aggressive etc) and discuss the reasons for your view.

Basing on the information you provided and your asset allocation, it is evident that you are balanced investors. Even though a vast majority of your assets has been allocated to property, all your disposable income have been channeled towards investments. I have also noticed that you are risk averse because most of these investments are associated with fixed interest securities. Only half of the total investment has been allocated to shares.

(ii) Determine the couple’s current asset allocation (across all their investments including super) in both $ and % terms and present this in the form of the following table.

Discuss the extent to which the current asset allocation is consistent with the couple’s risk profile determined in (i) above.

Table 4: Asset Allocation

  Current Asset Allocation
Investment value Cash Fixed Interest Property Australian Shares International shares Total
Family home 620,000 620,000 620,000
Boat 20,000 20,000 20,000
Cars 47,000 47,000 47,000
House contents 50,000 50,000 50,000
Commonwealth Bank shares 53,000 53,000
Bundoora Savings 40,054 40,054
Bundoora term deposit 165,000 165,000
Conservative fund 195,000 19,500 68,250 29,250 58,500 19,500 195,000
capital stable fund 135,000 27,000 54,000 13,500 27,000 13,500 135,000
Total of Asset Class in $ 1,067,000 46,500 327,304 779,750 138,500 33,000 1,325,054
Total of Asset Class in %   3.51% 24.70% 58.85% 10.45% 2.49% 100%

5 (i) Critically analyse the financial situation of Jerry and Jenny based on the information provided and provide an overall analysis of the couple’s situation identifying problem areas and weaknesses

Strengths and Weaknesses.

From the financial statements above, it is evident that the family’s expenditure is unsustainable. As such, you should make deliberate efforts to reduce your annual expenditure. Fortunately you have decided to cut down on entertainment, travel and holiday expenditure. If the family kept up this lifestyle, it was highly unlikely that there would be any savings left after retirement. On the other end of the spectrum, you has made commendable attempts to invest in a myriad of financial instruments including shares, term deposits and savings accounts. Nevertheless, there are several other financial instruments that could provide viable investment opportunities for the family. On the bottom line, you are apparently very concerned about securing your future so you have made deliberate efforts to minimize current expenditure while at the same time trying to maximize the returns on the resources at your disposal in order to generate higher cash flows in future.


In order to appreciate the variety of financial instruments at your disposal, you should understand how companies raise capital because when you invest in a company’s financial instruments, you essentially become a source of capital for the company. The capital structure of most companies is usually a mix of long-term and short-term debt, common equity and preferred equity (Mahmud et al., 2009, p.9; Mullen, 2012, p. 5; Angell & Mautz Jr., 2007). These sources of capital are divided into two broad categories, that is, debt financing and equity financing. While equity represents the right to participate in earnings, debt represents the right to be repaid with a predetermined rate of return (or interest) (Walter, 2003, p. 2). When deciding whether to invest in debt or equity, you should consider the risk and reward associated with each financing option and its effect on the level of control you will gain in the company (Sherman, 2005, p. 4). Other than that, the financing option at your disposal will greatly depend on the amount of money you are willing to invest. Notwithstanding, it is more convenient to invest in large companies compared to smaller companies (Great Britain Department for Business, Innovation & Skills, 2010, p. 13). Some of the main variables you should consider before making an investment decision include leverage, liquidity, profitability, and the tangibility of assets in a company (Duca, 2010, p. 525). Moreover, you should not only focus on the current financial position but also the historical performance and future plans of a company.

Equity is mainly composed of common stock and preferred stock (Walter, 2003, p. 2). As you might already be aware, given that you already own shares, common stockholders enjoy voting rights but are paid a varying rate of dividends depending on the profitability of the company. Preference stockholders on the other hand do not enjoy voting rights but are paid a fixed rate of dividends regardless of whether the company makes a profit or a loss. The dividends payable to preference shareholders can either be cumulative or non-cumulative (Sherman, 2005, p. 11). It is also worth noting that if a private company intends to become a public limited company, it will raise additional capital through an Initial Public Offering (IPO). This might present a perfect opportunity for you to increase your wealth in the long run because start-ups are more often than not characterized by a double digit growth in share value in the initial stages of their lifecycles.

Several companies prefer equity as a method of raising capital because it is associated with numerous advantages including the ability to raise large amounts of capital, improved corporate image, easy access to future financing, ability to attract and retain key employees and the use of stock for the acquisition of other companies. Nevertheless, this method of raising capital could translate to several demerits for investors such as the dilution of share value, double taxation and companies focusing on short-term performance at the expense of long term performance.

The most common types of debt finance include loans and overdrafts (Business Link, 2010, p. 4). Individuals can provide both short term and long-term loans to companies and governments by buying certificates of deposit, treasury bills and treasury bonds. They can also advance loans to companies, which pledge assets such as inventory, accounts receivable or purchase orders as collateral. The main advantage of buying debt instead of equity is that it does not come with the risks associated with equity. Treasury bills and treasury bonds are for instance considered to be risk free investments

(iii) Based on the weaknesses identified above, provide any four possible financial strategies that the couple may be able to use to improve their short-term and longterm financial situation.

Fund Management Strategies

Diversify the Investment portfolio

From the foregoing, it is evident that even though the family has invested in shares and company debt, there several other company related financial instruments that have not been explored. It could for instance invest in treasury bills and bonds as opposed to shares and company debt because they are practically risk free. This option would secure the company’s funds for future use and provide a reasonable return on their investment. This return would however be lower than what is currently being offered by the bank. Other than that, because you apparently prefer fixed incomes on your investment, you could invest in cumulative preference shares, which would offer a higher return on your investment through dividends while at the same time offering the possibility of capital growth. Company shares, especially for new companies, have the capacity to grow up to more than double the initial share value in the long run. This would therefore generate more returns compared to company debt, which remains constant.

Invest in a Fund

There are a myriad of other financial instruments at the family’s disposal such as hedge funds, mutual funds, foreign currencies and derivative contracts. While these instruments might be very profitable for some investors, they are virtually useless for individuals who lack adequate knowledge and experience in financial markets. The family could however invest in these instruments vicariously through fund managers. Fund manager’s generally hold a portfolio of diversified assets, which generates a given return every year. In order to maximize the returns on their portfolios, fund managers take several factors into consideration before they ultimately decide to commit investors’ funds to any particular investment opportunity. The major factors they consider include the risk inherent in the opportunity and the expected return. While all investors prefer high to low returns, the former are usually associated with high risk and as such, most managers commit their funds to investments that achieve a suitable trade-off between the two factors. Even though they are not as secure as government securities funds offer higher returns and could go a long way in enhancing the growth of the family’s wealth.

Start a Business

Other than investing in companies and financial instruments, the family can decide to invest in its own business, which could potentially grow into a very successful company. Even though businesses are in most cases very risky investments, the return will also more often than not justify the risks. You could identify a viable business opportunity in the region and attempt to exploit it. Apart from their profitability, businesses can be very fulfilling because you can become your own boss and at the same time work on something you enjoy doing. Nonetheless, business are associated with several challenges. First, the family would require a substantial amount of capital to start and operate the business before it eventually starts to generate a reasonable income. The proprietor would also be force to work for long hours, sacrificing the time they have to spend with the family. This would also imply that at least one spouse would have to quit their job hence putting their future cash flows in jeopardy. If you have a good business idea in mind you could consider pursuing it. You should however be cognizant of the risks and challenges associated with running a business.

Take out insurance policies for the children

One of the main reasons driving most families to invest is so that they maintain its current lifestyle in future, which includes maintaining their children in private schools. One way to guarantee that your children will continue attending private schools even after you retire is by taking out education insurance policies, which will require you to pay premiums now in return for the insurance company paying for your children tuition fees when they get to higher institutions of learning. This is perhaps the surest way of ensuring that your children will continue to attend private schools regardless of your future financial position. This can also be achieved by directly investing in hedge funds and mutual funds, which can be channeled towards the children’s education in future.

  1. The couple are thinking about borrowing some money to buy an investment property in 2017. Do you believe this is a good strategy for the couple? Discuss the appropriateness of the strategy for the couple including the benefits and disadvantages of negative gearing and investing into property.

Buying an Investment Property

As illustrated in Appendix 1, the family will have only five more years left on the mortgage and one year on Jerry’s car loan so buying in investment property is not a bad idea. The real estate industry in Australia is characterized by increasingly high prices, which are on the verge of becoming unaffordable. This fact was unearthed by the striking revelation that Australia has a median multiple of 5.6, implying that the prices are in fact unaffordable. Some economists have however pointed out that this methodology is misleading citing the law of demand which stipulates that high prices result in a decline in demand, which in turn forces market prices to fall. According to these economists, the fact that market prices are increasing is an indicator that there is a high demand for the latter, hence disqualifying the assertion that market prices are unaffordable. Notwithstanding, before purchasing the investment property, you should carry out extensive research to determine the best location to purchase a house in Australia. Information on historical housing prices can provide valuable insights on the future trends in housing prices in different cities in the country. You should also note that while the investment property will boost future cash flows indefinitely, thereby enhancing the family financial security after retirement, borrowing more money to buy the property will increase your debt ratio. A high debt ratio will have a negative impact on your credit rating and significantly lower your cash flows between now and retirement.

Based on using the funds from the balance of the term deposit and requiring a 20% deposit to be able to purchase an investment property, what price range is the couple reasonably able to afford and accordingly how much will they be required to borrow from a bank? Will the couple be able to afford to pay the loan repayments? Discuss.

From the computation below, it is evident that you can afford to purchase a property worth $990,000.00 using the loan and Term deposit alone, a property worth $ 1,048,432.50 using the loan and term deposit plus your savings and a property worth $ 1,087,679.69 using the loan, term deposit, savings and Commonwealth Bank shares. This implies that you can afford a house ranging between $ 1,048,432.50 and $ 1,087,679.69.Unfortunately you will not be in a position to repay the loan. If you were to take a total loan of 990,000.00 for instance, you will be required to pay at least $ 108,000 per annum as illustrated in appendix 1, which is virtually impossible. You should however consider buying a cheaper investment property

$ Cumulative Total
Term Deposit 165,000.00
Possible Loan 825,000.00      990,000.00
Other Current Assets:
     Savings    39,247.19 1,048,432.50
     Commonwealth Bank Shares    58,432.50 1,087,679.69

Key Figures

Annual loan payments      108,613.44
Monthly payments              9,051.12
Interest in first calendar year          33,058.48
Interest over term of loan        421,974.72
Sum of all payments     1,411,974.72


Angell, R.J. & Mautz Jr., R.D., 2007. Financing Growth in Small Companies. Commercial Lending Review, January-February. pp.27-34. Financial Planning

Basel Committee on Banking Supervision, 2011. The Joint Forum: Report on asset securitization incentives. Basel: Bank for International Settlements Bank for International Settlements. Financial Planning

Business Link, 2010. No-Nonsense Guide to Finance for High Growth and Innovative Businesses. [Online] Available at: [Accessed 31 July 2013].

Duca, F., 2010. What Determines the Capital Structure of Listed Firms in Romania? CES Working Papers, pp.523-32. Financial Planning

Great Britain Department for Business, Innovation & Skills, 2010. Financing a private sector recovery. 1st ed. London: Stationery Office.

Jiangli, W. & Pritsker, M., 2008. The Impacts of Securitization on US Bank Holding Companies. [Online] Available at: [Accessed 31 July 2013].

Lee, H.J., 2003. Essays on Asset Securitization, Bank Production Costs, and the Credit Card Market. Dissertation. Ann Arbor: ProQuest Information and Learning Company University of California, Berkeley. Financial Planning

Mahmud, M., Herani, G.M., Rajar, A.W. & Farooq, a.W., 2009. Economic Factors Influencing Corporate Capital Structure in Three Asian Countries: Evidence from Japan, Malaysia, and Pakistan. Indusrial Journal of Management & Social Sciences, 3(1), pp.9-17. Financial Planning

Mullen, M., 2012. Best Practice Guideline: SME Finance. [Online] Available at: [Accessed 31 July 2013].

Sabry, F. & Okongwu, C., 2009. Study of the Impact of Securitization on Consumers, Investors, Financial Institutions and the Capital Markets. [Online] Available at: [Accessed 31 July 2013]. Financial Planning

Sherman, A.J., 2005. Raising capital : get the money you need to grow your business. 2nd ed. New York: AMACOM. Financial Planning

Walter, R., 2003. Financing your small business. 1st ed. Hauppauge: Barron’s.

Appendix 1: Amortization

Table 5: Mortgage Amortization

Payment Date Beginning Balance Scheduled Payment Principal Interest Ending Balance
2015 250,000 (25,400) 224,600 (13,027) 211,573
2016 211,573 (25,400) 186,173 (10,798) 175,375
2017 175,375 (25,400) 149,975 (8,699) 141,277
2018 141,277 (25,400) 115,877 (6,721) 109,156
2019 109,156 (25,400) 83,756 (4,858) 78,898
2020 78,898 (25,400) 53,498 (3,103) 50,395
2021 50,395 (25,400) 24,995 (1,450) 23,545
2021 23,545 (23,545) 0 0 0

Table 6: Car Loan Amortization

Car Loan
Payment Date Beginning Balance Scheduled Payment Principal Interest Ending Balance
2015 16,000 (4,100) 11,900 (1,012) 10,889
2016 10,889 (4,100) 6,789 (577) 6,211
2017 6,211 (4,100) 2,111 (179) 1,932
2018 1,932 (1,932) 0 0 0

Table 7: Property Loan Amortization

Year Beginning Balance Payment Principal Interest Cumulative Principal Cumulative Interest Ending Balance
2,018 959,701 108,613 54,381 54,232 84,681 87,291 905,319
2,019 905,319 108,613 57,621 50,993 142,301 138,283 847,699
2,020 847,699 108,613 61,053 47,560 203,354 185,844 786,646
2,021 786,646 108,613 64,690 43,924 268,044 229,768 721,956
2,022 721,956 108,613 68,543 40,070 336,587 269,838 653,413
2,023 653,413 108,613 72,626 35,987 409,213 305,825 580,787
2,024 580,787 108,613 76,952 31,661 486,165 337,487 503,835
2,025 503,835 108,613 81,536 27,078 567,701 364,564 422,299
2,026 422,299 108,613 86,393 22,221 654,094 386,785 335,906
2,027 335,906 108,613 91,539 17,075 745,633 403,860 244,367
2,028 244,367 108,613 96,992 11,622 842,624 415,481 147,376
2,029 147,376 108,613 102,769 5,844 945,393 421,326 44,607
2,030 44,607 45,256 44,607 649 990,000 421,975              –

Financial Planning

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