Every detail is attached this a bit technical project that needs advanced knowledge in financial planning and use of excel analytic functionalities ensure to address every section properly
My professor is a hard grader so I will not accept just cooed figure please
SMITH FAMILY FINANCIAL PLAN (A)
Brian Lane and Nathalie Johnstone wrote this case solely to provide material for class discussion. The authors do not intend to
illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other
identifying information to protect confidentiality.
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permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com.
Copyright © 2013, Richard Ivey School of Business Foundation
Version: 2013-05-24
On December 21, 2012, Matt Pearson, a recently hired financial planner with J & L Financial Advisors,
was sitting in on an initial meeting with Lane Young, one of J & L’s founding partners, and Joel and
Amber Smith. The group was meeting in a sixteenth-floor boardroom in Saskatoon, Saskatchewan, that
had a breathtaking view of the city’s Meewasin Park, adjacent to the South Saskatchewan River. The
purpose of the meeting was to discuss the Smith family’s financial needs and develop a plan for their
financial future.
The Smith family was in a cash crunch. Even with a combined gross family income of $80,000 per year,
their monthly cash outflows were greater than their inflows. Joel and Amber were aware that they had
cash flow problems, but they did not understand where their money went. As a result of struggling with
current cash flows, they were having trouble setting and meeting future goals. They did not know if their
financial goals were realistic.
MEETING WITH THE SMITH FAMILY
(Lane made the initial introductions and opened the meeting.)
Lane: Welcome to our office, Joel and Amber. It is a pleasure to meet with you. Matt and I will be
working together on your account. I understand you are looking for financial advice that will help you to
meet your current and future goals. Joel, you look like you’re ready to dive right in.
Joel: I definitely am. Amber and I have been discussing our financial situation and we thought it was time
to seek professional advice in order to gain an understanding of our finances. We have been married for
11 years, have both lived in Saskatoon, Saskatchewan, all of our lives, are both 32 years old, and believe
we need to make some changes to meet our current and future goals. To be honest, neither of us really
understands where all of our money goes. We would like to start saving for retirement and our children’s
college education, but never seem to have enough extra money to put aside. For the past few months, we
have only been able to make the minimum payments on our credit card. We have talked about putting
together a monthly budget before, but it was not until we took a good look at our credit card statement
recently that we realized that we need a budget sooner than later, if you know what I mean. Our credit
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Amber: I do not understand why my salary of $65,000 is not enough to go around. It feels like we are
always making trips to the ATM (automated teller machine) for cash. I agree with Joel that we need to get
a better handle on where our money goes. When I phoned for the appointment, I was asked to provide
some information related to our personal spending, so we tracked our spending for a month. I e-mailed
you a list of all our monthly expenses (see Exhibit 1) and some other personal information.
Lane: The information you e-mailed to us is a perfect starting point, and we can use this to provide you
with some guidance on how to better manage your current resources. We will begin by preparing a
monthly plan. I understand you have three children. How old are they?
Joel: Luke is nine, Lori is seven and Landon is four. I had been a stay-at-home dad since our oldest son
was born. However, with all three kids in school I went back to work on January 2, 2012, as a part-time
substitute teacher. The increase in income has been nice, but we want to make sure we use it wisely. Our
family income increased by $15,000 and the school board has indicated that my current salary should
increase each year in line with inflation.
Lane: That sounds like the perfect situation; you can work part-time to increase the family income, but
still be home for the children after school.
Joel: It is wonderful that I am able to do this. We thought that since we are going to increase our overall
annual income it is definitely time to get a better understanding of our financial situation and set realistic
financial goals. We would like to be in a financial position to help our children obtain university degrees.
We would like to start putting aside $350 a month for their education, but we do not know if that goal is
achievable. We intend to invest this money and hope to average a return of about 5.5 per cent per year, up
to the time that our oldest child starts university. Amber thinks we need to save up at least $100,000 to
pay for all three children’s education, which seems unreasonably high to me. We have not considered
RESPs (Registered Education Savings Plans), as we do not really know anything about them. I also
wonder how much money we will have in place when Luke starts university and how much we might
have if the savings rate were higher, say at 7 or 8 per cent. We would really appreciate your advice on
whether an RESP would be beneficial in our situation.
Amber: I am hoping to increase my hours at work to earn extra income. Joel and I are excited at the idea
of having a little extra money to toss around, hopefully beyond what we need to meet our goals. In fact,
we have already made plans for a vacation, a new home theatre system, some new custom furniture, and a
different car for Joel. Also, with regard to extra cash, we received a letter in the mail inviting us to apply
for a new credit card with a $50,000 limit. The interest rate is significantly lower (1.2 per cent for the first
six months on transfers) than our current credit card. Having this new credit would make it easier to plan
for vacations and other purchases. I think it will also reduce our interest paid on our current credit card,
which will help us catch up. Joel is a little more hesitant about taking on additional credit, as he is
concerned about additional payments and thinks that the introductory interest rate might not be something
we should rely on.
Joel: Amber mentioned my car, which is quickly becoming a relic. Last month, I was stranded on the side
of the freeway for three hours while I waited for a tow truck. This was the second time, so we would like
to replace the car soon. I will need a reliable vehicle now that I have returned to work. We do not know
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card debt is climbing and becoming unmanageable. Last year we paid close to $400 in interest on bank
overdrafts and we would like to make sure that this does not happen again. We have also spent more on
programs for the kids recently and would like to better understand what this does to our cash flows.
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Amber: Our plan was to put aside $400 a month to replace the car soon, but we have not had much luck.
We looked into repairing the vehicle, but it does not seem practical, as it would likely cost almost as
much as a good-quality replacement vehicle. I have not included a monthly payment for a new vehicle in
our monthly estimated cost. My vehicle is reliable and has a market value of about $18,000, but we still
owe $13,500 on it.
Lane: What about your house? How much do you owe on the mortgage, what are the monthly mortgage
payments, and do you have an idea of its current value?
Joel: A comparable house on our block sold for $300,000 last month. We had the real-estate agent walk
through our house and he felt that it would sell for a similar price. The current balance on our mortgage is
just under $131,000. We purchased the house five years ago for $200,000 by borrowing $140,000 and
using the $60,000 that Joel received from his late grandfather’s estate as a down payment. Our current
mortgage rate is 6.5 per cent semi-annually, which by coincidence happens to be the same rate we got
when we first borrowed the money. Our mortgage payment is listed with our monthly expenses.
Lane: Perfect. Well, we certainly have enough information to get started on a financial plan to help you
achieve your goals. Is there any other information you have not given to me that you feel should be
considered in the financial plan?
Amber: We would like some guidance on our retirement goals. We keep talking about saving for our
retirement, but have not done anything at this point. Neither of us has a company pension plan, nor have
we placed any amount in our RRSPs (Registered Retirement Savings Plans). To be honest, we do not
know how much to save each month, but other expenses seem to come first. We have discussed trying to
save $250 per month for retirement, but do not really know if that would be enough or if we can afford it.
Joel: Amber and I were also wondering if you could provide us with some guidance on preparing our tax
returns. We have always prepared our own tax returns, but wonder if we are missing something. Would
you be able to help us with that?
Lane: We will make sure to give some guidance on your tax returns and your retirement. We will work on
putting a plan together for you. Once we have the plan drafted, we should meet to review the plan, make
any required changes, and discuss the implementation of the plan.
(Matt escorts Amber and Joel out of the office and returns to Lane’s office for further instructions.)
Lane: Matt, I have prepared some guidance to help you get started in preparing a financial plan (see
Exhibit 2). You will find that working through each step in sequential order will help you to develop a
reasonable plan of action for the Smiths.
Special thank you to Edwards School of Business student David Styles for his thoughtful feedback on the development
of this case.
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how much we can afford to spend on a new vehicle and how big our down payment should be. I think we
could manage a down payment of $2,500, but we would prefer to use less if possible.
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Electricity, water, sanitary services, and garbage pickup
Natural gas
Mortgage payment
Home insurance
Home security
Groceries
Telephone, long distance calls and home Internet
Cell phones/Smartphones
Car loan payments
Car gas, maintenance, and insurance
Clothing
School programs and dues
Children’s programs
Restaurants
Approximate minimum credit card payment
Other
Church donations
$225
$125
$877
$150
$55
$750
$90
$140
$520
$430
$200
$150
$850
$450
$174
$50
$100
Notes:
Expenses for the children’s programs include (per month):
Karate
$120
Gymnastics
$160
Piano lessons
$225
Guitar lessons
$125
Hockey
$220
RRSP contribution room carry-forward for 2012:
Amber
$95,300
Joel
$25,200
As long as Landon remains under the age of six, the family will qualify for Universal Child Care Benefit
payments of $100 per month, which will increase total income.
Family assets and liabilities
Cash
Chequing account
Current savings
Home (market value)
Mortgage
Home furnishings
Joel’s car
Amber’s car
Car loan
Credit card balance
$850
1,300
2,200
300,000
130,924
5,500
1,500
18,000
13,500
5,800
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EXHIBIT 1: SMITH FAMILY FINANCIAL INFORMATION
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Section 1: General discussion
How do you react to the Smith family’s current situation? What do you think of their financial goals? Are
there other goals that would be more appropriate? Will you be able to help them?
Discuss:
i.
The composition of the Smith family balance sheet.
ii.
The family financial goals.
iii.
How they can achieve their goals, implement a financial plan, and evaluate their plan.
Section 2: Planning with personal financial statements
To start, tell the Smiths that they need to put together a monthly budget that lists their income and
expenses. Between the two of them, the family’s after-tax monthly income is $4,800, which is
approximately 72% of their combined gross pay. As the kids have been getting older, a number of
lessons/programs have been driving expenses.
Use the information in Exhibit 1 to complete a personal cash flow statement for the Smith family. Based
on this statement, will the family be able to meet its goals?
Use the information provided to prepare a family balance sheet. What is the family’s total net worth?
Using the case data supplied so far, will the family be successful in achieving its lifestyle and savings
goals? Why or why not?
Section 3: Time value of money and its impact on family goals
In your discussions, Amber and Joel determined some initial savings goals, which included their plan to
save towards their retirement and children’s university education. They intend to put this money in an
account that will earn about 5.5% (with monthly compounding) every year, up to the time that their oldest
child starts university. At nine years of age, their oldest child has nine years to go until university begins.
The Smiths mentioned that they do not know anything about RESPs, so include a discussion on these to
help them understand how RESPs work, along with the benefits of investing in them. Amber believes that
it is important to have $100,000 saved before Luke starts university — will they be able to meet this goal?
Is this goal realistic?
Section 4: Using tax concepts for planning
The Smiths want to assess their tax situation for 2012. Using the information provided in the case,
calculate the total tax that the family will pay, assuming that Amber and Joel will use any applicable
deductions to minimize taxes owing. The purpose of this section is to give the Smiths a preliminary idea
of the taxes they will owe for the 2012 taxation year, due April of 2013, and to get an idea of whether they
will be receiving a refund next year.
The Smiths have not made any RRSP contributions and neither spouse has a pension plan. Be sure to
include Canada Pension Plan (CPP) and Employment Insurance (EI) contributions in your calculations.
The following links will provide useful rate information for EI and CPP:
– EI – www.taxtips.ca/cppandei/eirates.htm
– CPP – www.taxtips.ca/cppandei/cpprates.htm
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EXHIBIT 2: GUIDANCE FOR THE SMITH FAMILY FINANCIAL PLAN
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Section 5: Banking services and money management
The Smiths have been looking at guaranteed savings options with their bank, in the form of bank term
deposits, as they decide how to best use the money that they are planning to save. They would like to
invest their savings and yet have money available when it is needed. Assume that bank term deposits
have a minimum investment of $50. This presents no problem for them but the minimum lock-up period is
one year, with some flexibility thereafter.
Available term deposits
Term
Annual Rate of Return (%)
1 year
3.8
2 year
4.0
5 year
4.5
For this section, consider the following:
i.
What investment maturities should the Smiths consider in saving towards a different car?
ii.
What investment maturities should the Smiths consider in their RESP?
iii.
Are bank term deposits the right investment for all of the family’s investment needs?
iv.
If most Canadian economists believe that inflation will be significant over the next two to five
years, how might this affect the family’s savings plans?
v.
Based on the personal financial statements that you have constructed so far, does the family
have enough liquidity to do all of the things it plans to do? Will any adjustments be required?
Section 6: Assessing, managing, and securing credit
The Smiths have a credit card balance that is larger than what they are comfortable with, as they are
getting close to their credit card’s limit. For the last six months, they have made only the monthly
minimum payment, to keep the account current. This payment is barely making a dent in the balance.
Joel is concerned that if they continue to make only the minimum required payments they will never pay
down this debt. Their current savings earn 4.5% interest with monthly compounding and their credit cards
have rates that average 21.9% interest with monthly compounding. Amber and Joel would like you to
show them the effect that the difference in these two rates is having on their savings goals and whether or
not this situation is something they should worry about.
They were excited when they recently received a letter that invited them to apply for a new credit card
with a $50,000 limit. Although they do not recognize the company offering the new card, several of their
friends and neighbours have received the same letter. Amber mentioned that she is excited at the
prospect of a new card, as it will make it easier to plan vacations and other purchases. It will make their
needs and wants “so much more affordable.” The thought of another credit card concerns Joel slightly
and he would like you to comment on this.
Section 7: Personal loans
Amber and Joel would like to spend no more than $2,500 on a down payment for Joel’s new (or newer)
car. A friend recently offered them $1,200 for Joel’s old car and he is willing to pay cash and take delivery
as soon as the Smiths are ready to sell. The car that Joel has his eye on is a used model that is currently
at a nearby dealership, priced at $21,000 plus Provincial Sales Tax (PST) and Goods and Services Tax
(GST), both at 5%. They would like to put their $2,500 of savings and the $1,200 proceeds from the old
car against the newer model as a down payment. They will finance the rest of the purchase. The most
favourable borrowing rates they can find are from the dealership, with the following terms (compounded
semi-annually): 2.9% for three years, 3.9% for four years and 4.5% for five years. They would like to pay
for the car as quickly as possible, but do not want to make a monthly payment that is any larger than
$550 per month.
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EXHIBIT 2 (CONTINUED)
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