AYB 250 Personal Financial Planning

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Queensland University of Technology *

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B250

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Jun 2, 2024

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AYB 250 Personal Financial Planning Word Count 1476. Max Williams N10772065 Page | 1

1.0 Introduction .......................................................................................................................... 3 2.0 Financial Position Assessment ............................................................................................. 3 3.0 Advisory Offer ....................................................................................................................... 4 4.0 Recommendations ............................................................................................................... 4 5.0 Conclusion ............................................................................................................................ 5 6.0 Appendix .............................................................................................................................. 5 6.1 Cash Flow Statement for February 2023 .......................................................................... 5 6.2 Balance Sheet as at 28 February 2023 ............................................................................. 5 6.3 Financial Ratios ................................................................................................................. 6 6.3.1 Net Worth Ratio ......................................................................................................... 6 6.3.2 Liquidity Ratio ............................................................................................................ 6 6.3.3 Savings Ratio .............................................................................................................. 7 6.3.4 Monthly Debt Service Ratio ....................................................................................... 7 6.4 Advantages and Disadvantages ........................................................................................ 7 7.0 Reference List ....................................................................................................................... 8 Page | 2

1.0 Introduction This report will analyse the financial position of Jo and Tim, with reference to the financial statements provided. This report will include certain financial ratios to assist in the financial planning process. These ratios will highlight the overall state of Jo and Tim’s finances and aid in providing recommendations tailored to the client’s financial goals. Additionally, these recommendations will focus on wealth creation and the use of their superannuation. 2.0 Financial Position Assessment To understand Jo and Tim’s financial position several financial ratios have been calculated. Including the net worth ratio, liquidity ratio, savings ratio, and the monthly debt service ratio, as seen in appendix 6.3. Firstly, with regards to saving $200,000 to purchase a house it has been assumed that the couple’s current savings of $50,000 will be put towards this amount, thus requiring an additional $150,000 in savings to achieve this objective. Jo and Tim managed to save at total of $500 this month, as seen in appendix 6.1 as total inflows $15,700 less total outflows of $15,200. If we assume that the Barneses continue to save $500 a month it will take them 25 years, and to save the stated amount the couple will need to save $2,500 a month for the next 5 years. However, if we assume that Jo’s income doubles and their expenses remain the same, they will save $9,350 per month. Additionally, the Barnses savings ratio resulted in a concerning 3.19% considering that the Australian Bureau Statistics 2023 stated that average Australian household savings ratio is 19.8%. Secondly, with regards to purchasing a holiday unit in 15 years the net worth ratio which is net worth (total assets less total liabilities) divided by total assets. Considering that Jo and Tim enjoy an extravagant lifestyle that managed to produce an impressive net worth ratio of 84.48%. Meaning that Jo and Tim have the capability to take on additional loans and if they continue to have a net worth ratio like this it will be advantageous for them in future (O’Toole & Slaymaker, 2021). With regards to Tim becoming a stay at home parent the monthly debt service ratio shows the families monthly debt commitments in relation to their monthly income. This ratio resulted in 31.85% and many lenders have stated that a monthly debt service ratio below 36% is ideal (Folger, 2023). However, if we assume that Tim’s income is eliminated in becoming a stay at home parent this ratio would then become 56.18%. If we look at a situation where the Barneses are required to pay off their short-term liabilities using only their liquid assets the liquidity ratio displays this (Fernando, 2023). Their result for this ratio is 81.97%, meaning that their liquid assets will only pay off 81.97% of their short-term liabilities. Page | 3

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3.0 Advisory Offer Dear Jo and Tim, firstly I would like to show my advisory certificate and profile so you can peruse my qualifications and experience. Additionally, I would also like to share with you a Financial Service Guide, so you are aware of the undertakings involved in taking on financial advice. Also, I can point you in the direction of the Financial Framework Team and you can get a better idea of the service and team. I understand you wish to save $200,00 for a home deposit in the next 5 years and wish to purchase a holiday unit in the next 15 years. This is an area where I think we can help provide some guidance, as we can refocus your attention and offer a succinct financial plan that the both of you can follow. This information will be attached in the Statement of Advice (SOA). The SOA will highlight your situation and goals, along with the relevant advice to act on these issues. If you are both pleased, we can sign off and proceed. 4.0 Recommendations I understand that you consider yourself to have a high-risk tolerance, despite having all your savings in a bank account. I also understand that you have discussed buying an investment property but feel that you should wait until you are more established. Considering this I will provide a comparison between growth investments like managed funds and defensive investments like government bonds (Money Smart, 2023). To understand which option is favourable for you with reference to your risk tolerance please see appendix 6.4. This provides a clear breakdown of variables you should consider when evaluating the two options. As discussed in appendix 6.4 government bonds offer lower risk however, they also offer lower return then managed funds. Additionally, interest rates directly affect the yield on bonds, thus resulting in the 5-year Australian Government bond currently yielding 3.40% (Bloomberg, 2023). Considering the RBA recently increased the cash rate to 3.85%, which means that interest rates in turn rise. Further the RBA’s board concluded at the completion of their last meeting: “Further increases in interest rates may still be required.” (Janda & Lannin, 2023) And as stated by Money Smart bonds yields often have an inverse relationship with interest rates, meaning that the yields of bonds are expected to further decrease. There is a very small chance that government bonds offer a negative return, these are called negative yielding bonds. And they are bonds that cause bondholders to lose money when they mature. This happens when holders of such bonds will end up with less money than what they used to purchase them. On the other hand, for the purpose of this report we will be focusing on managed funds specifically indexed funds. As seen in appendix 6.4 managed funds offer higher risk however, they also often offer higher rewards. If we focus on the managed fund, Beta Shares A200 which is aims to track the performance of the ASX 200 index (before fees and expenses) Page | 4

comprising 200 of the largest companies by market capitalisation listed on the ASX. This fund returned (after fees) 14.31% in the last 3 years in comparison to the ASX 200 index returning 14.41% in the last 3 years. However, if we focus on the last year the fund returned 2.67% compared to the index returning 2.79%. And to further display the risk involved with managed funds the fund returned -0.86% in the last 12 months compared to the indexes -0.83% (Beta Shares, 2023). Based on this information I recommend that you allocate a portion of your savings toward Furthermore, looking at your superannuation, I am aware that both of you pay little attention to your superannuation. So, firstly I suggest that Tim consolidate your 3 funds into 1, because this will reduce your broker fees and eliminate the double up of general administration fees. Additionally, this will isolate your super’s investment into one. In order to grow your super and reduce your taxable income you both should consider salary sacrificing. It should also be noted that you can establish your own Self Managed Super Fund (SMSF) as this will give you the ability to invest in permitted assets whilst reducing fees and service costs over the long run, there are startup costs involved in establishing a SMSF (ATO, 2021). Moreover, considering you wish to have a child in the near future it will be assumed that both Tim’s income will be eliminated, and expenses will increase. Thus making it very important for you to evaluate your expenditure specifically your ‘extravagant’ expenses. Additionally, I recommend that you both consider the following life insurances: life cover, TPD insurance and income protection. 5.0 Conclusion Based on the information discussed in this report it is recommended that the Barnses invest $30,000 into a low cost index fund like Beta Shares A200 for the next 3 years. This will allow them to enter them to gain exposure to the market and thus potentially yield a return, and thus put towards their objective of purchasing a house. $30,000 allows Jo and Tim a $20,000 buffer that could be towards safe investments like a savings account, for example the ANZ Save Accounts base rate is 4.25%. Additionally, I recommend that you implement budgets in order to restrict your spending and improve your savings ratio of 3.19% to at least 15% considering the nation average is 20%. Finally, I recommend that you consider my recommendations in regards to super as this is a key step in ensuring yourself for a prosperous retirement. Page | 5

6.0 Appendix 6.1 Cash Flow Statement for February 2023 Page | 6

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6.2 Balance Sheet as at 28 February 2023 6.3 Financial Ratios 6.3.1 Net Worth Ratio = Net worth x 100 Total assets = $332,000 x 100 $393,000 = 84.48 % Page | 7

6.3.2 Liquidity Ratio = Liquid assets x 100 Current debt = $50,000 x 100 ($48,000 + $8,000 + $5,000) = 81.97 % 6.3.3 Savings Ratio = Savings x 100 Net Income = $500 x 100 $15,700 = 3.19 % 6.3.4 Monthly Debt Service Ratio = Monthly debt commitments x 100 Monthly Income = $5,000 x 100 $15,700 = 31.85 % Page | 8

6.4 Advantages and Disadvantages Managed Funds Government Bonds Advantages Liquidity: Considered to have high liquidity, therefore you can turn these assets into cash easily. Options: - Large number of funds. Returns: - Considered to offer higher returns then government bonds. Partial income: - Passive income can be obtained through dividends. Risk: - Considered to obtain less risk in comparison to managed funds. Liquidity: - Considered to have high liquidity, therefore you can turn these assets into cash easily. Partial income: - Pays steady interest income. Disadvantages Fees: - There are broker fees, general administrative fees and sometimes performance fees associated with managed funds. Risk: - Considered to obtain more risk in comparison to government bonds. Capital Gains Tax: - If you sell the asset, you will be subject to Capital Gains Tax. Interest rates: - A change in interest rates could reduce the market value. - If interest rates rise, bonds offering lower coupon payment rates become less attractive investments. Credit risk: - The risk that the insurer could default or go insolvent. Returns: - Considered to offer lower rates of returns then managed funds. Capital Gains Tax: If you sell the asset, you will be subject to Capital Gains Tax. Page | 9

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7.0 Reference List Australian National Accounts: National Income, expenditure and product (2023) Australian Bureau of Statistics . Available at: https://www.abs.gov.au/statistics/economy/national- accounts/australian-national-accounts-national-income-expenditure-and-product/jun-2020 (Accessed: 23 May 2023). Australian rates & bonds (2023) Bloomberg.com . Available at: https://www.bloomberg.com/markets/rates-bonds/government-bonds/australia (Accessed: 13 May 2023). Australian Taxation Office (2021) Self-managed super funds , Australian Taxation Office . Available at: https://www.ato.gov.au/Super/Self-managed-super-funds/ (Accessed: 17 May 2023). Bonds (2022) Moneysmart.gov.au . Available at: https://moneysmart.gov.au/investments- paying-interest/bonds?gclid=CjwKCAjwpayjBhAnEiwA-7ena2jRGQi4w-Ov- YU9fnNmVo0JcWMUOjKfwBTOuTs2m8m9GwDcriyNuhoCHpgQAvD_BwE&gclsrc=aw.ds (Accessed: 23 May 2023). Choose your investments (2023) Moneysmart.gov.au . Available at: https://moneysmart.gov.au/how-to-invest/choose-your-investments (Accessed: 16 May 2023). Fernando, J. (2023) Current ratio explained with formula and examples , Investopedia . Available at: https://www.investopedia.com/terms/c/currentratio.asp#:~:text=What %20Does%20a%20Current%20Ratio,every%20%241%20of%20current%20liabilities. (Accessed: 12 May 2023). Folger, J. (2023) What is a good debt-to-income (DTI) ratio? , Investopedia . Available at: https://www.investopedia.com/ask/answers/081214/whats-considered-be-good- debttoincome-dti-ratio.asp#:~:text=DTI%20is%20one%20factor%20that,how%20you%20can %20improve%20yours. (Accessed: 18 May 2023). Janda, M. and Lannin, S. (2023) House price rebound appears to have clinched RBA rate rise in May, minutes reveal , ABC News . Available at: Page | 10

https://www.abc.net.au/news/2023-05-16/consumer-confidence-down-amid-generational- inflation-battle/102350772 (Accessed: 20 May 2023). O'Toole, C., & Slaymaker, R. (2021). Repayment capacity, debt service ratios and mortgage default: An exploration in crisis and non-crisis periods. Journal of Banking & Finance (Accessed: 10 May 2023). Risks and benefits (2023) Australian Securities Exchange . Available at: https://www2.asx.com.au/investors/learn-about-our-investment-solutions/bonds/risks-and- benefits (Accessed: 10 May 2023). Page | 11

AYB 250 Personal Financial Planning

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