Independent Financial Plan of Jorge and Carmella's Case Study Answer

Net Worth Statement

Assets

• FMV of the house today is $1,200,000.
• The current mortgage on the house is $497,000 (first mortgage of $353,527, 5 years @ 2.85% p.a. & second variable rate mortgage of $143,473 @ 2.3% p.a.)
• There is requirement to make biweekly payments on both of their current mortgages are $2,500 ($1,650 + 850 respectively).
• Each mortgage payment represents a total pay down of $2,000 of principal They also have $200,000 from the renovation on a secured line of credit.
• They have $50,000 more credit available on this LOC.
• They own outright a 5 year old SUV
• The personal assets have a FMV of $16,000.

Investment Assets:

1. Jorge

• RRSP with a FMV of $365,000 as of December 31, 2022.
• Group RRSP from his previous employer valued at $17,275.
• He has invested $1500 in a TFSA.
• His DCPP has balance of $4,500.
• He has a non-registered investment account that has a FMV of $5,500
• His shares held have an ACB of $2,200

2. Carmella

• RRSP with a FMV of $122,201.
• She also has a locked in RRSP and a spousal RRSP that totals $45,800.

3. Both

• The family RESP for the girls’ education of $75,625 on December 31, 2022.
• They currently contribute $200 per month per child
• They maintain a balance of approx. $2,000 in the account.

Liabilities:

• Unsecured LOC at prime +2% with a $10,000 balance.
• Payment of $1000 per month ( $875 of principal and $125 of interest)

Cash Flow Statement

Working Notes:

Details of expenses:

Housing: 

• Property taxes are $5,850 per year.
• The utilities for the house are $6,707 per year.
• Total insurance are $620 per month.
• pool chemicals and maintenance of $1,000 per year.

Automobiles: 

• The lease on the 2^nd car is $600 per month.
• The total cost of gas per year is $7,400.
• Cost of parking per year is $1,400.
• Car maintenance of $100 per month.

Household: 

• Groceries are $9,500 per year
• cleaning lady is $2,800 per year
• Fast food and restaurants are about $4,500 per year.
• Internet/telephone and cable is $3,600 per year.
• Clothes are $6,000
• charitable donations of $1,000.
• Personal grooming is about $1,400 per year.
• Other miscellaneous expenses are $2,400 per year.
• Their family dog costs about $1,800 per year.

Family: 

• Trip costs of about $6,000.
• The swimming fees are usually about $12,000 per year for both girls.
• Annual fees and meals and drinks of golf club $7,000 per year

Financial: 

• Currently, they pay down debt (unsecured LOC) with $1,000 per month, which includes about $125 of interest, and give $400 per month to an RESP.

Other:

• $4,200 on Christmas/holiday gifts
• Jorge’s work pays for his membership fees of $1000 per year
• Carmella pays $1,400 out of her own pocket.
• Soccer fees are ($300 x2) = 600 per year

Details of Income:

Jorge:

• annual salary of $160,000
• lump sum car allowance of $750 per month
• bonus of $10, 000, resulting in a net payment of $5,775 after taxes (dec)

Carmella

• Annual salary $110,000 per year.

Financial Ratios

The most important financial ratio that is considered to rate a person is solvency ratio and liquidity ratio. Solvency shows that capability of the person to meet the liabilities using the proceeds from internal sources or retained profits. There is no need for the person to raise finance from the banks or financial institutions as the fundings can be easily done through the company’s profit only. The solvency can be tested through several ratios like debt-to-equity ratio, debt to capital ratio, interest coverage ratio etc.

Debt to equity ratio tells the portion of debt component as compared to equity component of the entity. If the debt-to-equity ratio is comparatively lower, then it suggests that the financial riskiness is very low and thus the entity can make the payoff very easily through the internal sources without the need to resort to banks or financial institutions for financing the fixed capital requirements. Thus, it is always better to have a lower debt-to-equity ratio as it creates less pressure on the entity to meet the expenses of financial obligations on a periodic basis.

Debt to capital ratio tells the portion of debt component in the overall capital structure of the entity. If the debt-to-equity ratio is comparatively lower, then it suggests that the financial riskiness is very low and thus the entity can make the payoff very easily through the internal sources without the need to resort to banks or financial institutions for financing the fixed capital requirements. Thus, it is always better to have a lower debt-to-equity ratio as it creates less pressure on the entity to meet the expenses of financial obligations on a periodic basis.

Interest coverage ratio tells the number of times the company can payoff the finance costs using the proceeds of operating profit. If the interest coverage ratio is comparatively higher, then it suggests that the financial riskiness is very low and thus the entity can make the payoff very easily through the internal sources without the need to resort to banks or financial institutions for financing the fixed capital requirements. Thus, it is always better to have a higher interest coverage ratio as it creates less pressure on the entity to meet the expenses of financial obligations on a periodic basis.

Liquidity ratio tells how much a company is liquid to payoff the current liabilities or not. It comprises of three ratios i.e., current ratio, liquid ratio and cash ratio. Current ratio states whether the company is able to payoff the current liabilities using the proceeds of current assets. Liquid ratio states whether the company is able to pay off the current liabilities using the proceeds of liquid assets. Cash ratio states whether the company is able to pay off the current liabilities using the proceeds of cash & cash equivalents.

Some of the financial ratios are calculated below:

Mid Term & Long Term Goals

The following goals are noted from the case scenario of the married couples:

• Jorge has taken an individual life insurance policy of $500,000 along with his employer has also given him a policy of $500,000. He further took a life insurance policy that provides personal accident and dismemberment coverage of $100,000.
• Similarly, Carmella has taken an individual life insurance policy of $500,000 along with his employer has also given him a policy of 1 times her salary from her employment at the hospital.
• The family has also taken a life insurance policy for the children that offers a coverage of $10,000 till they attain the age of 25 years.
• Both Jorge & Carmella holds group term life insurance from their professional educational bodies.
• Jorge is holding a personal long-term disability policy which will pay a monthly amount of $3,000 if there is some case of disability.

Retirement Components

• The couple has planned to reduce the retirement life costs by minimizing the expenses on swimming, education, debt portion or saving for retirement. They further planned to leave the grocery bill unchanged and cut down the clothes expense by 50%. At the time of retirement, they will require only one vehicle and consequently the expenses of car will reduce accordingly.
• Jorge has taken an individual life insurance policy of $500,000 along with his employer has also given him a policy of $500,000. He further took a life insurance policy that provides personal accident and dismemberment coverage of $100,000.
• Similarly, Carmella has taken an individual life insurance policy of $500,000 along with his employer has also given him a policy of 1 times her salary from her employment at the hospital.
• The family has also taken a life insurance policy for the children that offers a coverage of $10,000 till they attain the age of 25 years.
• Jorge is holding a personal long-term disability policy which will pay a monthly amount of $3,000 if there is some case of disability.

Education Components

• Tuition fee for completing Master of education of Carmella was approximately $40,000
• She also worked part-time during this time, which resulted in 50% decrease in her salary over the three years of school.
• As per their expectation, Meari will leave in 3 years and Madison will leave in 5 years. Thus, they need to save $5,000 per year, per child to accumulate the required amounts by the time their children go to university.

Investment Components

• The couple maintain the below investment for the retirement life and to fund the expenses on their children education:

Investment Assets:

Jorge

• RRSP with a FMV of $365,000 as of December 31, 2022.
• Group RRSP from his previous employer valued at $17,275.
• He has invested $1500 in a TFSA.
• His DCPP has balance of $4,500.
• He has a non-registered investment account that has a FMV of $5,500
• His shares held have an ACB of $2,200

Carmella

• RRSP with a FMV of $122,201.
• She also has a locked in RRSP and a spousal RRSP that totals $45,800.

Both

• The family RESP for the girls’ education of $75,625 on December 31, 2022.
• They currently contribute $200 per month per child
• They maintain a balance of approx. $2,000 in the account.

Post Suggestions

From the financial ratios & cashflow statement, it can be said that liquid ratio is good however solvency ratio is adverse. The current ratio is 1.80 times i.e., it indicates that the company can pay off the amount of current liabilities 1.80 times using the proceeds of current assets. Similarly, cash ratio of 0.20 time indicates that the company can pay off the amount of current liabilities 0.80 times using the proceeds of cash & cash equivalents.

However, the debt component of capital structure is about 60% of total net worth which emphasize that there is high financial riskiness on account of high financial obligations i.e., mortgage repayments & interest payments. Thus, the company is required to reduce the debt component from the capital structure to minimize the payoff of financial obligations. Currently, debt-to-equity ratio is comparatively higher which suggests that the financial riskiness is very high and thus the entity can make the payoff through the external sources by resorting to banks or financial institutions for financing the fixed capital requirements. Thus, it is always better to have a lower debt-to-equity ratio as it creates less pressure on the entity to meet the expenses of financial obligations on a periodic basis.

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