For the three couples mentioned above, as well as other families, making economic and financial strategies is critical for meeting future responsibilities. It will help individuals select and prioritize their short and long-term life goals. Following that, the procedure will guide them toward achieving their goals. For various reasons, all groups at various periods of the family life cycle should seek and use professional counselors.
The primary purpose of financial planning is income management. Both persons will be able to forecast the most important expenditure items in their lives (McMenamin, 2002, p. 112). For instance, the couples will be able to plan the sum they will spend on taxes, domestic and capital projects. Finally, they will be able to determine the balance that can be saved periodically. For Roberto and Lisa’s lives, they need to manage their incomes from the salaries they earn. Jeff and Juan also need to develop proper plans of using their wages and returns from their investments. On the other hand, Bill and Shirley require appropriate spending structures for their pension receipts.
A proper planning of finances allows the clients to manage their cash flows by monitoring the patterns of spending and other expenses (Hansen, Mowen, & Guan, 2007, p. 250). Developing estimates of federal taxes, prudent expenditures, and careful appropriations will enable one save more cash from careless use. A financial advisor will aid Roberto and Lisa to manage their overall flows from their salaries towards meeting the credit cards, car and personal loans without being stranded. For pre-retirees like Jeff and Juan, managing their cash flow will assist to prepare for retirement. On the other hand, Bill and Shirley are in the most critical stage for managing their monies and meet their lifestyle bills.
Having a proper cash flow management will identify loopholes that drain most of the family resources. It can lead to increasing the savings that can avail more money for investments that will improve capital projects and resources (Akdeniz, 2015, p. 15). An analysis of the expenditures will enable Roberto and Lisa to identify the spending points that are not priorities and consider reducing the item. In their early marriage, they need more cash to meet their immediate and future needs. On the other hand, Jeff and Juan are at their peak of accumulating wealth. Managing their spending will determine more unproductive investments that can be cut down to save or invest elsewhere.
Financial planning and budgeting are essential for attaining family income security. The couples can provide safety against unprecedented events through getting insurance coverage policies. Having all areas of expenditure and risks taken care of by insurers provides peace of mind to the members. Roberto and Lisa need to implement some investments that can assure their family a stable supply of finances. Jeff and Juan need to maintain their income flows and achieve their goals before retirement. On the other hand, Bill and Shirley require proper planning to ensure that the pension funds they have are available for the rest of their lives.
Budgeting is essential in determining the right type of investment that fits an individual’s circumstance. Planning entails analyzing the current economic situation, family objectives and the levels of risks that can be tolerated. Therefore, designing budgets allows one to choose the projects that fit the personal goals and needs. An analysis of the present and future cash needs will inform the couples of the investment option that can ensure their liquidity and solvency. Whereas Roberto and Lisa need to invest in long-term assets, Jeff and Juan can better place in mid-term opportunities. On the other hand, Bill and Shirley require short-term plans that can assure them ready cash within a short while.
Maintaining or improving the standards of living is at the core of financial planning. Making effective decisions in budgeting avails savings to the individual. It is essential at difficult times when some income can be lost. Implementing the insurance policies can enable the family to retain their livelihood in the event the breadwinner is unable to earn any more. All of the three couples require assets that will maintain their cash flows.
Financial plans and budgets instill an understanding of the resource flow regarding earnings and expenditures. It also educates one on setting goals, strategic choices and monitoring of decision outcomes. Every time one institutionalizes their plans, it gives them a chance of creating new approaches that allow them control over their economic status. The newly marrieds should utilize financial planning to redefine their targets and actions. Having no dependents gives them a good opportunity to review their family needs.
Every family is cushioned and served by assets in their daily lives. Most of the properties like houses, cars and other capital equipment come with costs. Acquiring the wealth requires clearing the liabilities in a way that maximizes the value of the current incomes. Financial planning and budgeting is one way of gaining knowledge on how to repay debts on assets in a way that sustains the person’s standards of living. Therefore, budgeting assists the couples to acquire and own the properties without feeling the burden. For the case of Roberto and Lisa, they require to purchase a house and go on a trip to Japan. On the other hand, Jeff and Juan also need to pay off a loan on housing. For the retirees like Bill and Shirley setting up assets like a sinking fund will meet the educational needs of their grandchildren.
Establishing proper plans is essential for a family to shield itself against unknown emergencies in the household. Some economic situations can throw one off-the-track in their financial needs. The couples should put in place investments that can meet the sudden life changes like sickness and accidents. More highly liquid and solvent assets are essential for giving the individuals peace and stability in difficult times. The early marrieds, Roberto and Lisa, should establish in place insurance plans to cater for eventualities. Medical covers, accidental and life policies are effective to assure income security in case one partner falls sick or dies. On the other hand, the other two couples should consider taking plans for healthcare.
The ongoing developments in the economy come with changes in the financial sector. Consequently, many new forms of investments come up with diverse benefits and risk profiles that one can choose to utilize. Therefore, utilization of planning and budgeting services from experts gives ongoing advice for customers to be updated on better opportunities. A personal advisor is well placed to assist in analyzing the situation of the client and designing customized plans. For instance, wealth accumulators like Roberto and Lisa should keep at par with the market advisors to ensure that they are aware of the most viable investment opportunities.
Risks of failing to plan
Having a personal budget is important in because it assists in matching the earnings and expenses. Life is filled with events and incidents that require liquid resources to clear bills whenever they arise. For instance, the couples need to establish plans to meet the daily needs of their families. On the other hand, failure to put up plans may land one in a financial burden.
When an individual fails to budget, their expenditures may exceed their incomes. Consequently, they may end up using the credit on basic groceries and clothing. It will arise if the personal needs are not harmonized with the revenues earned. A continued use of the credit cards except for emergencies leads to indebtedness.
The second risk to a person that does not plan their finances or budgets is the inability to track their expenditures. Creating a schedule of daily and monthly spending will assist one to determine areas that absorb most of the income. Otherwise, some patterns of use may rise and become unmanageable.
Thirdly, avoiding to the budget may make one miss out on securing some savings out of the regular revenues. It implies that one cannot attain resources to acquire essential assets. If the spending spree exceeds the current income, the next step is being vulnerable to suffering the loss of income instability due to sickness, death or joblessness.
The fourth pitfall of not planning is failing to monitor the pile up of liabilities. For instance, an individual without any saved funds is left to borrowing from one source to pay off another debt. Lack of the discipline will cause confusion by mixing spending on different aspects when the money allotted for one expenditure item is exhausted.
Investment Options
Unit trusts
Managed funds are mutual in the United States and unit trusts in the United Kingdom. Owners’ money is pooled and invested in various financial assets ranging from fixed deposit tools to government securities (Rutterford & Davison, 2007, p. 379). It can be placed in a lump sum or monthly purchases.
An advantage of investing in unit trusts or managed funds is the management of the assets by the professionals. The purchase gives the investor access to a financial expert that manages the fund by the individual objectives. For instance, one can select either to go for equities or bond trusts. Therefore, positive changes in the market can be leveraged for the gain of the buyer by the active expertise.
The second merit of the option is the diversification aimed at reducing the risk profile. By investing within and across classes of assets, the portfolio’s vulnerability is balanced. For instance, a broad range of choices exists from stocks to bonds. Furthermore, the two categories can be offered in four groups. It includes the theme baskets, asset allocation, sector and target strategies. Debt instruments can also be taxable fixed or tax-free fixed income unit trusts.
The third advantage of investing in the UTs is the low transaction costs due to the economies of scale gained. A pooled fund took monies from many unit holders and managed as one trust. Therefore, the costs and risk of managing the whole lot spread across many investors and asset categories. Thus, the cost advantage incentivizes the individuals to choose the option from other forms of investments.
The most driving merit of the unit trusts is the ease of accessing the cash from the securities whenever it is convenient. For instance, the minimum period of investment does not exist in the market. Thus, both couples with a long time and short term investment requirements can take up the opportunity. Unlike the traditional debt items, the UTs allow people with small minimal initial funds to invest in a wide array of assets. The flexibility also extends to the ability to add systematic additions to the previous amount invested. Furthermore, the absence of the minimum period for investing allows whoever needs to withdraw to sell their units to interested buyers. Based on the attribute, all of the three couples stand a chance to benefit from placing their monies in the kind of assets. Both the early married and retired partners are in a position to invest and gain returns anytime from the unit trusts.
However, the major disadvantage of investing in unit trusts is the high risk that does not guarantee returns. The other limit is the variable rate of return that makes its proceeds unpredictable.
Government/ corporate bonds
Purchasing the above instruments translates to lending money to the issuer being the government or a corporation. In return, the institution will pay the bondholder regular interests at intervals throughout the lifetime of the debt security. On the other hand, the principal amount is paid upon the maturity of the time. The initial price may be determined by the credit-worthiness of the issuer and the fluctuations in the rate of returns.
Government bonds are issued by the nation in its currency. On the other hand, corporate ones are sold by all forms of companies from small start-ups to large established corporations. The tools issued by the former are less risky and assure a lower return than those of the later. For instance, the performance of the firm and the rate of inflation make the proceeds from the instrument vary.
A second distinction between the two is the period. For a corporate bond, it is medium to a long-term ranging not longer than 20 years. For the three couples, buying the debt instruments from corporations will give them higher returns. However, purchasing the government bonds would be preferable for the balanced risk investors like Bill and Shirley. It is easier to trade in the securities at the convenience of the holder. On the other hand, the interest on the investment is lower historically (Arnold, 2015). Unlike the unit trust, the instruments require an investor to put their funds and receive gains semi-annually or yearly.
Gearing
The term refers to the situation where the individual may use debt to invest in property, managed funds or purchase shares. A couple may decide to borrow highly or use a small ratio of debt in their investments. The first situation is high gearing. It is cheap to access a loan for financing a project. An individual can then use the leverage to expand future incomes. On the other hand, it is not appropriate for a person with little income. If the current earnings cannot fully meet the interest requirements, it may expose the borrower to the risk of liquidation (Erdem, 2014, p. 17).
The second option is low gearing involving the use a limited form of credit. A low debt will not expose the individual to the risk if the changes in the interest rate occur to the upward trend. The risk of being liquidated or running bankrupt due to a small debt is limited (McMenamin, 2002, p. 478). Another merit of low gearing is that it frees the revenues received as only small amounts are paid regarding interest. Other funds can be invested elsewhere where the cash flows can be maximized to allow the family to take on larger projects. However, the use of debt limits the creditworthiness from other sources and for other purposes. For the three couples, Roberto and Lisa have the capacity to gear up the assets with leverage.
Investment in gold bullion
Precious metal like silver or gold is also sold in bulk quantities called bullion (Jagerson & Hansen, 2011, p. 100). The value is determined by the weight cast into bars and is traded by dealers and major banks. Coins are made from the elements and sold for investment purposes. An interested party can also obtain the assets from coin dealers, brokerage firms and precious metal vendors. The prices for the assets fluctuate depending on the cost of the metals on the world market. For the potential buyer, the available options are the American Gold Eagle, Australian Gold Nugget or the Canadian Maple Leaf. Therefore, the sale of Krugerands, gold bars, and coins can result in high profits. The physical bullion provides security to the investor.
The individual can exert personal control on the business of dealing with the physical precious stones. Unlike the case where inflation can destroy the value of paper currency, gold cannot be devalued as the owners themselves manage its exchanges. Another inherent advantage in the trade is the determination of the price of gold. The value of the tangible items like the coins correlates to the going market rates of the element. A dealer can calculate the rate of the assets easily without depending on the external conditions. Thirdly, the costs of minting, distribution, and marketing the products are by the seller through charging premiums. It ensures that the business yields reasonable profits. However, the main deterrent towards investing in the bullion is the security concern. Storage of the items at the investor’s residence is a safety hazard due to different risks like theft, fire or floods. Therefore, extra costs have to be incurred to ensure safekeeping by banks. Finally, the rate of taxation on the business is very high. The dealer pays a higher return to the government on the profits made compared to mutual funds, bonds or debt. Furthermore, precious stones are charged long-term capital gains tariffs. All of them are well positioned to deal with the gold bullion business considering the case of the three couples. It can meet all the risk profiles of the families. Robert and Lisa are in their stage of wealth accumulation. The duos have a high appetite for eventualities. Therefore, the investment option can be the optimal choice for their case.
Risk management
The investors should ensure that they put up mechanisms that protect their finances from loss due to impacts of risky external conditions (Akdeniz, 2015, p. 52). Changes in the stock markets cause volatility of prices of the securities, while skirmishes in the physical surrounding may harm capital assets. Therefore, effective plans should be established to ensure the minimization of such scenarios and the resulting damages.
Personal finances are open to a wide range of risks. Some of them include the fall of the value of stocks, accidents that can hurt the health and damage the vehicle. Incidences of fire are also common to destroying houses. Furthermore, the untimely death of a breadwinner cripples the supply of incomes to the family. The occurrence of any of the above events causes a significant financial setback on a person’s budget. Designing risk management strategies mitigate the effects of such eventualities and sustain the standards of living after facing challenges.
Such plans ensure the financial security of an individual even after undergoing an unexpected event that drains the funds or the earning capacity. A set of tools, tactics, and services are used to mitigate the occurrence of economic losses.
In the contemporary world, risk management entails ensuring that a comprehensive view takes care of all possibilities. Regarding this, one should consider protecting personal life, liability, and properties. The risks covered by a person include the incidents of losing income due to severe sickness, injury and loss of employment. Secondly, uncontrollable events can cause destruction to the property through fires, floods, and negligent damages. Finally, the individual could be held liable for legal issues, damaging others’ valuables due to negligence or accidentally. Having analyzed the possible risks opens the stage of choosing the management plan.
The most common strategy for dealing with the eventualities is through transferring the burden to insurers. Insurance policies protect the holders against the occurrence of the risk covered. However, the insured property or life assured is compensated by the company in the event of the happening of the peril contracted. It restores the person to the financial position enjoyed previously before the incident occurred.
Recommendations for the couple
Roberto and Lisa should consider taking a personal life cover against loss of income due to injury or disability. A general policy should take care of damage to their car from an accident or theft.
Jeff and Juan require coverage of their potential inability to earn due to severe sickness or body injury. Similarly, their home should get insured against damages resulting from fire, burglary, and political violence.
Bill and Shirley need to take insurance policies to cater for their medical bills and loss of revenues through bodily harm. Furthermore, the couple should consider insuring their precious car and home against theft, burglary and fire incidents.
Superannuation Contributions
The government has set up compulsory requirements that enforce employees to contribute a minimum amount to a fund that will serve as income during their retirement. Both the worker and the employer pay towards the superannuation plan. It is a benefit to the staff as the boss pays for their part besides their wages and salaries. Since the amounts are pooled to be used after an employee retires, it qualifies as a pension scheme. Furthermore, the state also awards tax incentives for members that participate in the plan.
The superannuation scheme reduces the pension benefits by half of the receipts of an individual or the couple above the limit. Since the contributions are made solely for the purpose of retirees’ usage, they make up the nation’s retirement schemes. For the couples considered in the case study, each pair can subscribe to a specific strategy that maximizes their incomes during old age.
For Roberto and Lisa, they can join the industry funds run on behalf multiemployers by the unions of employers for the sake of their labor force. Similarly, the parties can be served well by wholesale master trusts that are operated by financial organizations. For the pre-retirees like Jeff and Juan, the man can take up the superannuation program of the employer-stand-alone fund. The lady will be well suited to join the industry fund trusts since she is a human resource person. Finally, the retirees are no longer on the job and can only qualify for the schemes offered by the financial institutions namely the wholesale and retail master trusts.
Role of a Will and Power of Attorney
During estate planning, the will is a statement that shows how a person wishes his or her property to be passed upon death (Welch, 2009, p. 23). It clearly shows who the deceased wished to control his or her assets and regulate other belongings after they pass on. The document can be drafted by any person and does not have the power to enforce the actual decisions taken by the estate dealers.
A power of attorney is the certificate in which a person names a specific party to handle his or her specific affairs. It implies the transfer of the legal authority from someone to another. The principal gives the power to the ‘attorney-in-fact’ or agent. Consequently, the former act on behalf of the latter’s business or financial matters. He is empowered to do anything the nominator can do ranging from withdrawing cash from their accounts to paying bills. In the event of incapacitation, sickness or travel of the principal, the attorney can attend legal proceedings on his behalf. However, if one does not elect, it will take a court order for a family member one to act on behalf of the stricken party. For instance, Roberto can elect Lisa or a different party to be the agent. The spouse also has the right to do the same.
Although the power of the agent allows him or her to take care of almost all obligations and rights of the owner, he cannot take the chance to defraud and escape. It is one of the risks associated with nominating fraudulent individuals that may act contrary to their master. Furthermore, the act does not take away the rights of the principal. The authority given can as well be withdrawn from the source if it is deemed fit (Shenkman & Blattmachrr, 2015, p. 5). In the scenario of Jeff and Juan, all of them can elect each other or separate individuals to be their agents. Furthermore, they can fire them if they do not work in their bosses’ interests.
Reference List
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Arnold, G. (2015) FT Guide to Bond and Money Markets. London: Pearson UK.
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Hansen, D., Mowen, M., & Guan, L. (2007) Cost Management: Accounting and Control. New York: Cengage Learning.
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