Question

This question requires me to make recommendations to a client on how they can reach their financial goals. (Based in Australia)

The Clients information is as follows:

Inheritance $40,000,

Savings - $525 per month

Goals-

Holiday to China (will cost $8,000). (going on holiday in 2019)

Buy a house that costs $340,000 (wants to have a 20% deposit and $5,000 for legal fees) – so needs $73,000. (in the next 5 years)

Different investment choices to choose:

Cash – savings accounts, high interest accounts

Fixed interest – term deposit, government bonds, corporate bonds

Property – investment property or your own home

Shares – Australian shares, international shares, sector specific shares ((Would not commonly recommend)).

The question is as follows – which strategy (investment choices) need to be selected to reach both his goals. (can only use either savings or inheritance, cannot use same one for both questions)

Goal 1 – Holiday ($8,000) (in 2019)

Recommended strategy:

Advantages of strategy [reasons why]:

Disadvantages of strategy:

Alternatives considered:

Goal 2 – House deposit ($73,000) (next 5 years)

Recommended strategy:

Advantages of strategy [reasons why]:

Disadvantages of strategy:

Alternatives considered:

Answer 1

Given,

Inheritance = $ 40000

Savings per month = $ 525

Savings by 5 years = $ (525 x 5 x 12)    =$ 31500

Total amount accumulated = $ (40000+31500)    =$ 71500

Total amount required = $ (73000+8000)    = $ 81000

Goal 1 – Holiday ($8,000) (in 2019)

Recommended strategy: Invest in high interest accounts

Advantages of strategy [reasons why]: In a short period of time, it is possible to get a high return on the savings.

Disadvantages of strategy: This type of account provides variable interest rate which change with the market. So, if the market rate decreases, one might earn less return.

Alternatives considered: Savings Account

Goal 2 – House deposit ($73,000) (next 5 years)

Recommended strategy: Invest in 5-year Government bonds/Corporate bonds

Advantages of strategy [reasons why]:Bonds being comparatively safer investment one can earn good return than fixed deposits which are currently offering lower interest rates than that of bonds.

Disadvantages of strategy: Bonds are riskier than fixed deposit .

Alternatives considered: Term Deposits