Question

CASE STUDY 1 : SHORT?TERM GOALS : Tanya is 19 years old and has been working as a retail assistant for 2 years. She earns $33 800 per year in salary after tax. Because her family lives in a country town, Tanya had to leave home to find employment and learn to look after herself and her finances. She shares a flat with two friends. Her weekly payments on average are: rent $150; public transport fares $50; food $140; utility bills $50; mobile/internet phone $30; clothing $50; and entertainment $60. She also makes sure that she is saving some of her income and for the past 2 years has arranged for an automatic debit of $400 per month from her bank account into a managed fund. The amount accumulated in the fund comprises the original $2000 she was given for her seventeenth birthday to start the fund when she left home and contributions and earnings of $8000, making a total sum of about $10 000. The managed fund is a balanced fund. Any money left over after expenses and investment is kept in her bank account, which totals $1000. Tanya’s main goal is to buy a car in the next 6 months if she can afford it. She will use some money in her managed fund if she has to, but hopes to buy a car valued at about $13 000 plus insurance of $750 p.a.

QUESTIONS

1 Clearly state Tanya’s short?term goal.

2 How would a financial counsellor help Tanya to determine whether she may be on target to meet her goal?

3 Suppose the retail store proposes to reduce Tanya’s hours and her annual pay will decrease to $31 000 p.a. How will this affect her living costs and savings target?

4 What advice might a financial counsellor give to Tanya in such circumstances? Is there any other advice you may offer to help her achieve her goal?

5 What are the three main investment risks that Tanya faces given her short?term goal?

Answer 1

1) Tanya’s short term goal.

Tanya Earnings p.a. $33,800/-

Tanya's yearly expenses pa.=

particular (1)expenses per week ($) (2)per year (4*12) (3)Expenses per year ($) Rent 150 48 7200 Travelling 50 48 2400 Food 140 48 6720 Utility Bills 50 48 2400 Telephone/Internet 30 48 1440 Clothing 50 48 2400 Entertainment 60 48 2880 Total Expenses (1)*(2)= (3) 530 48 25440 Total Income ($) 33800 Net earnings 8360 Savings (accumulated) 11000

As it can be seen clearly, her short term goals including

• Survival in the new city by managing the expenses, also maintaing the standard of living.
• Savings could be considered as a short term goal, because it could be used in contingencies as well.
• Buying a car, which is also a short term goal for her, as she has already accumulated/ saved for this desired goal of her.
• Though, buying a car might reduce the monthly travelling expenses but required high initial investment.

2) How would a financial counsellor help Tanya to determine whether she may be on target to meet her goal?

answer: She is managing to meet her goals in a better manner. She is invested the funds in the balanced fund which is kind of conservative approch in regards with this age group. She could have purely invested in the equity market as there is no responsibilty on her head and is in the position to take risk and get better return as well.

Rather than going for purchasing a car, financial counseller would suggest her to invest the money somewhere she could get better return in future, as buying a car will wipe out the savings and expenditure will go up as well for short term, adding to same value of car will be reducing on yearly basis. Hence, she could use the same money in real estate eg., buying flat for herself.

She should always keep one thing in mind as the job is not permanent, hence always keep a part of fund in such kind of emergency if something went wrong. If not invested in such kind of scheme like PF, Else she should start soon.

3 Suppose the retail store proposes to reduce Tanya’s hours and her annual pay will decrease to $31 000 p.a. How will this affect her living costs and savings target?

Answer: In this case, there are two type of expenses she is incurring

1) Avoidable

2) Unavoidable

Hence, she cannot compromise with those unavoidable expenses. As staying in the flat and incurring those weekly expenses are unavoidable hence she could try to minimise them but can't avoid them at all.

Hence, the first thing will go for is she will start compromising with the savings part of it. She might reduce the amount of saving she saved earlier. Also, her short term goal of buying a car might hamper in this case as well.

4 What advice might a financial counsellor give to Tanya in such circumstances? Is there any other advice you may offer to help her achieve her goal?

Answer: look back on the calculations: She used to save $8,360 per annum earlier, where as reducing salary to $31000 directly impacting the net earning by net fall of $2,800 p.a. which will reduce the net earnings by ($8,360-$2,800)= $5560.00.

Also, this is going to impact her short term as well as long term goals somehow.

As nothing is mentioned regarding tax savings and tax payment, can't comment on this part but yes financial planner must have suggested her to invest or save on those schemes where she can get tax free income in long term as well able to reduce tax expenditure per annum e.g., investment under 80C, 80D and 10(10)D etc.