Question

You are a financial adviser and the following information is an extract of data you gathered as part of fact finding during an initial client consultation for married couple Janet and Steven Blake. Janet works as a Teacher and Steven works as town planner at the local government. The have two children who are aged 12 and 14.

Janet and Steven would like to know how much money they will receive after paying tax and expenses for the year ended 30^th June 2018. They would like advice on how to reduce their tax liability in the future.

The Blake’s have diversified their investments by investing equally in a bank savings account, a fund and some Macquarie Group Ltd Shares. Their risk profile is equivalent to that of a growth investor. They have come to you understand how they should invest in the future.

The Blake’s life goal has been to buy a property in the country and live the quiet life 10 years from now. They need to save a $200,000 deposit to achieve this dream. They have $60,000 invested now and they estimate they can save $5000 p.a. for 5 years and then $10,000 p.a. for the 5 years following this. They have come to you see if they can achieve this goal.

Income for year ended 30^th June 2018:

Income type	Amount
Gross Salary- Janet	$70,000
Gross Salary- Steven	$54,000
Vanguard Bond Fund- Distribution 3.85% (Janet)	$770
NAB Savings Account Janet- Interest 1.15%- Janet	$230
Macquarie Group Limited- Dividend $2.05 per share- Steven	$410 (partial franking credit $80)

Estimated annual expenses

Item	Amount
Rent (650 per week)….………………………………..	33,800
Electricity/Water/Gas ………………………………….	3,000
Telephone/Mobile ……………………………………..	2,200
Pay television/Internet …………………………………	1,100
Insurance –contents …………………………….	1,200
Insurance – car..………………………………………	3,000
Credit cards repayment ($500 a month for 12 months).	6,000
Car loans repayment ($8000 a year for 5 year term).….	8,000
Petrol/maintenance …………………………………….	6,000
Car registration ………………………………………...	800
Public transport ………………………………………..	2,800
Other expenses
Food ……………………………………………………	12,500
Clothing/Haircuts/Beauty ……………………………..	5,500
Medical/Dental ………………………………………...	2,500
Entertainment/Dinners ………………………………...	6,000
Teacher Union Membership (Janet)………………….…………	1,000
Gifts - Birthdays/Christmas ……………………………	3,000
Total …………………………………………………..	98,400

Current Assets and Liabilities

Assets (Ownership)	Current valuation $	Liability (Ownership)	Current valuation $
Home Contents (Joint)	20,000	Credit cards (Joint) Includes the annual interest cost	6,000
Car (Joint)	35,000	Car loan (Joint) 5 year term at 12%	30,000
Bank Account: Cheque Account (Joint)	8,000
Investments: NAB savings Account (Janet) Vanguard Bond Fund (Janet) Macquarie Group Ltd Shares (Steven)	20,000 20,000 20,000

Calculate the future value of the investment portfolio 10 years from now assuming it will earn a 5% p.a. after tax. In this calculation you should include the FV of the current investments and the FV of the contributions that Blake’s estimate that they make over the next 10 years. Assume that contributions are made at the end of the year and that the first contribution will be made 365 days from now. Finally, explain one strategy that Janet and Steven could reach their goal more quickly and show the influence that this will have. If assumptions are made, these assumptions must be clearly stated.

Financial Formulae   

Savings ratio = savings (or cash surplus)/net income after tax

Future value FV = PV(1 + i)ⁿ   

Annuity (Future value) FV = PMT[((1 + i)n – 1)]/i

Answer 1

Assumptions:
1 Salary increase @ 5%
2 Car Registration - as one time expenses. It will not recurr from Year 2
3 No Car loan from year 6
4 Income tax rate at 25%
5 Expenses to go up by 2% Year on year
6 No education expenses on Kids.
7 Additional Saving invested in Vanguard fund which fetches 3.85% returns
8 Assuming Income Tax rate remains same in the next 10 years

The Investment at the end of year 10 is still short by 58250. Since there is surplus savings from year 3, investment should be accelerated and also should find ways for additional income or reduction of expenditure year on year to achieve the goal.