Smith Family Financial Plan (A) & (B) Case Study Help
Alternative #1
For the purchase of new credit card, Smith Family should consider taking the car at lease which will reduce cash burden payment and it would also reduce the expenses on repair as well as maintenance. The Smith Family could avoidpurchasing the new car and make decision of buying the car in the future when critically required. The credit card need to be changed it should not be used for unnecessary and avoidable expenditures which are as follows;
- Vacation
- Travel and tours.
APR refers to the annual interest percentage rate a credit card holder will be charged on all or a portion of the balance if the full amount is not paid on or before the date of maturity. Therefore, the change of the credit card by opting new one which offers reduced APR would most likely lead to the significant reduction in the annual effective rate by 2.46%, releasing cash paid in payments of interest as well as with increased limits up to about $50,000, by increasing the pace of paying mortgage loans on house to save extra income.
Alternative #2
Another option that could be opted by Family Smit is the Registered Retirement Saving Plan as well as the Registered Education Saving Plan. This is due to the fact that the Registered Retirement Saving Plan is a legal trust which is registered with the Canadian Revenue Agency and it is widely recognized for the purpose of retirement plans.
As the case shows that the amount that the Smith Family is ready to put aside for their retirement amounts $250 per month. The Registered Retirement Saving Plan would be the best plan for the Smith Family because the Registered Retirement Saving Plan contributions are tax deductible and taxes are deferred until the money is withdrawn. A Registered Retirement Saving Plan can involves stocks, bonds, mutual funds, GICs, contracts and even mortgage-backed equity. The Registered Retirement Saving Plan has many advantages, but two of main tax advantages are as follows;
- Firstly, the growth of the Registered Retirement Saving Plan investments is tax exempted. Unlike other investments, returns are exempted from any capital gains tax, dividend taxes or income tax. Which demonstrates that under Registered Retirement Saving Plan, the investments are tax free when enchased.
- Secondly,the contributions of the Smith Familyare deductible against their income. For example, it could be said that if Amber’s tax rate is 25% on $250 that she invests in a Registered Retirement Saving Plan, then this would save her $62.5 in taxes per month, which would be up to her limit of contribution.
It is to notify that the Registered Retirement Saving Plan are essentially a tax free investment account that is set up by a parent to pay some or all of the costs for the post-secondary education of their children. Additionally such post-secondary education can be undertaken at universities as well as colleges.
Furthermore, the Smith Family could make investments in the Registered Retirement Saving Plan in way that the age of Luke is 9 years and there are still 9 years to go due to which the Smith Family could make considerable investment of the funds within a Registered Retirement Saving Plan in a variety of investments such as stocks, bonds, mutual funds, GICs etc. Registered Retirement Saving Plan contribution carry a room of $95,300 for Amber and $25,200 for Joel. On the basis of the risk tolerance of the Smith Family as well as could grow at a tax-free rate inside the Registered Retirement Saving Plan.
Alternative #3
The family is considering to opt for another credit card loan arrangement to finance their vacation for their holiday, which can put their children’s future education at stake, requiring an interest payment of 895 dollars per month. The amount of payment of interest is very huge, and if the amount is inverted to the RESP then the future value over 9 years can be above 100,000 dollars. The calculations and results of this alternative have been shown in Appendix 3 and Appendix 4 of the document.
Recommendation
After taking into consideration the quantitative and qualitative analysis, the Smith Family is recommended to opt both mixes of the alternative in order to avoid large payment in interest as well as save money for retirement and education of children. Along with this, it is also advisable to the family that if the car could be repaired with a minimal expenditure then the purchase of the new car should be delayed. This in turn would be going to save a large outflow of money to the family. However, if the car is not in a condition to be repaired then the family could buy a new one. Further, steps should be taken to pay the mortgage payments as it is going to reduce the interest payments paid on the mortgage.
The Smith family is paying around 21.5 percent compound annual rate of monthly interest on their credit cards due. The monthly interest payments like current credit card outstanding amount, is 98.5 dollars. The family cannot afford these payments as they have a receipt of interest with an annual interest of 4.5 percent.
The family’s priority should be to pay off their credit card dues as soon as possible. The family has an amount of 4,350 dollars in their current account; it is advisable to pay the maximum number of dues of credit cards as soon as possible, because it may increase the surplus of the family to about 90 dollars. The calculations and results of this alternative have been shown in Appendix 2 and Appendix 4 of the document.
Further, the new credit card facility is also going to reduce the effective interest rate of the company. This is going to reduce the debt burden faced by the company to a much larger magnitude. Overall, all the financial alternatives that have been analyzed above and the tax planning as described is going to make the current and the future financial condition of the family secure.
The Smith Family could implement the alternative through starting from registering both of parents to their children’s education plan and their retirement plans. The investments in their contribution funds will meet future needs of the children when they grow up and for parents when they retire. In addition, the Smith Family should take an appropriate and suitable decision about whether they should purchase a new car or not through assessing their need of car. If they reach to the decision of buying the car, they should make purchases on lease.
It is recommended and advised for the Smith Family to save a lot for the family. Both the above options that are buying the new credit card facility and the Registered Retirement Savings Plan are going to save money for Smith’s retirement and the education of their children.
Conclusion
The Smith Family is confronted with the liquidity crises due to many reasons such as overdependence on credit cards, unpaid mortgage payment, luxurious lifestyle, overspending on outing and dinners. Even though, the combined gross family income is amounted to 80000 dollars per year, the cash outflows per month exceeds cash inflows. The objectives of Smith Family includes developing a family plan of RESP for their children, having a vacation trip, which requires an estimated amount of approximately 50,000 dollars and purchasing a new car for Joel. After proposing various alternatives, Smith Family is recommended to abandon the idea of purchasing car and there is a criticalneed, they should purchase a car on lease. Furthermore, the Smith Family should chooseRegistered Retirement Saving Plan as well as the Registered Education Saving Plan.The family’s priority should be to pay off their credit card dues as soon as possible.For the purchase of new credit card, Smith Family should consider taking the car at lease which will reduce cash burden payment and it would also reduce the expenses on repair as well as maintenance.....................................
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