Financial planning

Assignment 1:

Net Worth & Cash Flow Statements and Analysis

John Smith, Client

Analysis of Net Worth

An analysis of your net worth indicates that you have high liabilities and few assets, a situation not unusual for someone at the beginning of their career and fresh from college. You have a significant amount of student loan debt, a car loan and some credit card debt related to living expenses while in college. Your assets include the car, some electronic equipment, furniture and a small amount of jewelry. Your overall net worth is currently ($49,000). Your liquidity ratio is 0.13, indicating that your liquid assets related to cash, savings and money market investments are much less than the value of your short-term debt and will not fully cover the value of the debt should it come due immediately. The current ratio of 0.88 is slightly better since it includes the value of your personal items (jewelry, furniture and electronics); however, even if these were converted to cash at their current worth, they would not cover the full cost of your credit card debt. Finally, the debt to asset ratio indicates that your debt exceeds your assets by a value of 2.96:1.

Cash Flow Analysis

The cash flow analysis I have prepared shows you have a total income of $3,350 per month, or $40,200 per year. The most significant expenses you incur each month relate to housing, averaging $1,326 per month, or 39.6% of your total income. Debt repayments towards student loans and credit cards amount to $537 per month, or 16% of your total income. Automobile expenses total $503 per month, or 15% of your total income. Food and discretionary items such as eating out and entertainment total $777 per month, or 23.2% of your total income. You currently spend all your earned income each month with no residual for savings. You seem to spend much time outside your apartment on discretionary entertainment with friends or family and enjoy eating out.

Based on the cash flow analysis, I have determined that $598 per month, or 17.8% of your income, is related to discretionary lifestyle items that are flexible over the short run. These include eating out, entertainment, clothing and gifts. The remaining items relate to your apartment, automobile, debt repayments, insurance, and payroll tax, and are generally inflexible in the short run. Inflexible expenses total $2,753, or 82.2% of your income.

Appendix:

1. Payroll deductions were obtained through www.taxtips.ca and are based on a $40,200 income in Ontario, Canada.

2. Apartment expenses including rental, electricity, water, TV and cable were calculated using kajiji.com and are based on average prices in Toronto for a studio apartment in the downtown area.

3. Debt repayments were calculated using a standard repayment obtained from the client of and minimum 1.5% of the current balance for the credit card.

4. Automobile loan expenses reflect the current payment given by the client, to be fully paid off in three years. Gas prices, insurance and maintenance vary, but reflect averages by people living in the GTA.

5. Dining out expenses were calculated with input from the client – he normally enjoys lunch during his work day at a cost of $9 per day and enjoys dinners out on a semi-monthly basis with his fiancé, typically ranging from $40 - $60 each time.

6. The client stated he typically purchases groceries on a weekly basis, typically spending $45 per week.

7. The client spends an average of $40 - $60 per month on clothing, with high variance. Typically, he purchases new items on a seasonal basis as needed.

8. John enjoys entertainment and goes to concerts and the movies with his fiancé on a regular basis.

9. John typically gives birthday and holiday gifts to friends, immediate family and his fiancé. These are infrequent in nature and vary by month.