Personal Financial Planning-Assignment Solution

Application Question 1. Richard and Monica asked if they could come in to discuss an issue. At that meeting, Monica seemed worried, and Richard sunk back in his chair. Monica said Richard was having second thoughts about going ahead with the financial plan. He wanted to know what the specific benefits of financial planning were. As far as he was concerned, he said, people’s planning took place one paycheck at a time. I could tell by Monica’s way of explaining this that she disagreed. She asked for my help in dealing with this problem.

What do you think is the difference in philosophy between the two?
How does the life cycle theory enter the discussion?
Based on the original interview with Richard and Monica and this one, how can looking at the household as a business help?
What are the benefits of financial planning for these people?
Write your explanation to their issues and your recommendation.
Application Question 2. Richard came in with his cash flow statistics and very helpful notes on projections. His list included


Salary $100,000

Investment income $8,000


Home related $20,000*

Food $5,000

Clothing $8,000

Health care $6,000

Transportation $2,000

Personal $3,000

Recreation $4,000

Cars, entertainment $9,000

Hobby $1,000

Gifts and charitable contributions $2,000

Insurance $6,000

Taxes $26,000†

  • Includes mortgage interest and principal payments, property taxes, home maintenance, and home insurance.

† Net of $3,000 allowable tax loss with $191,000 tax loss carryforward on original 200,000 loss.

He said to assume that his salary will rise 6 percent a year, and his investment income is 11 percent a year (the investment loss came a year ago). His expenses should rise 3 percent a year except for medical, which will grow at a rate of 6 percent yearly, and taxes, which will grow at about 7 percent a year.

Richard said he was not worried about the losses taken. He would make them up, but Monica insisted that they save additional monies. He wanted to know what I recommended to help him save. He said he knew Monica was secretly putting away part of her household money into an account in her own name.

  1. What observation do you have about the couple’s expenditures?
  2. What might the conversation above tell you about Richard?
  3. What might Monica’s actions tell you about both Monica and Richard? 4. What recommendations would you have to help them save more?
  4. Construct their cash flow statement for this year and the next two years. 6. What do the future cash flow figures indicate?
  5. Complete the cash flow section of the plan.

Application Question 3. When it came to investments, Richard and Monica could agree on only one thing—that they would have a tough time reaching a decision on asset allocations and individual investments. Previously, Monica had deferred to Richard on investment matters. Given Richard’s large recent investment loss, however, Monica was much more forceful in expressing her feelings. She thought that a 40 percent stock, 60 percent bond allocation fit, particularly given the lower level of accumulated wealth they now had. Richard, on the other hand, wanted 100 percent of the funds placed in stocks. He asked if it wasn’t true that stocks always did better than bonds over the longer term. He said that to reach their goals, they needed some aggressive investments. Monica interrupted, saying it was just that “stocks-had-no-long-term-risk” mentality Richard had that led to their investment losses. Richard then volunteered that there was an oil stock, “Energy Gulch,” a friend of his recommended that “couldn’t lose.” He wanted to place 20 percent of his money in it.

  1. What do you think of the Richard and Monica argument?
  2. Using the asset allocation alternatives listed in this chapter as a guide, what should their asset allocation be? Why?
  3. What do you think of the Energy Gulch idea? Why?
  4. Select one mutual fund you find attractive and give the reasons why you chose it.
  5. Complete the investments section of the financial plan.

Application Question 4. In our meeting, it became apparent that Richard’s investment loss was not a solitary act. Richard was very indulgent and paid little attention to his health. He went out on shopping sprees that he and Monica couldn’t afford. He was overweight. He used alcohol excessively and smoked. His doctor had warned him of his unhealthy habits including a high cholesterol level, which placed him at risk of a major illness. His work output was excellent, but he often got into verbal arguments with superiors. The result was a reputation as a brilliant but unsteady worker who shifted from job to job often.

Monica, on the other hand, was as steady as Richard was fickle. She was a vegetarian who exercised regularly. Her doctor told her she had the physical condition of a woman 10 years younger. Given Richard’s erratic behavior, one would think Monica would be under great stress. When I posed that question to her, she said that she had learned to cope with Richard’s behavior.

The couple had no life insurance except for a policy providing one times Richard’s sal- ary at work. Monica had often asked Richard to get some additional insurance. His reply was that they did not have enough money. Monica specifically requested that I look at term and whole life insurance and tell her the type and amount of insurance that was appropriate.

As we completed the topic, Richard said he was sorry for his behavior and would “turn over a new leaf.” Monica replied that she was not sure Richard could do it.

  1. What do you think of this couple’s overall risk profile?
  2. What recommendations would you make to improve it?
  3. Do you believe these recommendations will be followed?
  4. Assuming there is some uncertainty that the advice will be followed, what other recommendation might you make?
  5. Do you believe they should have more insurance?
  6. Which type would you recommend: whole life or term insurance?
  7. Prepare the overall risk management and life insurance parts of the financial plan.
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