SMITH FAMILY FINANCIAL PLAN (B) SMITH FAMILY UPDATE It was now May 1, 2013, and Matt had just finished a follow-up meeting with Joel and Amber Smith. They had followed some of the advice they received and had managed to get their cash flow situation into a healthier state. The revised family cash flow statement is included in Exhibit 1. The Smiths had made a number of changes in their finances and lifestyle, as listed here: 1. Amber had changed jobs! She and Joel had talked about increasing her hours and decided that it was not reasonable to do this. Her new job offered a 10 per cent increase to her $65,000 income and the family net income per month increased from $4,800 to approximately $5,190 (assuming that they took home about 72 per cent of their gross pay, and including Joels salary for the entire year). 2. The Smiths had reinsured their home (still for replacement value) with a different insurance carrier and a higher deductible of $2,500. 3. Smartphones: These were gone, for now. Joel now carried the cheapest prepaid cell phone he could find, in case he was out with the children and ran into an emergency. As a family, they carried this phone with them on any trips out of town. Amber was pleased to find that she had access to a cell phone through her new job. It was to be used prin cipally for work purposes, but she would have it in the event of a personal emergency as well. 4. Amber and Joel had reduced the number of nights the family ate out and reduced their monthly cost related to eating out to $150 a month. They noted that they had been eating more healthy meals since they ate at home more often these days. 5. Credit cards: After thinking about this, they had voluntarily increased their monthly credit card payment. They intended to look at this again in about six months and were hoping to increase the payment again at that time. 6. They had decided to set up all of their regular bills on a pre-authorized payment plan with their bank, in order to reduce the cash that they needed to carry and reduce the nu mber of trips they made to the ATM (automated teller machine). 7. Church donations: The Smiths made it clear that they intended to start giving to their church again within the next six months, but in order to gain a little ground financially right now they had decided to stop giving money in the short term and focus on donating their time to various projects in the church that desperately needed volunteers. The Smiths were excited about the change in thei r cash budget. They wanted to keep the momentum going and asked for some help in other areas of their financial lives.

SECTION 8: FINANCING A HOME When they purchased their house, Amber and Joel took on a 30-year mortgage. They were able to do this as Canadian mortgage laws still allowed a 30-year amortization at that time. As they mentioned earlier, the rate on this mortgage was 6.5 per cent and was compounded semi-annually (csa). About five months ago, Joel and Amber met with the bank to discuss the mortgage because the initial term of five years had expired. By coincidence, she was ab le to lock the mortgage in for an additional five-year term at the original rate of 6.5 per cent csa. Last month, Amber had discovered that mortgage rates had decreased to where a similar mortgage could now be locked in at 4.75 per cent csa. The Smiths were not planning to move in the next five years, but were wondering if they should refinance the mortgage to gain the lower interest rate. The bank informed Joel that refinancing the mortgage now, to gain the lower interest rate, would result in a refinancing penalty of $4,000. The refinancing fee included closing costs, a new loan origination fee and an interest penalty.

SECTION 9: PLANNING FOR INSURANCE NEEDS Property: As a part of their plan to improve their financial situation, Amber and Joel wanted to spend some time considering their insurance needs for their home and cars. They had a couple of questions in this area. 1. They had managed to reduce their home insura nce expense to $70 per month. The new policy included replacement cost coverage, $1,000,000 third-party liability, and specific wording to say that the policy did not cover basement flooding due to sewage backup or rainfall. They wanted to know if this was a good policy for them. Also, was there anything they could do (generally speaking) to reduce their premium? They were not too con cerned about basement flooding because although several of their neighbours had experienced it in th e last few years, the Smith house had never been flooded. The concrete in their basement was in good condition. 2. Both cars were insured through the provincial government insurer. Coverage included a $700 deductible on each, with $200,000 third-party liability coverage. They had no additional collision coverage and no additional comprehensive coverage. The Smiths lived in a no-fault auto insurance province. Were they adequately insured in this area? Healthcare and Insurance Needs: The Smiths also wanted to review their health and life insurance coverage. Joels dad had died two years ago at the age of 55 due to a heart attack. Ambers mom was currently 58 years old and had struggled with several forms of cancer over the last 10 years. Amber had supplemental health and life insurance th rough her employer, with some disability coverage. She believed that the coverage was quite good, but she was not sure if her plan offered disability coverage for family members. Amber was also unsure as to the exact coverage she would receive should she be required to use her disability insurance. Joel was a member of a group plan at work, but the family relied on Ambers medical coverage as Ambers plan provided better coverage of medical and dental costs. Joels plan offered no disability coverage. Joel and Amber did not pay the premiums for these plans. Life insurance was something that the couple had considered. Amber was covered through her group plan for 1.5 times gross earnings. Joels coverage was also at 1.5 times gross earnings, but with his limited hours and smaller salary they wondered if they should purchase additional coverage. They wanted to have enough insurance so that if one of them were to die the family expenses would be covered for at least 15 years.

SECTION 10: INVESTMENTS In the initial interview, the Smiths discussed their intentions for educa tion savings for their children and for retirement savings. To date, they only considered bank Guaranteed Investment Certificates (GICs) and term deposits as suitable choices in these areas. Lane mentioned in the follow-up meeting that their assumption of 5.5 per cent growth in the Regist ered Education Savings Plan (RESP) account was unlikely, if they stuck with GICs and term deposits. 1. Stocks: In the follow-up meeting, Joel and Amber offered further insight into their investment goals and risk tolerance. They told Matt that Joels father lost most of his savings through investments in the High Alpha Investment Club. The club had sold investment units in a tiered system that later proved to be a Ponzi scheme. The system was challenged and shut down by authorities and Joels parents lost almost all of their Registered Retirement Savings Plan (RRSP) accounts in addition to the RESP money that they had been saving for Joel an d his younger sister. As a result, Joel was very much against stock and bond investments. Amber, on the other hand, wanted to know more about them and was looking for guidance on these investment classes. While she was aware of Joels concerns over risk, she felt that there was a pot ential for some investments in stocks and bonds, notwithstanding Joels concerns in these areas. Amber mentioned that their next-door neighbour, Ronda Shah, took every opportunity to tell Amber about the incredible returns that the Smiths were missing by failing to invest in stocks. Ronda seemed to always be earning big returns in stocks. In fact, Amber said Ronda never loses money! and often achieved returns on technology and mining stocks of 50 to 100 per cent. Amber was very interested in stocks and thought that the Smiths should pick two or three with names that they recognized to help them meet their future goals by generating big retu rns. Amber and Joel did not have a lot of time to manage a stock portfolio, but she was not concerned based on Rondas wisdom, this should be as easy as pie, as long as Amber could convince Joel to go along with the plan. 2. Bonds: Given his choice, Joel preferred to invest everything in bank GICs and term deposits, but to compromise with Amber he was willing to consider bonds. Joel knew there were bonds available with different maturities and he wanted to know if longer term bonds would be a good investment for the family, given the family assets and investment goa ls. He did some research and found some AAA provincial government bonds with maturities of 10 years that paid a four per cent semiannual coupon. He also found two corporate bonds, both with 10-year maturities. The first corporate bond paid six per cent semiannually and was rated BBB. The second corporate bond paid 11 per cent semiannually and was rated B. His impression was that a bond was a bond and he did not understand why one bond would have an interest rate five per cent higher than the other. He believed that since the coupons and principal were guaranteed in the contract, there was no risk as they would receive the payments regardless so why would they not invest fully in the 11 per cent bond? Joel also wondered if they should invest in a corporate, municipal or federa l bond. Were there other maturities that might be more appropriate for the family? 3. Mutual Funds: Matt suggested that the Smiths consider mutual funds as an alternative to the stocks and bonds they had been looking at. Amber seemed irritated by this suggestion Ronda had assured her that mutual funds were for novices and the simple-minded, that mutual fund fees were ridiculously high, and that mutual funds under-delivered on performance, in Rondas words, all of the time. Amber is looking for feedback regarding her comments. She is also wondering about the types of mutual funds that might be appropriate to meet the familys investing needs. If Joel and Amber decided to invest in mutual funds, should they invest their savings in a number of funds? Or should they invest in just one fund? Do Exchange Trad ed Funds (ETFs) have a place in the Smith family portfolio? 4. A Well-diversified Portfolio: How might the Smiths benefit from a well-diversified investment portfolio? How might they construct one?

SECTION 11: RETIREMENT PLANNING Amber and Joel had some options in this area thr ough their respective employers, although they had not taken advantage of these options yet. Ambers employer allowed an employee contribution of up to $4,000 per year to an employer-matched RRSP account. The employer would match dollar for dollar any contributions that Amber might make, up to $4,000. Joels employer, given his income, allowed contributions to an employer-matched RRSP account of $1,000 for the year and matched the first $500. For both of them, the funds invested in the company-sponsored RRSP plans would be invested in either mutual funds or in the companys stock. If they chose the fund option, Amber and Joel would not have any control over the fund family, but would be able to specify whether they preferred conservative, balanced or aggressive funds. If they were to purchase stock in the employer within the RRSP, they suspected that there might be unique risks. The couple did not understand some of the important differences between con servative, balanced and aggressive funds. They were also unaware of some of the risks associated with investing in the stock of ones employer.

SECTION 12: ESTATE PLANNING Amber and Joel wanted to ensure that if they were to die at the same time, their children would be cared for and that there would be enough money available to carry the children to at least age 18. In the event of their deaths they wanted a substantial amount set asi de for educational purposes. They also wanted to ensure that while there should be enough money for the kids to get through school, the money should be distributed at regular intervals, rather than distribut ed all at once. Their fear was that while they had responsible-seeming kids, too much money all at once would end up squandered. They did not want their children spending it faster than what was reasonable. Were there any other important areas that they were overlooking with regard to estate planning? EXHIBIT 1: SMITH FAMILY REVISED CASH FLOW STATEMENT Monthly cash inflows Net employment income $5,190 Universal Child Care Benefit (Landon only) $100 Total cash inflows $5,290 Electricity, water, sanitary services, and garbage pickup $225 Natural gas $125 Mortgage payment $877 Home insurance $70 Home security $55 Groceries $750 Telephone, long distance calls and home Internet $90 Cell phones/Smartphones $20 Car loan payments $520 Car gas, maintenance, and insurance $430 Clothing $140 School programs and dues $150 Childrens programs $650 Restaurants $150 Approximate minimum credit card payment $250 Other $50 Total cash outflows $4,552 Net cash flow $738

QUESTIONS

1. Property: Do the Smiths have any options for improving their home and residential insurance? Are they paying too much? Is their coverage adequate? Why or why not?

2. How would you change their investment strategy and portfolio given the potential impact of COVID-19?

3. Comment on the types of mutual funds/ETFs that might be appropriate to meet the family's investing needs. If Joel and Amber decide to invest in mutual funds/ETFs, should they invest in a number of funds? Or should they invest in one fund? Do ETFs have a place in their portfolio?