Terry and Breanna Joyce had a recent conversation with their friend Jake about life cycle changes and the importance of seeking financial advice. They have recently found out that Breanna has fallen pregnant with twins, due in seven months, so they decided to have a chat with Jake and his wife Margie, as they have just had a baby and might be able to offer some advice about how to plan for such a big change. Jake explained to Terry and Breanna that it was a big process to plan as their lives would change drastically. Something that Jake and Margie didn't think too much about was their finances. Jake and Margie had made an appointment with a financial planner to have their finances reviewed and told Terry and Breanna that they should carefully consider doing the same.

Terry and Breanna have been happily married for five years. During your first meeting with them, Breanna was quick to point out that she dislikes financial surprises. Terry is willing to take some risk if the associated returns are worthwhile. Neither of them have seen a financial planner before and do not spend a great deal of time understanding their finances.

Terry is currently 30 years old and works as an architect at a local firm and earns a gross salary of $140,000 per year. Breanna, two years his junior, is a software developer and has a yearly gross income of $150,000. Breanna is eligible for four months of maternity leave plus accumulated annual leave of 8 weeks (two months). She wants to take two years off work to raise their children. Her employer has indicated that she could take her maternity leave and annual leave at half pay.

Terry and Breanna have a mortgage on their home of $400,000 and the property is valued at $800,000. Terry owned the home before they married and he and Breanna decided to move into his house. The interest rate is 3.5 percent and they are making fortnightly repayments. Terry and Breanna have a joint savings account balance of $90,000 that earns annual interest of 2 percent. They share a chequing account that has a balance of $1,000 and the bank requires them to keep a minimum amount of $1,500 to earn annual interest of 1.5 percent, otherwise they receive 0.5%. Breanna had bought her own home before they married using an inheritance to make a deposit. The value of the home is $600,000 and the mortgage is currently $300,000. The property currently generates a rental income of $500 per week, which is paid monthly to coincide with the monthly repayment. Rates are $4,000 p.a., insurance $1,000 p.a., maintenance $1,500 p.a., real estate management fees, 1.5% of rental income.

They are somewhat concerned about the amount of personal income tax and medical levy withheld from them. They are not entirely convinced that the tax calculations are correct. In their regular weekend shopping, credit cards are often used. Their monthly balance always seems to hover around $3,000 at all times and they repay only 15% of the outstanding amounts at the end of each month. They use their card to draw cash from the ATMs to cover their daily household expenses even though they carry about $500 in cash between them.

Education is highly valued by the couple, they thought they should start a savings plan for their childrens education expenses. To encourage their children to take up tertiary education they are happy to set up an education fund for their children. When the children start university the tuition fee per person will be $15,000 annually for each of the three (3) years of study, which will be paid at the beginning of each year (1st January). The tertiary program will take three years to complete.

The couple believe they should save and be self-sufficient during retirement although they have yet to establish a retirement plan. To date, Breanna has accumulated $40,000 in her superannuation account while Terry has $53,000 in his account and has not named the beneficiary.

They are currently saving $30,000 p.a. after tax, and depositing it to their joint savings account.

The following additional information is also available: Superannuation dividend payments are approximately 5% p.a. after tax. In general, an increment of 3% in salary is expected every year. The long-term return for equity investment is projected to be around 14% per year, whereas bond funds are expected to offer yield of 5% per annum. Investment in term deposits will generate average return of 5% per annum over the next 35 years. Return from low risk managed fund is approximately 6% per year. Average yearly return on all other investments is expected to be around 4% per year. The life expectancy for Terry and Breanna are 80 and 85 years old respectively. The children are expected to be dependent on their parents until they turn 24 years old. Tertiary education will commence when the children turn 19 years old. Terry and Breanna are Australian residents. For calculation of taxable income, use the relevant tax rates provided by the Australian Taxation Office (ATO). Terry has tallied his work-related expenses for the year to be $2,500, which includes $2,000 for return bus fare from home to work during the year. He has also donated $200 to CARE Australia. Breanna has work-related expenses of $1,000, tax deductible gifts totalling $500 and paid $350 for tax return preparation. Both Terry and Breanna provide approximately 9% superannuation contributions via salary sacrifice and their respective employers provide another 10% contribution into their superannuation funds. For the use of credit cards, interest charged for unpaid balance is approximately 21% p.a. A yearly fixed rate of 7% will be incurred for all other types of loan. All debts are amortised over the period of the loan

Question 1

Help Terry and Breanna identify their short-term and long term financial goals.

Question 2 -

i.) Based on the information available to you, construct an income and expense schedule for the couple.

ii.) Create a net worth statement for the couple. Comment on whether they have a negative or positive net worth.

iii.) Using information from the above, calculate the following ratios (make sure you make a brief comment on each ratio).

a. Savings ratio b. Liquidity ratio c. Solvency ratio d. Monthly debt service ratio

Question 3 -

Given the information regarding the home loans given in the background information calculate:

i.) The repayments for their home loan.

ii.) The repayments for their investment home loan.

ii.) How much do they still owe the bank when their twins start university?

(Present an amortisation table for their mortgages. DO NOT VARY THE RATES OR THE REPAYMENT REGULARITY).

Question 4 -

Calculate the amount to be saved at the beginning of each year in order to accumulate $45,000 for each of the twins education, assuming a discount rate of 12% on their savings. They will commence their university study in the month of January.

If instead, they save money at the end of the year, how much do they have to put aside to meet the same education funding goal?

Question 5 -

Terry and Breanna are doubtful about their tax calculation. Using the information provided, calculate the taxable income and tax payable. What tax planning advice can you offer to the couple?

Question 6 -

Terry and Breanna do not have a will. Advise them on the issues they should consider in drawing up a valid will (make sure you include the children in the will).

Question 7 -

Discuss the need for the following covers for both Terry and Breanna.

i. Total permanent disability ii. Trauma iii. Income protection

Question 8

Based on your discussion in parts 1 to 7, provide specific recommendations to allow the couple to achieve their desired goals. Advise them of any potential problems or issues they need to know and suggest alternative plans to overcome them. Support your recommendations with additional calculations.