WEEK #4: MONDAY MAY 30^th FIN 1011

IN-CLASS ASSIGNMENT #1

The Rashad Family

Omar and Mahnoor Rashad and their 5-year-old daughter, Sara, live in Pickering, Ontario. They have heard about you and your expertise as a financial advisor. Your references were exceptional. Having established their trust, you explained the next step in the financial planning process is collecting personal financial information and creating a set of family financial statements (which the Rashads have never prepared). Based on your reputation, they have no hesitation in telling you all about their financial position.

Omar is 33 years of age and graduated in 2019 as a medical doctor. Mahnoor is 28 years of age. She recently quit her job as a librarian to help her husband by working as the receptionist in his medical office. In 2020, they purchased a modest house for $840,000 with a down-payment of $84,000. They assumed a mortgage (at 1.99%) for the remaining $756,000 and the current monthly mortgage payment is $1,254. They are happy to be in their own home and are very thankful to both set of parents who gifted the young couple money for their down payment.

Regarding financial assets, you are told that Omar has $1,500 in his personal chequing account and Mahnoor has $900 in hers. They also have a joint savings account that currently holds $8,000. They are also trying to save for their retirement; each has a personal RRSP account (Omar has $14,000 and Mahnoor has $9,500).

They guess that their clothing would cost $9,000 in total to replace and the remainder of their household effects would have a total replacement cost of approximately $31,000. Omar drives a Honda CRV that he purchased from a used car dealer for $23,000 including taxes. Mahnoor drives an older model Kia compact car that is in good condition and would sell for about $6,000.

The Rashads have outstanding balances on three credit cards: Omars Visa ($18,000 @ 17% interest), Mahnoors MasterCard ($4,000 @ 18% interest) and a charge card (in Mahnoors name) from The Bay ($3,000 @ 22% interest). Last year, they paid approximately $370 per month in interest payments for these three credit cards. In addition to these credit cards, they still have a car loan with an outstanding balance of $19,000 @ 5% interest and monthly payments of $79.

In response to a few more of your questions, Omar and Mahnoor tell you they have no luxury assets, except for some expensive gold jewelry Mahnoor has received from her family over the years (approximate value is $30,000). Also, a real estate friend says the value of their house has increased in value approximately $10,000 since the day they bought it. Mahnoors sister (who works at a car dealership) has told Omar he could sell his car tomorrow for $16,000.

The Rashad Family (Continued)

After your discussion about the Rashad family assets and liabilities, you turn the discussion to the other important part of their family finances their income and expenses. Omar and Mahnoor were a lot less confident in their knowledge of their income and expenses (especially expenses) than they were concerning their assets and liabilities.

For the question of income, Omar and Mahnoor are working very hard to build a successful medical practice. They now have combined monthly income of $8,000. By coincidence, Omar earned exactly 3/4 of this amount and Mahnoors monthly income from the practice is $2,000. Based on these numbers, you estimate that Omar is in a 33% overall tax bracket and Mahnoors overall tax rate is 20%. In addition, due to some smart tax planning last year, they received $2,800 in combined tax refunds last year.

You already know what they pay as a regular monthly mortgage expense ($1,254). But they did some checking before your meeting and identified the following annual expenses related to their home: real estate taxes - $3,500; utilities - $1,900; insurance - $880; home repair costs - $2,000.

Other personal expenses included: hygiene - $2,900; food - $14,000; clothing - $6,800 (combined); entertainment - $6,000; daycare - $12,000; donations (Mahnoor) - $1,000; miscellaneous expenses for Sara - $800 and a family vacation to visit relatives in India - $10,000. Unfortunately, they have not saved too much in the last couple of years since buying their house and due to costs related to setting up Omars medical practice. This thought reminded Mahnoor that their cars (together) cost $5,800 in gasoline and maintenance last year in addition to the monthly payments of $78 on Omars car.

Mahnoor had also forgotten that, several years ago, she inherited some mutual fund units from her aunt who had suddenly passed away following a car accident. She holds this investment in a personal, non-registered investment account. She believes this investment has a current market value of $45,000. Although it does not pay dividends, they would really like to keep it. They have been told that they can borrow money at 6% interest for investment purposes (but are not sure whether that is a good idea or not). On the other hand, both are agreed that they are willing to sell the mutual fund units if it helps their financial position.

Finally, they remember they just received a statement showing the current outstanding balance on their mortgage is $725,000.

Omar and Mahnoor are careful with their money. But it is an expensive time for them as they start a family and manage the ongoing costs of running a medical practice. They feel they live on a tight budget (even though they dont really have a formal budget to manage their family income and expenses). It is not surprising that they have trouble saving any money.

The Challenge

Take on your role as advisor now.

Before you can answer their questions, you will need to make sense of their financial position.

Do you think there are omissions in the information they have given to you? What additional questions would you ask.

Instructions:

Prepare a personal balance sheet and income statement for Omar, Mahnoor and Sara.