Personal Financial Advice For Joe: Short And Long Term Goals

Circumstance -1

The report seeks to present the personal financial advice for Joe under two different circumstances. The personal financial advice relates to best management of savings, pension and property contribution so as to maximise the wealth in the medium term (5 Year to 10 Year) and in the long term (20 years to 25 Years). The advice takes into account personal circumstance of Mr Joe along with attitude to risk, growth in salary, rate of inflation, expected return on investments. The advice has been prepared based on client financial needs.

Mr. Joe is currently 33 years old and works as a free-lance journalist for a national newspaper in London. He is satisfied with the way his career has progressed, although he started working later than expected, when he was 27. His job is relatively safe. His annual salary varies between £50,000 and £65,000, he currently rents a small flat in Greenwich for which he pays £1,800 a month in rent.

Mr. Joe is considering buying his own place. Working as a freelancer, Mr. Joe is not in any occupational pension scheme, nor in any personal scheme, he would like to start contributing to a private pension but he is wondering whether they are good value for money and if that would allow him to live comfortably once he retires or whether he would be better off with alternative arrangements such as buy a property to let or investing in a mutual fund.

Mr. Joe has a credit card on which he pays 38% APR and which he rarely uses. He also has £54,000 in a saving account from which he receives 1% annual interest rate and £25,000 in another saving account from which he receives 1.5% but has no access to the money for 3 years. He would like to earn more interest on his savings as well as gain accessibility to them but does not know how, he is willing to take more risk. Joe is planning to get married next year.

The short/medium/long term goals of Mr. Joe has been presented as under:

• Purchasing a house for which Mr. Joe shall be required to pay down payment of approximately 26.5% of the property value. Further, if Mr. Joe purchases a studio flat the cost shall be GBP 200000 and thus he shall require GBP 53000 upfront. Further considering loan @5% on home for a tenure of 30 years the EMI shall fall at 790 GBP approx..;(statista.com, 2020)
• Wedding expense: As Mr. Joe is planning to marry next year, he shall be in need of funds for marriage expenses. If Mr. Joe plans for a simple wedding the cost shall be GBP 18000 approx. Thus, in short term he shall be in need of such funds;(gov.uk, 2020)

(statista.com, 2021)

• Retirement Planning: Mr. Joe is currently 33 years old and has no active pension for his retirement and thus an active pension shall be required to manage the retirement. There are both public and private pension scheme in UK. The pension scheme can be defined contribution or defined benefit.(zurich.ie, 2022) In case of Mr. Joe defined contribution scheme shall apply. Further, 25% of the pension pot under this scheme is tax free. Considering retirement requirement and needs the amount of pension per month has been determined at GBP 295. The computation has been presented as under:

Table 1: Monthly contribution (indiafirstlife.com, 2020)

Annual Requirement at retirement has been considered at GBP 100000 at the time of retirement and the life after retirement shall be 20 years.

The age for retirement shall be 60 years and time left to retire is 27 years.

Rate of interest on investment has been considered at 6% per annum

Circumstance -2

 As given to understand, Mr. Joe currently earns between GBP 50000 and GBP 65000 and it is estimated that he spends 50% of income on living expenses and effective tax paid ranges between GBP 8000 to GBP 10000 and also sufficient medical coverage Thus, there is savings of 15000 to 20000 GBP which shall be utilised towards house payment, pension contribution and setting aside money for marriage. Accordingly, there is no other money left. Further, saving of GBP 79000 shall be used for down payment of home and for emergency funds.

Considering the current income and expense analysis of Mr. Joe, the risk limit of Mr. Joe is very low as he does not have any extra money left after meeting the requirements and thus the risk bearing capacity of Mr. Joe is low.

 Considering the risk profile and financial needs of Mr. Joe he shall break the funds from saving account which are earning a very poor return and utilise the major proceed for down payment and keep the balance as emergency funds. Further, the annual income shall be utilised towards tax payment, living expense, pension contribution and EMI of the home loan. Also, the expense for wedding which is due next year may be arranged from the funds.

Further, the requirement for retirement may be duly met from the pension scheme and thus goals and objectives shall be met if the above matrix is followed.

 Mr. Joe is 33 now and a well-known journalist, he has been working hard since graduating and he has now worked for many UK broadsheets, he is currently employed by the Financial Times. His annual salary is £85,000, he is in his employers DC pension scheme.

He owns and lives in a small property in Wimbledon, however he now needs to move into a bigger place as his two children are 2 and 5 need more space. He hopes that both his children will go to University.

All his savings (£50,000) are in a savings account which provides him with 0.8% interest a year. He is very risk averse but would like higher interest on his savings as he is becoming concerned about how to pay for his children’s education.

Joe also owns an expensive vintage car he rarely uses and would be willing to sell.

He is also paying a mortgage (£1000 a month), he has an interest-only mortgage and does not realise that in 8 years he will have to pay back the capital he borrowed which amounts to £240,000.

Short to Medium to Long Term Goals

The short/medium/long term goals of Mr. Joe has been presented as under:

• Education of Children: University expenses for children is estimated to be 150000 GBP per annum and thus total expense in this regard shall be GBP 300000 (Playdon, 2022)
• Moving to new Home: Mr. Joe is considering to purchase new home and the down payment of the same may be made from his previous home;
• Repayment of Loan of GBP 240000 which is currently interest only.(careerloans.ca, 2020)

 As given to understand, Mr. Joe currently earns between GBP 85000 and it is estimated that he spends 50% of income on living expenses and effective tax paid ranges between GBP 15000 to GBP 20000 and also sufficient medical coverage Thus, there is savings of 25000 to 30000 GBP which shall be utilised towards house payment, setting aside money for children education. Accordingly, there is no other money left. Further, saving of GBP 50000 shall be used for reducing mortgage debt of home and for emergency funds.

Considering the current income and expense analysis of Mr. Joe, the risk limit of Mr. Joe is very low as he does not have any extra money left after meeting the requirements and thus the risk bearing capacity of Mr. Joe is low. (economictimes.indiatimes.com, 2021)

 Considering the risk profile and financial needs of Mr. Joe he shall break the funds from saving account which are earning a very poor return and utilise the major proceed for repayment of mortgage and keep the balance as emergency funds. (K.Prat, 2020) Further, the annual income shall be utilised towards tax payment, living expense, EMI of the home loan. Also, the expense for children education expense which shall be due in future may be arranged from the funds.

Further, the requirement for retirement may be duly met from the pension scheme and thus goals and objectives shall be met if the above matrix is followed. Also, he may sell his vintage car and invest the proceeds in the fix instruments which carry low risk to meet the education needs.

Conclusion

Based on above discussion, it may be inferred that under both the cases Mr. Joe has very low risk taking capability and the income is sufficient enough to meet the living expenses and other necessary requirements for Mr. Joe. Besides above, Mr. Joe has short term, medium term and long terms goals which are satisfied based on above matrix

References

careerloans.ca, 2020. Goal Setting: Short, Medium and Long-Term Goals. [Online]
Available at: https://careerloans.ca/goal-setting-short-medium-and-long-term-goals/
[Accessed 15 April 2022].

economictimes.indiatimes.com, 2021. Wealth. [Online]
Available at: https://economictimes.indiatimes.com/personal-financ
[Accessed 14 April 2022].

gov.uk, 2020. UK House Price Index for January 2018. [Online]
Available at: https://www.gov.uk/government/news/uk-house-price-index-for-january-2018
[Accessed 15 April 2022].

indiafirstlife.com, 2020. Retirement Calculator. [Online]
Available at: https://www.indiafirstlife.com/tools-calculators/retirement-planning-calculator
[Accessed 15 April 2022].

K.Prat, M., 2020. risk profile. [Online]
Available at: https://searchcompliance.techtarget.com/definition/risk-profile
[Accessed 15 April 2022].

Playdon, J., 2022. How Much Does it Cost to Study in the UK?. [Online]
Available at: https://www.topuniversities.com/student-info/student-finance/how-much-does-it-cost-study-uk#:~:text=Now%2C%20UK%20and%20EU%20students,Survey%20of%20University%20Tuition%20Fees).
[Accessed 15 April 2022].

statista.com, 2020. Median loan-to-value (LTV) ratio for mortgage sales in the United Kingdom (UK) from 2016 to 2020. [Online]
Available at: https://www.statista.com/statistics/1077616/median-loan-to-value-ratio-for-mortgage-sales-in-the-united-kingdom/#:~:text=The%20median%20loan%2Dto%2Dvalue,percent%20with%20their%20own%20savings.
[Accessed 15 April 2022].

statista.com, 2021. Median loan-to-value ratio for mortgage sales in the United Kingdom 2016-2020. [Online]
Available at: https://www.google.com/search?q=marriage+expense+UK&rlz=1C1ONGR_enIN964IN964&oq=marriage+expense+UK&aqs=chrome..69i57.3126j0j4&sourceid=chrome&ie=UTF-8
[Accessed 15 April 2022].

zurich.ie, 2022. Defined Benefit versus Defined Contribution. [Online]
Available at: https://www.zurich.ie/pensions-retirement/faqs/defined-benefit-versus-defined-contribution/
[Accessed 15 April 2022].

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