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The Financial Planning Process


Bill and Jan may have real financial planning problems that they can offset with a better planning approach. However, this consideration would not be possible if they did not have any form of income they could budget their needs and wants on. Based on the $60,000 household they currently have, both Jan and Bill have the potential to budget in a better manner as they are not in deep debt. In such case, the income they bring in from their respective sources is above the average that lower middle class households have and, therefore, they have a better chance of settling their mortgage loans and servicing their car. However, while these are the considerations, the savings they have exceed $3000, but are lower than $4000, which is way above the $5000 they make in a month given the annual income of $60,000. In this case, it is strength to consider that, given the major budgets the two consider, they are able to secure above 50% in savings.

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Jan and Bill have two problems in both the way they budget and the priorities they consider in their budgeting. Paying for a mortgage is one thing, while selling the current mortgaged house is another. In this case, it shows that Jan and Bill are not considering settling the debt anytime soon. For example, selling of houses involves mortgage plans upon which the duo would not be moving to a less attractive house than they already have. In this case, while they sell the current house, the new house would force them to dig deep into their pockets, though their income does not increase. In addition, the consideration of buying a new car is not a bad idea, but it is uneconomical to buy the new car and keep the older one. The current car costs $400 to maintain upon which it serves Bill and Jan properly. Buying the other car without selling the previous one is a weakness as the new car will bring in new costs, while the older one will maintain a certain level of expenses even though lower than before.

Fundamental Steps of the Financial Planning Process

1. Determination of the current Financial Situation

With regards to budgeting and setting financial consideration in line with the current situation, it is advisable tat Jan and Bill review their current situation with regards to income, expenses, debt, and savings. Preparation of a list comprising current assets and debt balances gives a foundation for financial planning activities.

2. Development of Financial Plans

Bill and Jan require making a list upon which they indicate their values and goals with the periodic review of their goals. It is important that both Jan and Bill analyze their feelings about money and why they feel so. This step is essential as it cultivates the ability to differentiate wants and needs. Specificity in determining or setting financial goals is vital to the process of financial planning. There are various steps or courses of action that can be suggested by outside sources with regards to the goals, but the goals require an arrangement upon which priorities are observed. For example, savings do not always mean better financial goals as investing all the current income to secure a brighter future is an action plan as well (“The financial planning process”, n.d.).

3. Identify Alternative courses of Action

In the decision making process, having a defined set of alternatives is a crucial consideration. In financial planning, there are plenty of variables that will influence the alternatives that any given entity decides to settle on. However, to determine the most relevant alternatives, a number of action courses is considered; these include: continuing with the initial action plan, expansion of the current situation, changing the current situation, and taking a new course of action. Although not all these courses of action are applicable in all the decisions to be made, they have a merit of influencing possible alternatives (“The financial planning process”, n.d.).

4. Evaluate Alternatives

Possible courses of action need to be evaluated with regards to the current lifestyle, personal values, and economic situation. For every decision made, an alternative course of action is closed. For example, choosing to invest in stock may mean the abortion of a plan to take a vacation. For every decision made, one is entitled to live with the consequences of leaving an alternative course of action. While evaluating alternatives, risks are considered as a vital element of the financial planning process and they should be equally considered as any other positive expectation from the decision made. For example, if Jan and Bill choose to sell their current house, it does not mean they will get a better house or land a better deal from their buyer (“The financial planning process”, n.d.).

5. Creating and Implementing the Financial Action Plan

In this step of the planning process, development of an action plan is considered. This involves setting ways and means of achieving the financial goals decided upon. Immediate or short-term goals come first while the goals that follow in line come next. In the implementation process, it is advised to consider assistance of others who understand some of the action plans in focus. For example, while investing in stock, it is wise to seek the help of an investment broker (“The financial planning process”, n.d.).

6. Reevaluating and Revising the Plan

Taking a particular action plan does not mean the end of a financial planning process. The process has to be reevaluated to ensure that the decisions made are in sync with the current resources and are logically fitting into the set timeframes. For example, the decision to buy stock does not close the probability of the stock’s increase in trading prices nor does it prevent companies from closing their offerings. When changes are inevitable with regards to income, debts and savings reflected in the financial plan should be adapted. For example, given that all factors are held constant and one’s vehicle is involved in an accident, repair of the vehicle and settling any legal charges to other road users may affect the financial plan, hence requiring reevaluation.

Measurable Goals

With consideration to Bill and Jan’s current financial status, their financial goals should reflect the following three measurable considerations;

  1. Selling the current car
  2. Paying up the credit card debt in 3 installments
  3. Declining to sell the current house and investing in stock

Implementing the Goals

  1. Selling the current car
  2. The current car costs $400 a month to maintain and selling it allows this amount to be directed to other businesses, such as settling the credit card debt
  3. Since the car is pay off, it can be sold for any amount above $5000 as this would allow the chance of buying a new car and restrict maintenance costs of the older car (Taleb, 2007).
  4. The amount from the car should be directly invested in the new car to limit the expenses acquired from income
  5. Paying up the credit card debt in 3 installments
  6. After selling the current car, a two to three months delay is to be considered before buying the new car, hence investing the maintenance cost of $400 into paying the credit card debt – this will offset about $800 - $1200 of the card
  7. With regards to savings, the $200 debt payment is increased to $1000 making a $3000 in debt payment with the same period.
  8. $3000 from savings in three months and $800-1200 from the maintenance of the car would make $3800-4200, leaving only $800-1200
  9. Since mortgage is a long term expense, the current $1000 monthly payment will be reduced to $700 for the three months making the total payment of the credit card debt $4700-5100 over the duration of three months
  10. Declining to sell the current house and investing in stock
  11. After the three months of having no car and paying the $5000 credit card debt, the current savings will hike from the current $3400 to $4300 a month, assuming that the mortgage payment of $700 is maintained.
  12. The payment of the mortgage can be increased from $700 to $1400, resulting in the original $3400 in savings.
  13. Instead of saving in the back, $2000 is invested in stock using a stock analyst for this task (a long term decision to invest $2000 every month for 2 years is preferred)
  14. The $2000 worth of stock will be the new savings plan upon which lifetime returns are expected (Lewis, 2011).

Housing and Car

Jan and Bill cannot buy a new house while the current one is still under payment as there is no guarantee that their income can sustain buying a house better than the current one. In addition, while the current house may have a pending mortgage to clear, it is highly unlikely that any other house of the same quality and size will be sold cheaper than the current one. The housing prices have gone up with regards to high demand and global financial instabilities. This means that the only economical move Jan and Bill can adapt is to keep the current house in order to strategically be economical with regards to household income.

A car is a vital requirement at this stage as the current financial plan involves selling the current stage. After selling the current car for $5000, a new car is considerable through the payment of the $5000 and the $1400, which remain after $2000 worth of stock is bought initially. With a budget of $10,000 or a new car, car can be bought using two major methods that can have equal impacts on the financial status of Jan and Bill – these methods are explained under buying a new car below.

Buying a New Car

Cash: With $6400 in cash, it is evident that most energy saving vehicles will not be affordable at that price according to market analysis. In this case, considering that buying a new car will come three months after the current one has been sold, it is highly likely that three more months would enable them to buy an energy saving model. The rationale of buying a car in cash is that it overrides the benefits of other means when it comes to saving on the dollar.

Hire purchase: Buying a car after three months can be economically viable, but after six months it can be very devastating considering other means of transport to and from work. In this case, after the current car has been sold, Jan and Bill can clear up the credit card debt and buy a $10,000 worth of car through hire purchase upon which the remaining $3600 can be subject to the dealer’s terms and condition. However, as compared to cash payment for the car, hire purchase gives Jan and Bill immediate ownership of the car, but costs more in the long run. Attempting the cash payment will take longer to accumulate the cash, but will be less expensive in the long run. Each method is considerable, but cash payment is better as subway transport is an alternative means that saves energy arising from the increasing amount of traffic.

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