Personal Financial Planning: The Case of Mr. X Research Paper

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Updated: Mar 9th, 2024

Introduction

Everybody prefers to have financial security in his/her life so as to be free from financial troubles and distress. Indebtedness is the worst thing that everyone dislikes in life. Financial security can contribute personal wellness and peace of mind. Financial planning is a necessary step towards securing one’s financial future. Having a financial plan and adhering to it will help one better manage his/her finances and retire rich. When one starts earning, he/she also needs to plan his/her expenditure and savings. Though, not in the form of a perfectly written document, one should definitely have a rough idea about his/her expenditure every month. When one is single, there is a lot of disposable income available with him/her. If married, he/she will have a larger expenditure and different priorities for savings. Whatever be the case, one should have a plan of where his/her hard earned money is going either as expenditure or savings.

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Personal Financial Planning- Meaning and Significance

Personal financial planning entails planning for one’s financial needs, present as well as future, keeping in mind his income. He should also have a rough idea of how much he spends on essentials like groceries, rent, travel, and phone and electricity bills. Money for shopping/eating out/entertainment should also be budgeted for. These needs vary significantly according to one’s standard of living. Two people earning the same amount of money may have different spending needs, according to their habits, tastes and preferences. Apart from these, one must set aside a part of his earnings for some unforeseen events and emergencies and the remaining money he has every month, should be invested instead of letting it sit idle. (Harry and Smith).

Most of the people need formal personal financial planning so as to achieve their basic financial goals. To achieve their goals, there are different avenues of investments, insurance coverage, savings plan, tax savings devices, retirement plans, etc. Personal financial planning mainly includes the development and implementation of the total plans in order to achieve the over all financial objective. Each person’s financial objective differs depending on their individual goals and their attitudes. There are different steps involved in the preparation of the personal financial plan. The first and foremost step is to collect the useful information regarding the personal situation of the person. It includes the information regarding the person’s family investment that means investment in the health, life, property, liability, tax, employee benefits etc. Using this information, the personal financial statement of the person and a balance sheet is also prepared. The main purpose of the preparation of the personal balance sheet is to determine how much amount the person has now, and how much amount he needs to achieve his long term and short term financial goals. The short term goals will be related and will be based on the current financial situation of the person. Also the preparation of the personal financial plan will enable the person to identify his assets and liabilities. Listing of the assets will help the person to get an idea regarding the liquidity and liabilities give an idea regarding his personal claims and both are listed according to the order of liquidity and claims. The difference between the assets and the liabilities gives the net worth of the person, which indicates the financial position of the person at that particular point of time. Some of the other items listed in the personal balance sheet include fixed assets, which are characterized by reduction in the value over the entire life time, then comes the appreciating assets which characterized by an increase in their value over the life time, another item is diversification in which the money is allocated among different assets than concentrating on a single asset. Another item called the portfolio of assets consists of all the assets the person posses. Return on portfolio is another item listed in the balance sheet which consists of the cash generated from the assets and the annual increase in the market value of the asset instrument. By calculating the net worth, the person will get an idea regarding his present financial condition and from there he can plan for his future. If the net worth is showing a negative amount then in the financial plan, top priority should be given to pay off some of those debts. If the net worth is positive, then more importance should be given to increasing the net worth by either decreasing the liabilities or by increasing the investments in the assets.

The second step involved in the preparation of the personal financial plan is the fixing of the objectives. But the problem is that the objective may not remain static since the priority of the objectives change along with the circumstances of the person. A person can fix many objectives according to his situation.

Personal Financial Plan of Mr. X

To draw the roadmap of a strategy to implement, the first thing needed is to define the destination. Therefore, it is vital to set the financial goals one wants to achieve. The personal financial plan of Mr. X cannot be separated from his life objectives. It includes both monetary and non-monetary objectives. The ultimate aim of a financial plan, as stated earlier is to have financial security and personal wellness. Mr. X has also the same objectives in life. His long-term objectives in life include:

  • Maximizing earnings and wealth
  • Practicing efficient consumption /Efficient Spending
  • Finding life satisfaction through enough savings, owning home, being free of debt and having a good job that pays handsome package
  • Financial Security

However, the specific goals through which his long-term objectives are attained can be put as below:

  • Finish BCCC 2 years college in 2010 with AA degree
  • Attain a Bachelor Degree in Accounting from the University in the next 2 years
  • Acquire a good job that pays in the range of $ 50,000-$70,000 per annum
  • Pay off all debts including that o$530 f three credit cards worth $1,200 with Best Buy MC, $670 with Sears MC and $530 with Discover Card
  • Loose weight of 10 pound in three months
  • Save $1000 for a pleasure trip in June 2009

Mr. X’s financial goals are not arranged sequentially. The above list is the various financial goals to be attained at different tome points. The first thing that he would like to have in life is an academic qualification with a very good grade. This takes two years for completion. However, he will have many short term financial objectives during this period. After that, he likes to attain a University Bachelor Degree in another two years. Though, this seems to be somewhat non-monetary, the purpose of academic qualification includes acquiring wealth also for better living. Acquiring a job that pays a handsome salary is of course an objective that is most important to Mr. X. Because, financial security is basically depends upon how regular one’s income is and its volume. But volume does not matter when one is not able to spend economically and logically. Thus, knowing one’s sources well before spending is very important for financial wellness and prosperity. Mr. X has to first practice budgetary discipline so that he will be able to spend the money efficiently. Savings can be made only if the monthly income exceeds the monthly expenses. But, if the monthly expenses exceed the monthly income, savings become impossible. He wants to pay off his debts taken from three credit cards during his studies. Similarly, he wants to go for a leisure trip in the middle of his studies by incurring an amount of $1000. Mr. X also likes to loose his weight by 10 pounds in the next three months.

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Question No. 2

Tabl 1. List of Monetary and Non-monetary Goals with target date and amount of money

Sl.
No.
Monetary GoalsTarget DateTarget Amount of MoneySl.
No.
Non-monetary GoalsTarget DateTarget Amount of Money
1Gaining a good jobAfter 2012$ 50000 – $ 700001Completion of BCCC2010
2Debt Pay off2Bachelor Degree in Accounting2012
aBest Buy MC$1,2003Reducing weightin the next 3 months
bSears MC$670
cDiscover card$530
3Pleasure TripJun-09$1,000

Question No. 3 (a)

Table 2. Mr. X’s Income Statement for the month of September, 2008 (Amount in $)

IncomeSep-08
Salary1150
Total Income1150
Expense
BGE150
Car Insurance67
Apartment Payment200
Food, shopping190
Credit Card Payment150
Personal spending150
Gas100
Total Expense1007
Net Income143

(Flexo).

Question No. 3 (b)

Table 3. Balance Sheet of Mr. X for the month ending September, 2008 (Amount in $)

AssetsAmountAmountLiabilitiesAmountAmount
Cash143Credit Cards
a. Best Buy MC1,200
Investments200b. Sears MC670
c. Discover card530
Total Liabilities2,400
Real EstateNilLess payment during the month150
2,250
Other AssetsNilOther LiabilitiesNil
AutomobilesNil
Negative Net worth1907
Total Assets2,2,50Total Liabilities2,2,50

Question No. 3 ©

Table 4. Mr. X’s Monthly Budget commencing from September, 2008 to August, 2009

CategorySeptOctNoveDeceJanFebMarAprilMayJuneJulyAug
Income
Salary115011501150115011501150115011501150115011501150
Other Income
Income Sub total115011501150115011501150115011501150115011501150
Expense
Apartment payment200200200200200200200200200200200200
BGE150150150150150150150150150150150150
Personal Spending150150150150150150150150150150150150
Utility
Gas100100100100100100100100100100100100
Food
Food and Shopping190190190190190190190190190190190190
Debt Payments
Credit Card Payment150150150150150150150150150150150150
Pleasure trip1000
Car Insurance676767676767676767676767
Investment and Savings200
Total Investment and Expenses120710071007100710071007100710071007200710071007
Surplus or Shortage-57143143143143143143143143-1053143143

(Budget Worksheet).

Calculation of Ratios

Question No. 3.1

Table 5. Liquidity/ Expense Ratio

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MonthLiquid AssetsTotal Monthly ExpensesRatio
September343100734.
October343100734
November343100734
December343100734
January343100734
February343100734
March343100734
April343100734
May343100734
June343200717
July343100734
August343100734

Question No 3.2.

Table 6. Debt Payments to Disposable Income

MonthDebt PaymentDisposable IncomeRatio
September150143104.89
October150143104.89
November150143104.89
December150143104.89
January150143104.89
February150143104.89
March150143104.89
April150143104.89
May150143104.89
June150Nil ( Pleasure trip)Nil
July150143104.89
August150143104.89

Question No. 5

Table 7. List of Outstanding Debts

Nature of DebtName of LenderAmountMonthly PaymentTarget date
Credit CardBest Buy MC1,200at the end of each month
Sears MC670
Discover card530150

Question No. 6

MonthSurplusDeficitNet SurplusAverage Surplus
Septembernil57
October143
November143
December143
January143
February143
March143
April143
May143
Junenil857
July143
August143
Surplus/Deficit143091451643

Mr. X has an average Surplus of $ 43 per month and he can avail debt for another $688, which can be calculated as below.

Monthly payment made by Mr. X for a total debt of $ 2400 is $ 150.

Therefore, rate of interest is 150/ 2400 = 6.25 %

Average surplus available with Mr. X is $ 43

Assuming the same interest rate, the maximum debt amount is 43/ 6.5 X 100 = 688

Question No. 7

No information on price range of house

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Question No. 8

The only insurance policy with Mr. is auto insurance

Question No. 9.

The investment of $ 200 with a bank is the only investment

Question No. 10

No relevant data such as retirement age, percentage increase in the income and expenses etc are given, the calculation is impossible

Works Cited

  1. Budget Worksheet. . 2008. Web.
  2. Flexo. . Consumerism Commentary. 2006. Web.
  3. Harry., and Smith, Francis. Sample Statement of Net Worth. Finplan.com. 2007.
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