Scott Carr
...xpenses- Cut back on variable expenses such as eating out. He needs to treat some of these expenses as fixed expenses. Cut down on eating out. Bring more lunches. No more than $250 a month should be spent on groceries and eating out. $50 a week for groceries and $50 a month for eating fast food. He needs to purchase a single cup coffee maker and make his own coffee. No more Tim Horton’s. Recreation will also have to be limited to no more than $125 a month. Instead of going out to the movies every week with his son, he will have to rent movies more. Credit Card - He needs to pay off the credit card with the amount that he has in his savings. Pay if off completely. It will leave him with no savings whatsoever, but the amount of interest on savings in a bank account is very low compared to the amount of interest that he is paying on his MasterCard each month. The MasterCard needs to be taken out of his wallet and put in a drawer. It must only be used in emergencies. Since he has no home expenses, the only extreme emergency would be a vehicle repair. Emergency Savings Fund - This will allow him to be able to put at least $239.00 away every month into an emergency savings account. Saving $239 a month will take him 3 years to save three months worth of living expenses. It will not take him this long though as his truck loan will be finished in 13 months and his student loan will be finished in two years. Student Loan - Scott can claim the interest that he pays on his student loan on his income tax return as a deduction so I recommend that he leave that loan as it is. He will only be paying that for another two years. After that two years, he can use the additional $130 to invest in RRSP’s. RRSP’S AND RESP’S – I have recommended that he put $50 a month away into an RRSP and an RESP. I know that you are supposed to wait until you have your three month’s emergency savings fund saved before you start to invest but I think it is important that he start investing in these at the same time. $50 a month will give his son $600 in an RESP at the end of 2005. Because he is still young, it could be invested in some higher risk areas thereby generating a higher return. The government will add 20% to this amount up to a maximum of $400 a year. The government would give a grant for 2005 of $120. Scott may even be able to convince his son’s mother to also put $50 away in the same account giving his son a total of $1,440. The returns on the RESP are tax sheltered. If his son does not decided to attend a post secondary institution, the investment (less the government grant) can be rolled into an RRSP. He can’t lose. The $600 in the RRSP will give him approximately an additional $250 back on his tax return. This should be put immediately back into the RRSP account. In three years he should have approximately $4,100 in RRSP’s if he uses his income tax refund and the additional $130 in year three that he was paying on his student loan. I advised him because of his age, he should sit down with a financial planner before investing in RRSP’s and really understand what his risk tolerance is. VEHICLE PAYMENT – His vehicle payment for his truck is fairly expensive even though it is at a good rate through the dealer of 3.5%. In all, transportation costs him approximately $650 a month. That does not include any repairs. It would be much cheaper is he used the bus, but I could not convince him to give up the truck. He only has 13 months left owing on the truck and he plans on keeping it for a few years. That $350 extra a month should be divided up between RRSP’s and RESP’s. The important thing to remember about a financial plan is that it is flexible and must be revaluated as things change. NEW (TO HIM) HOUSE – By starting to invest in RRSP’s which was a short term goal, he is also achieving a long term goal. Under the Home Buyer’s Plan, Scott can withdraw up to $20,000 tax free to put towards a down payment for a house. He would have to repay the amount withdrawn back within 15 years. INSURANCE – No additional insurance in required at this time. There is adequate life and medical insurance coverage from his employer. His apartment and vehicle insurance are fine. He may want to call around to see if he can get better rates. He admitted that he just went with the company that his parents were insured with. SAVINGS BONDS – He seems to be short of cash at the end of the year when Christmas is approaching. One suggestion is that he saves for Christmas throughout the year, $35 a month. This amount could be added to his payroll deduction for Canada Savings Bonds and then he could withdraw to do his Christmas Shopping. If he ever finds a surplus in the savings bonds, he can easily convert them to RRSP’s. WILL – Even though he did not mention this as a short or even a long term goal it is something that I recommend that he do immediately. He needs to get a will drawn up. He does have his son’s name listed as a beneficiary on his life insurance policy, but he needs a will to state when he can have it, at what age, maybe he can have it early for education. Again the most important thing about a financial plan is that it is followed and monitored. It needs to be flexible and adapted to changes. I wish him all the best. Scott Carr Cash Flow Statement For the Year Ended December 31, 2004 January February March April May June July August September October November December Income (cash inflows) Salary (Gross) $ 4,600.00 $ 3,680.00 $ 4,600.00 $ 3,680.00 $ 3,680.00 $ 4,600.00 $ 3,680.00 $ 3,680.00 $ 4,600.00 $ 3,680.00 $ 3,680.00 $ 3,680.00 Less Taxes and deductions 1,300.00 1,000.00 1,300.00 1,000.00 1,000.00 1,300.00 1,000.00 1,000.00 1,300.00 1,000.00 1,000.00 1,000.00 Interest On Savings 16.00 16.00 16.00 17.00 18.00 19.00 20.00 21.00 22.00 23.00 24.00 25.00 Total Income 3,316.00 2,696.00 3,316.00 2,697.00 2,698.00 3,319.00 2,700.00 2,701.00 3,322.00 2,703.00 2,704.00 2,705.00 Cash Outflows Fixed Expenses Rent 550.00 550.00 550.00 550.00 550.00 550.00 550.00 550.00 550.00 550.00 550.00 550.00 Studen Loan Payment 130.00 130.00 130.00 130.00 130.00 130.00 130.00 130.00 130.00 130.00 130.00 130.00 Car Payment 350.00 350.00 350.00 350.00 350.00 350.00 350.00 350.00 350.00 350.00 350.00 350.00 United Way 20.00 16.00 20.00 16.00 16.00 20.00 16.00 16.00 20.00 16.00 16.00 16.00 Car Insurance 140.00 140.00 140.00 140.00 140.00 140.00 140.00 140.00 140.00 140.00 140.00 140.00 Apartment Rental Insurance 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 Satellite 35.00 35.00 35.00 35.00 35.00 35.00 35.00 35.00 35.00 35.00 35.00 35.00 Internet and Telephone (Fixed because on Prime Pac) 110.00 110.00 110.00 110.00 110.00 110.00 110.00 110.00 110.00 110.00 110.00 110.00 Child Support 280.00 280.00 280.00 280.00 280.00 280.00 280.00 280.00 280.00 280.00 280.00 280.00 Total Fixed Expenses 1,640.00 1,636.00 1,640.00 1,636.00 1,636.00 1,640.00 1,636.00 1,636.00 1,640.00 1,636.00 1,636.00 1,636.00 Variable Expenses Groceries and eating out (includes Tim Horton's) 250.00 320.00 280.00 390.00 320.00 280.00 290.00 320.00 330.00 360.00 320.00 300.00 Electricity 38.00 36.00 34.00 35.00 38.00 32.00 36.00 34.00 39.00 41.00 43.00 44.00 Recreation 210.00 195.00 280.00 186.00 225.00 300.00 280.00 250.00 260.00 240.00 300.00 390.00 Furniture 500.00 - - - - - - - - - - - Clothing 100.00 40.00 50.00 200.00 300.00 100.00 150.00 160.00 40.00 80.00 200.00 200.00 Credit Cards 50.00 50.00 50.00 50.00 50.00 180.00 50.00 50.00 50.00 50.00 50.00 50.00 Christmas 180.00 100.00 200.00 100.00 Transportation 180.00 175.00 160.00 180.00 192.00 195.00 194.00 186.00 191.00 188.00 194.00 195.00 ...