Financial Planning for Allen Family | Ratio Analysis, Tax Planning, Debt Management | Finance

Financial Planning for Allen Family is a comprehensive guide for financial planning for the Allen family. The document covers various aspects of financial planning, including ratio analysis, tax planning, debt management, and retirement planning.

Running head: FINANCE
Finance
Name of the Student:
Name of the University:
Author’s Note

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Table of Contents
Financial Plan..................................................................................................................................2
Step 1: Gather and Organize Relevant Qualitative and Quantitative Information..........................2
Step 2: Ratio Analysis.....................................................................................................................5
Step 3: Align Financial Resources and Goals................................................................................12
Step 4: Make an Overall Recommendation...................................................................................13

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Financial Plan
Step 1: Gather and Organize Relevant Qualitative and Quantitative Information
Qualitative Information (Goals)
 Building a Garage as soon as possible.
 Purchase a new car with the options which is provided by the employer.
 Full Payment of the Mortgage of the House as soon as possible.
 Providing half fees for education of two children in a well-established university.
Risk Tolerance
The case which is provided for Allen Family does not reveal any significant risks of that
sort but some can be assumed in the investments which is made by the family in retirement funds
and other kinds of funds. However, there is a risk of accidents in the line of work of Greg.
Completeness of information
In the balance sheet which is prepared for the financial paly, the amount which represents
car loans is missing and therefore the calculations for the same is shown below:
P/Y= 24
C/Y = 12
PV= $20000
I = 5%
N= 120
PMT= $341.91
The amount which is represented by mortgage payments is also not shown and the
computation for the same is shown below:
P/Y= 24

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C/Y = 1
PV= $28972
I = 6%
N= 24
PMT= $558.39
558.39*24 = $ 13401.36
The Allen Family
Cash Flow Statement (for prior year – to be updated)
Income (net)
Greg
Sharon
65,000
12,000
Total 77,000
Expenses (yearly)
Housing:
Mortgage payments 13400
Property taxes 3,000
Property insurance 1,200
Maintenance 3,000
Utilities (heat, phone, etc.) 6,500
Automobile:
Payments
Gas, insurance, repairs 4,445
Parental care 6,000
Health and hygiene 4,500
Groceries 4,000
Clothing 3,500
Miscellaneous (charitable donations, gifts, etc.) 9,000
RRSP contribution 2,000
Leisure and travel 4,000
Total Cash Outflow 1 =64545
Surplus (deficit) 12455

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Exhibit 2
The Allen Family
Balance Sheet (to be updated)
Assets Greg 1 Sharon 1 Combined
Liquid
Chequing account 15,000 15000
Savings account 1,800 1800
Investments
Registered—RRSPs
BlueBell Canadian Equity Fund 24,000 24000
Non-registered
Government of Saskatchewan bond 10,000 2 10000
Canada Savings Bonds 5,200 5200
GICs 3 8,000 8000
BlueBell Canadian Equity Fund 8,450 8450
Personal
Residence 4 130,000
Household furnishings 35,000
Car 8,500
245950
Liabilities
Current
Credit cards—overdue 750 375 1125
Line of credit—Sharon’s business 1,800 1800
Personal loans—car
Long-Term
Mortgage 5 100,000
Total Liabilities 102925
Net Worth 143025
The Allen Family
Other Financial Information

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Greg Sharon
CPP death benefit 2,500.00 800.00
Maximum CPP benefit at age 65 (current, but
indexed to inflation)
801.00 165.00
Expected inflation rate 2.5%
Expected average, pre-tax, nominal return on all
sheltered and unsheltered investments including
employer pension plan
6.0%
Estimated funeral expenses 10,000.00
Step 2: Ratio Analysis
The nest step in the financial planning process is the computation of the key financial
ratios which are associated with the business. The three major areas which are to be assess for
this part are liquidity, savings and debt and such aspects would be considered in the ratios which
are computed. The liquidity ratios are considered for the business and the computation of current
ratio for the family is shown below:
Current Ratio = Current Assets/ Current Liabilities
=16800/2925
= 5.74
The current ratio which is computed above shows that the liquidity position for the family
is significant better and the same suggest that the business has appropriate sources of funds for
the purpose of undertaking the financial plan effectively. It can be further argued that the
liquidity of the family is extremely well as the same estimate is above the ideal level. The

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liquidity ratio of the family also shows the currents assets is significantly more than the current
liabilities which suggest that the business has financial strength and the family can effectively
cover its expenses for a given period of time provided the liquidity estimates are maintained by
the business.
The current ratio also shows the ability of the family to meet the current expenses and
obligation and the estimate which is computed for Allen Family is appropriate.
Debt Ratios
Total Debt ratio = Total debt / Total assets
= 120000/245950
= 0.49 or 49%
The total debt figure is shown to be 49% of the total asset figure as per the computations
which are shown in the above figure. The debt figure is shown to be high which suggest that the
family depends to a certain degree on the application of debt capital for financing the activities
and requirements of the family in pursuance of the goals. Allen Family is shown to have
significant amount of debts which is almost equal in terms of percentage to the assets of the
family.
Investment Ratios
The investment ratios are computed on the basis of the investments which are made by
the family in various insurances and the same is assessed whether the same is appropriate or not.
Investing to Net Income after Deductions ratio = Cash flow available for investing / Net income
after deductions
The above is shown to establish as relationship between the cash flow from investing
activities and net income which can be computed for the Family. The ratio analysis shows the

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Allen’s have the ability to cover their short- and long-term obligations, a large amount of debt
capacity, and perhaps too much invested in liquid assets with too little return. The liquidity ratios
which is computed for the family is favourable and therefore can cover all obligations. The
family uses too much debt capital which is also clear from the ratio analysis which is computed
for the family.
Tax Planning
Greg have made certain investments in funds which would be providing the family with tax
benefits. Greg Has investments in pension plan which is provided by the employer of his business
but also has an RRSP and 10 years government bonds which would count as investments which
have made by the family and therefore would be subjected to tax deductions. The case shows that
Sharon has not made any investments in RRSP funds and most of the investments have been made
by Greg. The family would be eligible for deductions for all consumption expenses and direct
expenses of the family and therefore would be getting tax benefits. In addition to this, the family
can claim deduction for travel expenses which forms an important part of Greg’s work. The couple
has also taken loan during the period for which the employee can claim more deduction from the
total taxable income of the employee.
The Allen Family needs to effectively split their incomes in order to take advantage of tax
benefits and the same strategy is provided below:
 Greg needs to pay Sharon for any work which is done by her which can be advisory or
even as a simple book keeping as this would effectively split the income of Greg and would
provide tax advantage during the time of computation of the same.

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 Sharon is also eligible for medical credit as she fall under the category of lower income
group and a lesser amount will be deducted from legitimate medical expenses in arriving at
allowable medical expenses.
 The household expenses should be paid by Greg and Sharon should invest her earnings
which would attract lower rate of taxes for the family. The finances of both Greg and
Sharon needs to be kept separately so that they can effectively support this strategy.
The Allen Family also needs to consider strategies which is related to RRSP and the same is
given below in details:
 If either has any RRSP carry-forward room, they should maximize their RRSP
contributions which would be beneficial for the business.
 Where RRSP and spousal RRSP contributions have been maximized to reduce taxable
income and create income tax splitting during retirement, TFSAs should be used to keep
investment income tax free up to the limits available for each of Greg and Sharon. Any
capital gain on the GHI stock will have to be claimed before it is contributed in-kind to the
RRSP.
 In order to ensure tax efficiency, the IMCanadian Equity Fund could be moved out of the
RRSP and GICs swapped in by the Allen Family.
Debt and Cash Management
The debt and cash management need to be effectively carried out by the Allen Family.
The plan of the family is to make the mortgage payment earlier than the due date. The period
which is actually left for the mortgage is 3 years while the family intends to settle the mortgage
within 2 years period. The mortgage was originally taken for an amortization period of 15 years
but the same is being covered for a period of 12 years. The family also has an offer for taking a

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car loan which is offered by the employer of Greg. The car which is being offered on loan is a
second-hand car and the same
Car Loan
The family also intends to take a car loan which is represented in the financial statements
which is prepared for the family. Having a new car is one of the goals which is identified for the
business.
Credit Card Debt
Both Greg and Sharon have credit cards which has a debt and the same attracts interest at
the rate of 19.9%. The case shows that the couple do not use their credit cards most of the times
as they do not like such debts. The strategy which is applied by the couple is appropriate as they
can easily meet their obligations without bearing additional interest on the credit cards which is
being offered.
Cash Management
The cash flow statement for the family is prepared in order to shows the cash inflows and
outflows of the business and how the same can have an impact on the operations of the business.
The family has invested significantly in different kinds of registered and non-registered funds as
presented in the balance of the family. The family still has an amount of $ 15000 for Greg in
Cheque Account while an amount of $ 1800 is shown to be present in the savings account of
Sharon. The couple may use such amounts also for the purpose of investments in some funds. In
case of any emergency Greg can always rely on 5-year locked-in GICs and Canada Savings
Bonds.
Risk Management and Insurance
General Insurance

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The general insurance coverage of Greg is provided by the employer and the same is
provided to a maximum of three times of Greg’s salary and in addition to this Greg has also
purchased general insurance which is twice as much as his salary. The assumption which can be
made is that the general insurance which is available with Greg is appropriate but the major risk
which can be identified with the same is related to the coverage which it provides and the same
needs to be assessed before any new insurance is purchased. It is also required to be assessed
whether the same can cover Sharon appropriately or not.
Disability Coverage
One of the major risks which is faced by Greg is of accidents due to the nature of work
which is carried out by Greg. The nature of such accidents is so frequent that the employer does
not provide any Disability Coverage. Greg is covered by a insurance package which was purchased
by him, however, it would have been better if the disability co0verage was provided. The
assessment of the policies also does not clearly specify whether Sharon would have covered by
such disability coverage.
Investment Management
One of the major things which needs to be cleared with Greg is that the diversification of
portfolio is to be made appropriately. The portfolio should be shown as one and not as secured
and unsecured securities. Greg also has made investment in Government Bonds which are
providing an interest rate of 6% and has 6 years left for the maturity for the same.
In addition to this, Greg should start trading in stocks which is held by him. As the value
of the stock decrease, it is always the right move to sell of the stock rather than hold the same
with an expectation of rise in the value for the same.
Risk tolerance and investment objectives

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There is no direct knowledge of the tolerance of risks for Greg but it can be judged from
the financial position of the family and the net worth which is computed, it can be said that the
family is in a strong position and therefore can take risks and make investments in more equities
in order to enhance the wealth of the family. The retirement age of Greg is also good and
therefore Greg should definitely take more risks.
The case shows that the Allen family can take more risks by investing more in equity but
they are shown to be uncomfortable with the same and therefore, it is up to them as they can
avoid more risky investments.
Retirement Planning
The plan of Greg is to retire at the age of 60 years and he plans to provide for 25 years’
worth income which would be received by the family post retirement. The opinion of Greg is
that the couple needs 60% of the current years for the purpose of making the life after retirement
smoother. The retirement plan has been formulated on the basis of a forecasted life span for both
Greg and Sharon being considered. The major risk would arise if one or both of the outlive their
estimated life span which would result in shortage of money during retirement. This can be
considered as a serious risk to the plans which is formulated by the family.
Estate Planning
The Allen family can undertake the following steps for the purpose of planning for the
estate:
 Firstly, they should have wills. Their assumption about the distribution of assets would be
appropriately done if either one or both them die in case of a will. The assets of the
family would be distributed according to the intestate laws of the province they live in

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and would result in fair distribution of assets among children and other relatives whose
name is on the will.
 Secondly, their situation is endangered by the fact that their investment assets are not
registered jointly and are shown separately in the balance sheet which is prepared for the
family.
 Third, they should consider naming each other as beneficiaries on their RRSPs which can
be as per the decisions of Greg and Sharon.
The above planning is necessary in order to safeguard the assets of the family for their
children and their grand-children.
Step 3: Align Financial Resources and Goals
In order to effectively align the goals of the family, a budget is formulated by the family
shows the revenue and expenses and the necessary estimate amounts which are required for the
goals of the family. The estimate for the budget is shown for a period of 11 years and the same is
represented below:
Particular 1 2 3 4 5 6 7 8 9 10 11
Income
7700
0
7700
0
7700
0
7700
0
7700
0
7700
0
7700
0
7700
0
7700
0
7700
0
7700
0
Expenses
6454
5
6454
5
6454
5
6454
5
6454
5
6454
5
6454
5
6454
5
6454
5
6454
5
6454
5
Surplus
1245
5
1245
5
1245
5
1245
5
1245
5
1245
5
1245
5
1245
5
1245
5
1245
5
1245
5
Goals
Car loan 5355 5355 5355 5355 5355 5355 5355 5355 5355 5355 5355
Garage 410 410 410 410 410 410 410 410 410 410 410
Fees for
Education 4000 4000 4000 4000 4000 4000 4000 4000 4000 4000 4000
Mortgage
Payment
1340
0
1340
0
1340
0
1340
0
1340
0
1340
0
1340
0
1340
0
1340
0
1340
0
1340
0
Balance 0 0 0 0 0 0 0 0 0 0 0

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The budget which is shown above represent the values which are considered on an
estimation basis and the same is aligned with the goals which are associated with the business.
Step 4: Make an Overall Recommendation
The case which is shown for the Allen Family shows that the financial position of the
family is significantly strong, however some recommendations cam be made to the family for
improving the financial position and the same are listed below in details:
 In case of Tax Planning, the Allen’s need to ensure that all rules and regulations which
are applicable are being followed in a legitimate manner and all the tax payments are
made by the family. The tax planning should be in such a way that the family is able to
split their incomes so that lower taxes can be charged. In addition to this, all deductions
for expenses needs to be taken into consideration while planning for tax.
 The family needs to effectively utilize the liquid cash which is available at their disposal
so that efficient utilization of all idle resources can be done.
 The retirement plan is formulated on the basis of an assumption of their life which can go
wrong and therefore the family needs to plan properly for the same.
 The Allen’s existing portfolio contains some significant risks: interest rate, inflation,
market, and currency exchange which needs to be managed effectively. The
diversification of the portfolio process needs to be done appropriately by the business so
that the risks of the portfolio can be managed more efficiently.
 Estate Planning should be done with the help of will so that smooth succession for the
assets can be made.
 The family needs to focus on the goals which are set and try every step to achieve the
same in the long run.

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Bibliography
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Townson, M., 2017. Strengthening Public Pensions with Private Investment—Canada’s
Approach to Privatization Pressures. In Building Social Security (pp. 83-94). Routledge.
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Security Programs and Retirement Around the World: Disability Insurance Programs and
Retirement (pp. 137-178). University of Chicago Press.
Messacar, D., 2017. Trends in RRSP Contributions and Pre-retirement Withdrawals, 2000 to
2013. Statistics Canada= Statistique Canada.
Rice, J.J. and Prince, M.J., 2013. Changing politics of Canadian social policy. University of
Toronto Press.
Schmeiser, H. and Wagner, J., 2013. The impact of introducing insurance guaranty schemes on
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