Financial planning
Establishing a financial plan is one of the most essential achievements in preparing economic freedom. A financial plan must incorporate intelligent financial goals and evaluation of the procedures to achieve their goals. This is highlighted by looking at annual income, expenses, future demands, and growth opportunities. This report focuses on offering Joe a fanatical plan as part of wealth management strategies, considering their financial situation, annual income, and aspects related to owning property, saving, investment, and retirement. However, this plan is segmented into three scenarios. In scenario one, Joe Joe is to get stable in his career and purchase a property. In scenario two, JoeJoe works at BBC, and his goal aligns with supporting children’s education and payment of the mortgage. In scenario three, Joe Joe is more concerned about investment and mortgage payments. A financial plan based on each scenario is given below:
Scenario one: Freelance Journalist
In this scenario, Joe is 33 years old and has average annual earnings of about 50-60. Also, he has 54000 savings, earns an interest of 1%, 25000 additional savings locked for three years, monthly rent expenses of 2000, and a credit card with a high APR of 38%, which he rarely uses. His motives and goals are property, starting a pension plan, and earning better returns on his savings. Joe’s financial needs are related to his credit card debt, low-interest earnings savings, retirement plan securing, and owning property. In other words, the financial goal is to ensure he has zero debt and that his savings and pension can generate adequate interest returns as income or retirement.
Apart from this, several assumptions have been made. first, Joe’s retirement age is expected to be 65 years, and the current average basic pay is 60,000. However, the plan considered continued learning g to increase his experience and skill, thus attracting a 3% salary growth rate in the next 32 (65-33) years. In reference to the report filed by Statista, the average annual salary for full-time workers in the UK is 5.8, recorded in 2023, which justifies the selection of 3% for freelancer journalists (Statista, 2023). Another assumption is based on the monthly expenses. According to the Office of National Statistics data, monthly spending for the average household is 500, totaling 200, plus rent 2000, totaling 4000 Monthly (Barnes, 2023). This cost is assumed to remain constant for the next 32 years. The last assumption involves inflation on the returns from investment. This calculation recognizes that inflation will affect the future cash flow of the return, and a discount factor of 10% will be taken into account.
Management plan
Summary cash flow in the next 10 years.
Figure 1:
Debt management
Based on Joe Joe’s current financial position, it is essential to consider addressing credit card debt, which attracts 38% APR. Practically, this means that a higher percentage of credit payment goes to interest, thus taking longer to pay all the amount due. The assumption is that Joe rarely uses credit cards, and paying them would avoid the accumulation of further interest charges, increasing his financial health. In other words, paying up his credit card debt will free up funds that can be directed towards savings investment or other financial goals (Stavins, 2020). The alternative to support this goal is taking cash from the low-paying savings account, paying the debt, and focusing on a high-interest savings account.
Property
In the current financial health, property ownership is a crucial long-term financial goal. According to Stavins (2021), some of the most appealing properties Joe can focus on include Flat, Terrac, or semi-detached houses. Apartments or flats are the most affordable property for first-time buyers where there is less maintenance or cost associated with improvements. In doing this, Joe has two purchase options: use of savings and buy a property in 10 years or use a mortgage. An example of an affordable apartment in Westminster is a two-bedroom house in Oxford, which has an average cost of 100-150,000 (Rightmove.co.uk, 2024). Joe has 54000 savings, including on25000, which may be available after three years. In 10 years, Joe’s savings will increase by 145482, thus raising an adequate amount to get one or two properties that can be rented out to bring in more income. With consistent savings, Joe can focus on proper in areas such as Westminster, Manchester, or regions near London where the purchase price is high but the income generated is high (Foxtons.co.uk, 2024).
Savings and investments
Joe’s only investments include savings from different accounts where he earns low interest rates, approximately 1% and 1.5% for the locked savings. According to the BBC report, the UK inflation rate has been volatile, recording the lowest in three years at 3.4 in 2024 (BBC News, 2024). This means that Joe will not gain interest from savings in the following years. Taking up the savings strategy of 70% out of the disposable funds will only accumulate funds but not gain interest from the savings. However, an excellent option would involve mutual funds known for diversification, thus lowering the risk potential (Benetton, 2021). For instance, Vanguard US Equity index fund is valued at 905.38 per share. Converting Toe’s savings into this fund, Joe will have approximately approximately80,000 investments as Vanguard index. A report published by the Financial Times reveals the growth rate for this fund has been 37.2% in the past five years, making it more strategic for Joe (Ft.com, 2024).
This growth is graphically represented in the figure. 2.
Figure 2:
With an investment of 80000, Joe is likely to have an investment worth 163355 in 10 years.
Annual growth: 7.44
Investment: 80000
Time: 10 years
A = P X (1+r) n, {80,000*(1+0,0744) ^10} = 163,355
Pension
Joe is currently under no registered pension scheme. His career is freelance, and his only option is to find self-invested personal and stakeholder pension schemes (Owadally et al., 2021). This type of pension scheme usually attracts potential high returns and greater flexibility but also requires commitment and, most likely, high fees for account and transaction costs. According to Forbes, the best personal pension providers include Interactive Investor, Vanguard, Pension Bee, and Best Invest, all in the UK (Groves, 2024). Compared to the interactive investor SIPP, Joe will be best suited to Vanguard SPP. The annual charge is 0.15% of the pension pot, capped at 375 annually (Groves, 2024).
Insurance
Given that Joe is planning a marriage, the primary insurance factors to consider are life, health, property, and liability. Life insurance will provide financial protection for him and his spouse throughout their marriage, as well as the exact insurance for health against medical expenses, liability against lawsuits, and proper against damage to his home. Joe’s most crucial insurance coverage is health and property for the next 5 years (Owadally et al., 2021). As a freelance, he must avoid emergency costs that may lower his savings contribution. Aviva is one of the companies that have a full health cove for just 878 annually, and by the time he marries, he will be almost 35, and this will lower emergency costs related to hospital and medications. This is a better option than AXA Health or Vitality Health, which offers health insurance with an annual contribution of approximately 1161 (Tardieu et al., 2020).
Scenario two
In scenario two, Joe works at BBC and receives an annual sala80,0also 00. Joe also has a family with two children who work part-time, working part-time, with an average yearly salary of 10,000. Joe also has0,000 in savings with an interest of 0.8%, which is considerately compared to the inflation rate, which is currently at 3.4% (BBC News, 2024). Accordingly, his financial needs include providing financial support for his growing family, ensuring sufficient funds for the children’s education, eacateringcatering for mortgage interest, and the principal amount at the end of 8, wanting a desire to maintain his current lifestyle post-employment. Therefore, he has multiple decisions, such as investing the principal amount on his mortgage, children’s education, family stability, and retirement planning.
In evaluating Joe’s Situation, several assumptions about inflation, income growth, and economic performance have been made. The inflation rate is assumed to be constant at a rate of 4% and a salary growth rate of 3%, as the total annual income is considered to be 90,000 (the sum of Joe and his wife). A report published by Statista reveals that wages in the United Kingdom grew by approximately 4.2% in February 2023 compared to 3.7% recorded in 2020 (Statista, 2024). Another assumption relates to monthly spending. According to Numbeo, an online database for the cost of living, the average employed family spends between 3200-4500 on living expenses. This cost is assumed to be 4500 for Joe and his family, including the mortgage (Numbeo.com, 2024). This cost is supposed to remain constant over the next fifteen years. In addition, Joe’s children are 2 and five years old. Therefore, this report assumes that in 15 years, both children will need college fees. This makes his financial goals pay the mortgage in 8 years, invest in children’s education in 15 years, and plan for retirement in 32 years, considering he retires at 65.
Management plan
Property
Joe’s property is the house at which he has an 8-year mortgage, paying 1250 monthly and 300,000 principal after eight years. However, he has to move into a bigger house that is spacious for his family. To achieve this, Joe can purchase a new house, sell the current house, use the cash for the new house, or refinance the existing mortgage (Stavins, 2021). Assuming he lives in a one-bedroom house in east London, the property will sell at 100,000-150000. This would generate a deposit for 3 3-bedroom detached house in Haling Park Road valued at 650000 (OnTheMarket, 2022). A deposit amount will be from the cash received on the sale of the current house, additional savings of around 500000, and mortgage refinancing for 450,000, but principal and interest are paid monthly. One of the advantages of this house is its location near reputable schools, proximity to London, where Joe would be working at BBC, and fair cost, which will be payable at low mortgage rates, assuming there are no refinancing costs and interest rates remain unchanged.
Savings and investments
There needs to be more than the current Joe Plainaare investment for Joe Plain to cover his future DS and generate returns. Most importantly, the inflation rate is considerably higher than the percentage return (Ryngaert, 2022). In order to optimize the saving plan, Joe will need two different saving options with high returns. The first is to build an emergency fund with 3-6 months of living expenses. In support of this, Stavins (2021) reveals that emergency funds are most critical due to job restructuring and uncertainties that may lead to loss of income. Secondly, I have a savings account with a high percentage return. According to a Forbes article on best current accounts, Habib Bank has the best interest-paying account with 5.18% buy a minimum deposit of 5000. However, Isbank has a 4-year fixed-term deposit with an interest of 4.5. Joe will consider opening an account with ISbank where he will deposit their 460000 savings and commit approximately 2000 monthly for principal payment in 8 years. In the year, the following will be received:
A= (60000(1+0.045) ^8}
B = FV=2000× (0.00375(1+0.00375)96−1)
= 85326 + 223 217
= 308 544
At the end of eight years, Joe will have accumulated just above the 300,000 required for mortgage principal payment. In addition, Joe needs to contribute to a child education savings plan to support his children’s education.
Pension
Joe is currently under BBC’s defined contribution scheme. However, this cannot guarantee that the current lifestyle will be maintained after employment. This will require Joe to consider increasing his pension contribution, looking for private insurance, and including long-term investments like 30-year bonds that will mature just after retirement. For instance, according to the London Stock Exchange, a 30-year bond attracts 4.746% interest (Investing.com UK, 2024). By investing 100,000 of the savings, the bond will generate 368 089 (FV=100,000× (1+0.0474)30) at retirement, which can support retirement expenses.
Insurance
Apart from property ownership and accumulation of sufficient savings for his family’s retirement, Joe is exposed to multiple risks that may require insurance coverage. First is personal health. With a family of three, Joe is likely to spend a lot of funds on medications, which may drain savings amount. However, health or life insurance coverage would support the financial goals for Joe’s emergency expenditures through healthcare insurance coverage. Joe also owns the property, and any loss or damage would cause a massive economic crisis in his income. Therefore, it would be necessary to consider property insurance coverage against his assets (Stavins, 2021).
Scenario 3
Scenario 3: Well-paying job and risk-averse attributes
Scenario three is where Joe focuses on children’s education, mortgage payments, and concerns about low-earning savings. However, he understands that investment would be the best solution. His financial needs can be vied in three different periods. In the short term, Joe is interested in managing his mortgage’s rising interest. This can be done through refinancing, where he hopes that a low-interest mortgage will help be more stable and lower exposure to interest risk.in addition, Joe is required to optimize returns from his savings account. The current interest rates are just 1%, which falls below the current inflation in the UK (Ryngaert, 2022). In the medium term, Joe is more into supporting children’s education. In 5 years, both children will be 7 and 10, meaning they will be enrolled in primary school. More importantly, this will extend to university expenses. In the long term, Joe is interested in securing assets and a retirement plan to jumpstart their retirement savings scheme, generating a larger retirement corpus above inflation.
Another element in the scenario is assumptions made. First, the plan assumes that Joe and His wife will consistently be working at their current jobs till retirement at 65, and the salary growth rate will be 3%. The justification is potential changes in inflation that will help counter expenses. In line with salary growth, inflation is assumed to attract a 3% increase based on the historical trend and assumption of moderate economic performance. Joe is risk averse, so the plan assumes that his expected return on investment is between 4%-5%. This means that an investment paying above or an average of 4% would be sufficient for Joe. Lastly, the plan assumes that the mortgage is considerably high and that Joe will refinance in one year. This will not attract transaction costs but will help get a low-interest mortgage.
Management plan
Property
The property under management for Joe includes the mortgage option house after the sale of the inherited house. The management of this house relates to the payment of its mortgage obligation. From the scenario, the current interest rates are significantly high, and there is a need to refinance to have a low-interest mortgage and adjust from an interest-only term. Also, the family has sufficient income amounting to 165,000 and savings of 150,000; this can be utilized to increase monthly contributions to lower the time for the repayment as a strategy to lower interest risk (Benetton, 2021). However, the best option is mortgage refinancing for better terms.
Savings and investment.
As part of short- and medium-term goals, Joe has to optimize profits generated from their savings accounts to match inflation or the time value of money. Considering his risk-averse nature, the best option is generally fixed or government bonds. According to a publication by Finacial Times, a 10-year government bond yields 4.14%, matching the required return for Joe (Ft.com, 2024). However, Joe can align with modern portfolio theory, emphasizing diversified investment in stocks and bonds (Koumou, 2020). This increases investment resistance to economic disruption, including investment in mutual funds.
Pension
Joe and his wife are enrolled in their employer’s pension scheme. This means that they have a consistent contribution to their retirement. However, there is a need to include private pension schemes and increase the contribution amount. This will increase the payment amount to receive during retirement. Joe’s retirement planning should consist of contributions to a top workplace pension, a self-invested personal pension plan, and a diversified investment portfolio (Koumou, 2020).
Insurance
Based on Joe’s risk attribute, acquiring an insurance policy would lower expenses related to the unforeseeable future. With a family of three, there is a need for health care, property, and liability insurance. According to Ham (2020), households tend to attract high costs related to medication, which may strain the amount dedicated to savings and investment. Therefore, Joe should consider all these factors, including the potential loss of income, thus ensuring solid and stable financial health for his family.
Conclusion
In essence, the three scenarios provide complex dilemmas where Joe has to make strategic decisions toward a sustainable financial position in the future. In scenario one, Joe must invest in personal or stakeholder pension schemes for retirement planning. His primary focus is maintaining a stable life based on the risk of a freelance job. The most strategic recommendation in scenario two is to transition to low-interest mortgages and reduce principal terms. In scene scenario three, the focus is on evaluating investment options to meet their retirement demands or secure assets that can generate income in the future. In this situation, Joe has to invest in health insurance, property insurance, and liability coverage to maintain stability in their income and consistent savings. However, the most crucial factor is the continued monitoring of interest and inflation rates for adjustment on investments and saving plans due to the practicality of pre-determined assumptions that may not logically work due to the vibrancy and dynamics of economic performance.