Gary and Joyce Yau, both 30, last month bought their dream house in London, Ontario. The purchase price was $450,000 plus addition fees such as taxes, legal fees, administration fees etc., of $10,000. They paid $100,000 cash-part of it from their savings and the rest was a gift from the parents---and borrowed a mortgage of $360,000 from the local bank. They find it very difficult to keep up with the monthly mortgage payments of $1,800, and have approached you for advice. The following is a summary of their financial situation:
Cash in chequing account $600
Five year GIC maturing this month 5,000
Mutual Fund $31,000
Two cars $15,000
Personal Assets $20,000
Joyce inherited the mutual fund a few years ago when her aunt died. Although it does not pay dividends, she would really like to keep it, but she is willing to sell if it helps their financial situation.
Both work for small companies near their home and they have a combined take home pay of $80,200. They do not have any pension plans or other benefits. They plan to have children in the next few years. Their marginal tax rate is about 35%. They have outstanding balances on three credit cards: Visa ($21,000 @18% interest); Master Card ($11,000 @16% interest); and a department store charge card ($4,000 @24% interest). They are currently paying on these cards only the minimum payment of about $1,100 per month. On top of the credit cards, there is still a car loan with an outstanding balance of $5,500 @6% interest, and monthly payment of $450. They spend freely, and live from one pay cheque to another. They find saving money very difficult. They can borrow money at 6% interest for investment purposes.
a) What are the most important areas of personal financial management for Gary and Joyce?
b) What is their net worth? Do not create a complete balance sheet.
c) Give seven specific recommendations on personal financial management. Support your recommendation with calculations and/or explanations.
d) Show how much interest and taxes they can save, if they convert their consumer loan to an investment loan as per the guideline in the textbook.