Family Case Study

Introduction

Good financial planning helps to reach family spending and saving’s goals. Financial planning is designed to cover all family assets, liabilities, and incomes received during the year. Family means those persons related to the head of the household and who live with the head of the family. For example, family of Marwa Mohammad, his wife Abdullah Saleh and their loved eight years old daughter Samiya. Family of Marwa Mohammad uses balance sheet, budget and cash flow statements to obtain information that allows them to have knowledge of their financial position. Financial planning helps the family to change their financial position over time through investing in government securities, increasing the level of income from the daily activities, as well as through increasing their saving accounts to create more net worth of the family.

Interest of every family is to make their long-term and short-term financial goals realistic. Hence, some families plan to increase their retirement benefit as a saving for their family, increase the level of investing into their children through education in colleges, and reduce vacation and outing expenses in order to create more savings and investments. They also decided to increase premiums for health and life insurance, because it acts as a saving account.

Family planning is important as it helps in proper management of income, which increases family cash flow and capital for investment. Also through financial planning families are able to evaluate the best investment opportunities and the ways to allocate money among the different types of investment. Through financial planning families are able to provide proper family financial security coverage from the right policies. Financial understanding enhances new approaches to the family budget through evaluating the level of risk in an investment portfolio. Standards of living are enhanced by minimizing the household insurance portfolio through clearly defining goals to be fulfilled in the family. Financial plan through budgeting provides directions and means to one’s financial decisions.

Part A: Financial Position Analysis

Marwa Mohammad and Abdullah Saleh

Liquid assets

• Cash at home 12,800
• Current savings account balance 37,800
• Fixed deposit 34,600
• Total liquid assets 85,200
• Physical assets (market value used)
• Cars 69,300
• Furniture and appliances 43,600
• Jewelry 18,000
• Home 1,695,400
• Total physical assets 1,826,300
• Stocks and bonds 46,700
• Total investment assets 46,700
• Total assets 1,958,200

Liabilities

Current liabilities

• Utilities bill due 440
• Credit card payment due 5,800
• Home loan payment due 16,800
• Total current liabilities 23,040

Long term liabilities

• Credit card loan after current payment 24,000
• Car loan remaining after current payment 53,800
• Home loan (mortgage) after current payment 1,438,000
• Total long term liabilities 1,515,800
• Total liabilities 1,538,840
• Net worth 419,360

According to Mortimer (2000), balance sheet is used to represent transactions that take place in an organization purchasing and selling. Balance sheet ensures that assets are equal to liabilities plus shareholders’ equity. The balance sheet of Marwa Mohammad and Abdullah Saleh shows that they have healthy net worth of total assets more than total liabilities by AED 419,360. But in future they should increase long-term assets and investment to increase their net worth in the coming years. They should engage themselves in buying more stock, securities in form of bond and increase savings at the bank to increase net worth of their family. They should try as much as possible to reduce liabilities while increasing assets.

Personal Cash Flow Statements

Marwa Mohammad and Abdullah Saleh

Cash flow statements record all the income and expenditures of a given time, such as a month or a year (Hamilton, & Chen, 2008). Income or cash inflows are recorded first in their account of entries followed by the expenses or cash outflow entries. The expenditures are divided into fixed expenses and variable expenses, respectively. Fixed expenses do not change from time to time but variable expenses vary from time to time due to demand and supply of the market. Total cash outflows are deducted from the total income inflows and the difference is categorized into either cash surplus or a cash deficit.

Marwa Mohammad and Abdullah Saleh’s cash flow statement shows that they have a healthy cash surplus of AED 21,610. It means that their cash inflow was higher than cash outflow. Interest earned on saving accounts increased by AED 340, interest earned on fixed deposits increased by AED 370 and earnings from investments increased by AED 2,140. While cash outflow was high in fixed expenses due to high payment of the mortgage, car loan repayment and car insurance premium. Total variable expenses were less than those of the fixed expenses total due to the average amount of money spent on each and every expense.

Personal Monthly Budgets

Marwa Mohammad and Abdullah Saleh

Family budgeted amount of Marwa Mohammad and Abdullah Saleh was enough for the family expenses and with a surplus amount of AED 21,720. Hence, they should improve on proper management of income to increase family cash flow and capital for investment; increase investment and increase saving amount in bank to increase their saving; reduce luxury expenses like recreation and entertainment, gift, food outside of home to save more money for saving for the family; go for proper family financial security coverage from the right policies, such as bond and stock in savings.

Bank Product Analysis

NBAD offers its customers a variety of wealthy investment solutions to help them grow their money. It offers fixed income investment at attractive interest rate of 5%, and mutual funds at affordable prices to customer. The bank also offers smart investment plan to build saving habits for higher education of customers’ children, purchasing a car or home, and single premium plans to cater to all investment needs of customers.

While ADCB offers wealth design investment solution for product spread across the world and across different securities. But it does not offer a guarantee to any risk of investment products because it is not the bank deposit. ADCB offers a systematic investment plan to customers, where customers invest a fixed amount of money periodically to earn an interest.

Borrowing

NBAD lends money to its customers at lower interest rate, such as personal loans with 4.99% interest rate per annum. It offers auto loans at 2.49% interest rate and at a flexible repayment period up to 60 months to the customers who want to buy a car. The bank also offers mortgage loans at 3.85% interest rate for the loans up to AED 20 million.

ADCB offers personal loans for the UAE nationals and personal loans for expatriates at affordable interest rate with longest repayment period. It offers rental loans with simple and easy documentation and approval to its customers. The bank also offers smart cash loans to the customers who take an advantage of a loan without going through the hassles of assigning salary to the bank and opening a current or saving account. It has a repayment period of 36 months. ADCB also offers mortgage loans and car loans at low interest rate of 3.99%, which have the repayment period of up to 25 years.

Saving

NBAD has regular premium saving plans for customers to prepare for their retirement, saving for the children’s education, and general saving. NBAD’s regular premium saving accounts help the customers to achieve assets and grow financial stable for future.

ADCB has different saving accounts, such as ADCB saving and call account with interest accrued monthly to customer account. It also offers a millionaire destiny saving account, which has several incredible benefits, along with monthly grand prizes of AED 1,000,000 and 10 prizes of AED 10,000 each. The bank also offers fixed deposit account with high interest rate.

According to the similarities and differences in question one above, NBAD is the bank with affordable interest rate for its customers and favors them to invest more in their accounts.

NBAD favors its customers more than ADCB because ADCB offers an investment solution for products spread across the world and across different securities. But it does not offer a guarantee to any risk of investment products because it is not the bank deposit.

Recommendation

The increasing net worth requires the family to reduce liabilities and increase assets holding. It can be done by eliminating spending beyond their ability to pay, because this way the family will accrue debts. Hence, the family of Marwa Mohammad and Abdullah Saleh should pursue a strategy that allows for the beneficial movement of both assets and liabilities simultaneously. They should have residual income necessary to adequately increase their assets beyond liabilities. The family has to pay attention to examining their habits of spending or cash outflows, and increasing net worth, because it is the yardstick, by which they can estimate their own financial success. Marwa Mohammad and Abdullah Saleh should pay off their debt as soon as they are able, because money they owe to others could be used to develop their net worth.

Marwa Mohammad and Abdullah Saleh should make an extra payment, where possible to reduce the overall debt burden. They should max out their retirement contributions. This will help to increase the contribution faster without leaving money on the table to defer taxable income at lower earnings years and increase available generative assets. They should cut off expenses by realizing them, for example, reducing expenses for vacation, credit card, telephone bill, and miscellaneous in order to curb family spending. They should bank their money in interest bearing account and invest into the beneficial projects.