SMITH FAMILY FINANCIAL PLAN (A) Case Solution
The Smith family has been in the cash crunch because the family’s cash outflows are more than cash inflows. Since both husband and wife have combined annual income of $80,000 pretax. However, there expanse are increasing rapidly, and they use acredit card that at the end of month incur huge interest expense. Meanwhile, in this situation, the family could not understand how their future planning should be and how their future goals could be achieved in given situations, where their expenses are over their income level.
Critical Success Factors
The family has been under the cash crunch, the reason is that their expensesare not controlled. Indeed their expenses exceed the income they have. On the other hand, they use the credit card when they are out of money, and at the end, the family ends up with a huge liability of interest payment on the credit card payment. Similarly, the family had no planning about how they should drive their expenses daily, and they had no goals and budget system at all.
Furthermore, the family had been using most of theincome in expenses, and it has created many liabilities over them, whereas their home mortgages, their car is mortgaged, and they also have insurance planningwhich is over the house and the cars. Therefore, from the situation, it is understood that controlling expenses is critical success factor one, and planning and budgeting are the second factor, and thethird factor is making assets rather than liabilities.
Furthermore, increasing financial complexities has emphasized on managing the assets and liabilities. Therefore, these three factors Control expenses, planning and budgeting, and creating assets. These are critical success factors for the family. However, the creating assets rather than liabilities refers to the investment. On the hand, the family has been suffering thishuge crisis, because it has frequently been relaying on the credit card as month approach to mid.
How Smith family could achieve their goals in given cash crunch situation, in given situation,the family is under debts and ends up with huge interest payment on the credit card, and has many liabilities over.
Balance Sheet and Income Statement
Smith’s family has huge liabilities whereas they had purchased the home on mortgage, and car as well. However, indeed, thevalue of assets is more than the liabilities. See Exhibit 1 that shows the assets and liabilities owned by the Smith family. However, if we analyze the situation, then it can be determined that Amber and Joel has $850 cash in hand, and bank balance of $1,300 with a saving of $2,200 only.
Furthermore, the Smith family is engaged in the mortgage loan in thehouse and car loan as well. On the other hand, it also has the credit card loan of $5,800. That is mean if the banksask for the credit card payment, and Joel would not be able to pay the amount of the credit card payment. Therefore, Joel and Amber are out of capital, which means they would not be able to meet their daily expenses.
Then, they would have single option to use their credit that incurs huge interest rate on average of 21%. That is hugerate. Indeed, at the end of year or month family pays interest rate payment, and could set off the debt, and it goes out of control, and credit card debt is compounded monthly, that increases the interest rate payments for the card holders.
Meanwhile, the Smith’s family hasa good net worth of $173,626 that means that if family set off all its liabilities, then it would have good net worth amount in hand. However, it is determined that Amber and Joel not be managing their cash needs for thewhole month that create problems for them at the end of themonth and incurs huge interest expense as well.
Consequently, thefamily would only pay the interest rate payment on the credit card, and would not be able to pay the principle. However, Smith family is also suffering from the same situation, because on one hand family needs money at the end of themonth or mid of month for the daily wages and expenses to continue to the house and other expenses.
So, they use their credit card for wages and expenses, and at the end of themonth they could not pay back the payment, and interest rate applied is compounded monthly that increases the interest rate expense for the Smith family. Indeed, the family on average pays $2,088 in credit card payments. This is ahuge amount for the family to expense, whereas this amount could be used for the investment purposes..........................................