Assess Your Financial Spending and Savings Decisions to Meet Goals
The Financial Assessment Calculator links your client’s trigger questions about life events, financial events, and economic events with changes needed to get the financial results needed now and in the future. See it in action with the following what-if-scenario and then try it for yourself, risk-free!
Most important, this calculator allows for analysis of the use of money in two stages:
· non-discretionary spending
· discretionary spending
The calculator then moves clients from thinking in the present to a future orientation: how to use their “redundant income” as a tool to build income-producing capital (affectionately called “don’t see it, don’t need it” money).
Now you and your clients are ready to make decisions about making changes to spend and save to meet goals.
Kevin lives in Saskatchewan. His 2011 income is $100,000. His current assets and liabilities are:
· RRSP: $125,000
· Mutual Funds: $100,000
· TFSA: $15,000
· Other deposits: $5,000
· Principal residence: $450,000
· Vehicle: $10,000
· Credit Cards: $10,000
· Line of Credit: $12,000
· Investment Loan: $50,000
· Home mortgage: $300,000
Using the Calculator
Step 1: What’s on your mind?
In your interview with Kevin, you determine what Kevin is thinking about and his immediate an long-term concerns. In the first section of the calculator you record that he is concerned about saving for his son’s college (his son is just graduating from elementary school), saving for his own retirement, and also recovering from losses in the market.
Step 2: What do you want to accomplish?
The next section of the calculator explores where Kevin would like to be in the future, but this is really a summary of the details of the next three steps so we’ll get back to this section after completing those steps.
Step 3: Where do you stand?
The next section of the calculator allows you to determine Kevin’s current net worth and key data regarding his financial health. Entering Kevin’s assets and liabilities in the next section gives the following:
Kevin’s current ratio is 1.89. His assets exceed his liabilities which is a healthy situation.
Kevin’s debt to income can’t be determined until we enter his income.
Kevin’s Debt to Equity is 1.11 indicating he owes more than his net worth – this number should be reduced.
Step 4: Where would you like to be?
The next step is to look at where Kevin would like to be in the future. For now, we’ll look at a goal for five years from now when Kevin’s son enters college. Kevin would like to grow his RRSP, mutual funds and TFSA deposits; he’d like to establish an RESP for his son; and he’d like to pay off his consumer debt and reduce his investment loan and mortgage. His target Net Worth statement shows:
This target improves his current ratio and move is debt to equity ratio within the target range of less than 0.50. Further analysis requires income and spending data – Step 5.
Step 5: How are you using your cash?
Entering, Kevin’s current income and spending as well as target figures gives the following:
As we can see, Kevin is currently spending almost all of his income (only $277 remaining per month). By projecting a modest increase in income, reduction in lifestyle purchases as well as in increase in RRSP contributions, RESP contributions and a reduction in debt service, Kevin’s remaining income increases to over $2,000 per month.
Now that we have income, we can look back at Kevin’s debt to income ratios. Currently it’s 7.04 but is reduced to 5.2 after changes to income, spending, assets and liabilities are taken into account.
Back on the first tab, “What would you like to accomplish” shows:
This section summarizes the plan to decrease discretionary spending, and increase capital.
On the Net Worth tab, the middle section shows:
Part A gives details of the savings required to maintain the current or retirement income if current income sources did not exists.
Part B summarizes the plan to build capital and reduce debt.