A Financial Plan Cum Transformation Report

By Estelita Chavez- Catacutan, CPA, ME, CFC , RF P Batch 23

Anton (39) and Marie (42) Mateo* live independently without getting any financial support from relatives. He works as a full time Managing Director of a Social Enterprise while she works as a church worker. Living with them in their family home is their three-year-old daughter; Marie’s widowed mother, and one helper. The senior citizen mother is declared a legitimate dependent of the wife. All of them have a clean bill of health and are non-smokers and non-drinkers. Anton and Marie plan to retire by age 65 and assume to live another 15 years from retirement which will not mean totally withdrawing from secular work but a modest income is still expected to be received from consultancy work and pensions.

Objectives of the Financial Plan

  1. To determine the household income and costs structure as well as the family’s net worth in order for the family to be consistently disciplined in the way financial resources are managed ;
  2. To determine the protection needs, educational needs and retirement needs of the family;
  3. To set the required amount of savings that would be needed to meet the funding gaps in the order of priority need areas;
  4. To determine the most practical investment vehicle that would yield the most reasonable rate of return according to the family’s risk appetite;
  5. To set the yearly milestones that would challenge, discipline and inspire the family to fulfill the financial goals.

Time Table of Key Result Areas and Milestones

For easier implementation and better monitoring, a milestone is clearly set per specific area of financial plan. Except for the complete build up of the retirement plan, all of the milestones are achievable within the next five years.

Based on the set milestones, emergency fund build up is a top priority. Forced savings contribution through salary deduction shall be adopted to complete the emergency fund. A pre-need memorial plan shall be secured within the year coming from the emergency fund.

All debts (housing and car loans) shall be fully settled within two years. The life insurance plan shall be paid within five years. Build up of educational fund shall commence after the full settlement of the car loan.

After all loans have been fully settled; life insurance, memorial plans and educational plans have been fully funded; the retirement plan shall come in last. The Retirement Plan shall be funded within 20 years until the couple reaches the desired retirement age.

Any excess funds or windfall income shall be reserved to complete the emergency fund or upgrade the insurance plan. Total protection shortfall is computed at P4 million.

No additional investments shall be made unless the emergency fund is completed and protection shortfall is completely funded. Likewise, no new loans shall be contracted.

To be able to intelligently draw up a financial blue print, a careful assessment of the family’s current and desired lifestyle in the future is employed. The target investment rates were based on a moderate risk appetite. For purposes of conservatism, all future salary increases are not considered. However, it’s assumed that the couple is continuously employed.

Analyses, conclusions and action points

  1. The Cash flow Analysis – comparative analysis of cash income and cash expenditures. Annual cash outflows amount to P1.10 million while annual cash inflows amount to P1.32 million, which leaves net cash inflow of P0.21 million.

Cash Inflows:

Both the husband and wife are fixed income earners. The husband receives variable pay from his teaching and mentoring sessions.

Cash Outflows:

  • The couple’s strategy of giving at least 10%, saving at least 30% and spending  no more than 60% based on their gross income is being mirrored in their cash flow. Actual expense to income ratio is computed at 56% while savings to net income ratio is computed at 28%.
  • The family considers their monthly debt amortizations as part of their savings and not as expenses. Consequently, upon full payment of the housing and car loans, the said amount shall be restricted to fund the educational and retirement fund program.
  •  The level of discretionary expenses is reasonably set at 10% of the household’s total expenses. This kind of lifestyle is being made feasible because the family has resolved to live within their means. The family budget shows that tithes and offering are not considered discretionary but rather part of their standard cash outflows.
  • The family is disciplined in utilizing the credit card as a substitute to cash. Credit limit has never been maxed out and bills are consistently paid not later than due date. The family is covered by a HMO program. Both the husband and wife are active members of Phil health and SSS with updated premium contributions and zero loan.

Conclusion and Action Points:

The family needs no adjustment in managing the household expenses. During the financial planning and coaching exercise, the family decided to withdraw from their savings to pre-settle some debts. The family is holding excess cash while there is still large amount of debts. Only 19% of the gross income goes to debt amortizations. For every one peso of cash outflow (excluding discretionary expenses), there’s available cash of four pesos. They have also decided to reduce their cash savings contribution and allocate 50% of their monthly savings to debt amortizations.

  1. The Net worth Analysis – identification of assets and liabilities in the order of liquidity to determine how much wealth has so far been created.
  • The family’s net worth as of February 2012 is estimated at P3 million.
  •  Investments in mutual funds are stated at current market values. Investment portfolios are being managed by reputable and leading investment houses. FAMI (Metrobank Group) (64%) and PAMI (Philam Group) (36%). Portfolio types include (79%) Balanced fund and (21%) equity funds. Annual yield from mutual funds ranges from a low of 8% to a high of 23%.
  •  Equity to asset is 87% while debt to asset is 13%. This means that large portion of the asset is owned and only minimal amount is financed through debt.
  • Except for the family home and car, the couple is practically debt-free. Car loan is set to be fully paid within the year while housing loan is set to be fully paid within two years. The monthly debt amortizations on housing and car loans are manageable and practical substitutes for the monthly expenses on apartment rentals and taxi fares.
  • The family car is covered by comprehensive car insurance and the compulsory third party liability. The family house is insured with HDMF but still needs to be covered by a separate insurance to fully cover the market value of the property.

Conclusion and Action Points:

The family has just created enough wealth to live a comfortable life. During the seven month period of financial planning and coaching, the couple has made partial debt payments and debt restructuring. Total debt payments made reached P250, 000. The remaining loan terms of car loan and housing loan were shortened by one year and two years respectively. Total savings reached P190, 000. Sans the advice of the financial planner, the couple would have otherwise invested the money to build up either the educational fund or the retirement plan.

  1. The Protection Analysis – determines protection needs as compared against protection sources

Protection Needs – The protection needs cover three (3) areas:

Immediate needs include hospitalization, burial costs, estate settlement and miscellaneous expenses. Estate tax dues are computed using the current estate tax table of the Bureau of Internal Revenue. A buffer equivalent to three months of the family’s standard expenses is a moderate allotment for miscellaneous costs.

Educational need is likewise critical as a hedge to cover educational expenditures after any of the couple’s untimely demise. Educational need is determined considering the current age of the couple’s only child. Future values of said costs were determined using assumptions on inflation rates and target growth rates.

Replacement Income Fund is computed equivalent to the family’s expenses for the next five years in case of the husband’s untimely death. An inflation rate of seven per cent is assumed based on the current level of spending. It is assumed that the wife can already recover after five years.

Protection SOURCES – the death benefits on government contributions (Pag-ibig and SSS) are not considered.

Conclusion and Action Points:

Our risk analysis revealed a shortfall of P3.9 million. The shortfall originally amounted to P5.2 million.

Immediate Needs – A pre-need memorial plan is intended to be secured within the year coming from the emergency fund. Estate tax due is minimal at P21,000. Car loan is payable within the year while the housing loan has mortgage redemption insurance that can cover the entire loan balance in the event of the husband’s demise. At the end of the year, the required funds for the immediate needs will be purely for miscellaneous expenses and estate tax dues. This is the target amount of emergency fund which will be fully funded within 18 months until June 2013. The emergency fund shall be maintained in a regular savings account that can be withdrawn anytime.

Educational Needs – An educational plan for the couple’s three-year-old daughter shall be paid within three years at P20, 000 per month and shall be fully funded by the time the child reaches her seventh birthday. An annual withdrawal from the fund is projected starting on the child’s first grade in school. The couple’s level of risk tolerance is moderate and so the target yield of 10% per annum is realistic. The couple is given the option to choose between securing a pre-need educational plan or investing the amount in the balanced mutual funds. Investing in mutual funds promises a higher yield as compared to a preneed plan but a pre-need plan has insurance component that assures the educational needs of the child in the event of the husband’s untimely death.

Replacement Income Fund – Realizing the shortfall computed by the financial coach, the husband secured an upgraded permanent life insurance plan (on top of the couple’s existing insurance plans). The option to upgrade the husband’s insurance plan is only practical within three years until the husband reached age 42. Beyond that, the insurance premiums might be too expensive for him. Therefore, any excess funds or windfall income during the three year period shall be reserved to upgrade the insurance plan and bridge the P4 million funding gap provided the emergency fund is already completed.

  1. The Retirement Analysis – The Retirement Plan shall be funded within 20 years until the couple reaches age 65. The couple must be able to build up a retirement fund of P19M to comfortably live another 15 years until age 80.

The Retirement Calculator designed by Mr. Alvin Tabañag, RFP and Founder of Pinoy Smart Savers Learning Center was used in the Retirement Analysis.

Conclusion and Action Points:

During the financial planning and coaching exercise, the couple realized that the Retirement Pay that would come from their employers as well as the seed fund invested in the mutual funds are not enough to give them a comfortable retirement years. Retirement Fund Sources would come from the Retirement Pay

(37%), Retirement Fund Contribution (54%) and the Seed Fund (9%).

Minimal Monthly pensions that will come from SSS and Pag IBIG membership shall help augment the monthly expenses.

The couple committed to start the build up of the needed Retirement Fund after all loans have been fully settled; life insurance, memorial plans and educational funds have been fully funded.

*Names have been changed to protect clients’ identities

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