Finance

Financial Overview and Personal Goals
The fact that the Simpsons have started thinking about their financial well-being, begun to budget their cash inflows and outflows and are trying to make up a savings plan for their various goals is a good start and the first step to financial management. However, their cash flow statement (See Appendix A), tracking their cash inflows, and their various cash outflows, shows that the Simpsons expenses are exceeding their income by around 35 a month. This is contributing to their debt, and eating away into their meagre assets, as shown in the Assets and Liabilities columns in Appendix A, not taking into account the savings that the Simpsons wish to make in order to pay for a new car and their son Harpers education. As the Simpsons are currently exceeding their monthly income, unless they make some changes to either their income or expenses, they will not be able to save for their financial goals.

The Simpsons have a current annual income of 30,000. They have expressed three types of financial goals  short-term, intermediate and long-term ones. Their short-term goal is to save 3,000 with the aim to put a down payment on a new car for Mary. In order to be able to afford this, the Simpsons hope to save 250 per month, so that in a years time, they can replace Marys current well-worn car. As an intermediate term aim, within 10-12 years, the Simpsons want to save enough for their son Harpers education to support him through college. For this reason, they hope to save 150 per month. Assuming an interest rate of 8 annually, they will be saving 27,442 over 10 years (see Appendix B). In the long term, the Simpsons plan to save for their retirement. However, since they do not have any spare cash and are already planning to save 400 a month for their short and intermediate term goals, they have decided to postpone saving for retirement until later.
In order to evaluate these goals, it is important to know the actual amounts that are needed for each of the short, intermediate and long term goals. Assuming, for instance, that 3000 is enough for a down payment on a car, the Simpsons have not explained how they plan to include the payments for the new car within their already constricted monthly budget. As for the goal of saving for Harpers education, the actual cost of college expenses is not provided, so it is assumed that saving 27,442 is sufficient. This goal is realistic, if the Simpsons are able to save the 150 each month at the assumed interest rate, or are able to secure a higher rate of return on their investment.

The Simpsons have set a long-term goal of saving for retirement, but have not expressed a realistic timeline concerning when they can start saving for it, and how much they plan to put aside. Most financial planners like Burton Malkiel suggest starting to save for retirement as early as possible, as less money saved over time can add up quite quickly. In Appendix B, I have demonstrated the amount that the Simpsons can have at the age of 65 if they invest 50 a month starting today. The amount is a staggering 114,694. By contrast, if they save the same amount over a 15 year period, they only put away 17,301 for retirement. Financial experts typically suggest that you should hope to retire at the age of 65 with 80 of your pre-retirement income. Thus, if the Simpsons are serious about saving for retirement, they need to start thinking about it now.
Cash Flow Statements and Balance Sheet
The Simpsons current monthly income is 2,600, and their total expenses are 2,635 (Appendix A). Thus their cash outflows exceed their inflows by 35, which they are probably making up from their current account or charging to their credit card. They also have assets totalling 77,900 and liabilities totalling 61,500.

Net Worth

Their current net worth, their total assets, is less than the scope of their total liabilities. The Simpsons current net worth is 16,400 (see Appendix A). If the Simpsons pay off their credit card debt from the current account, their liabilities will reduce by 1,500, but so will their assets, leaving the net worth unchanged. If they are able to save 400 a month, their assets will go up, by at approximately 30,000 (see Appendix B).

Revised Cash Flow Statements
Their current income and expenses do not have enough room for the savings that the Simpsons are currently contemplating, let alone for saving for retirement. Whilst their goals to save are admirable, in order to make them a reality, they would need to make some changes to their cash flow statement. Assuming that their income is fixed in the short term, the changes would thus be needed on the expense side. Without knowing the details of the details of some of the Simpsons expenses, it is difficult to make recommendations for instance, I would need to know how the 600 spent on recreation and programmes for Harper is distributed, and whether some of it can be cut back. I would recommend however, that the Simpsons look closely at their expense column, and attempt to cut back on their expenses by approximately 435, which would mean that they would not be spending more than they currently earn, and they would be able to save 400 a month. They should consider cutting back on are the recreation, clothing, cable and gym expenses. Additionally, depending on the rate of interest that they are paying on their credit card balance, they could consider paying off the credit card debt with the money they have in their current account. They are not earning any interest on their current account, and they could save a lot of money on interest by paying off this debt. In case of emergencies in the future, they could charge any unforeseen payments by the credit card. In Appendix D, I have created an alternate budget for the Simpsons, which is simply one way to reallocate their income and ensure that there is still some savings, in this case, 385. Depending on what expenses are essential and what can be curtailed, the Simpsons can allocate their income in some other fashion.

Another way to achieve their financial goals would be to re-evaluate the time lines for them. If they cannot cut back on their expenses quite that much, they might consider postponing buying a car by a few more months and putting aside less every month for the car. Besides, the Simpsons could save less than 150 monthly for their sons education, or start with a smaller amount now and increase it if their income goes up in a few years.

Liquidity

If the Simpsons alter their budget as recommended, they can cover their current expenses as well as a large part of their planned monthly savings. This does not take into account any future increases in income. According to the statement in Appendix D, the Simpsons can save 385 monthly. In addition to this, the Simpsons have assets of 77,900. To determine their liquidity, we can use two financial ratios to see if they have adequate cash for emergency situations.

Their current ratio is 1.2733, which is the ratio of their assets to their liabilities (see Appendix D). Their quick ratio on the other hand 0.016667, which is the ratio of the assets that are easily liquidated to the liabilities.

Savings Options

There are various saving options available for the Simpsons. It is a good idea to shop around for different rates, before deciding on a savings option. A good website, such as Bankrate.com or Moneysupermarket.com, can provide details on different options such as fixed term bonds or individual savings accounts (ISAs). Appendix E has two short-term saving options, and compares the rates between Barclays and HSBC. As is evidenced, the rates can be very different, and vary depending on the length and amount of the investment. Whilst here Barclays is obviously the superior choice, it is possible that the Simpsons prefer a savings option that is for a shorter or longer term.

Identity Theft Precautions

The Simpsons should separate their mail, and any mail that does not have any personal information like date of birth, bank account details etc, can be disposed of in the trash. Mail that has sensitive identifier information should be shredded and disposed of safely. If in doubt, shred it anyway. It is also a good precaution to check bank and credit card statements to ensure that all the charges on it are genuine.

Paying Off Credit Card Balance
The Simpsons have a current credit card debt of 1,500, on which they are simply making the minimum payments, which does not reduce the principal amount of the debt. They would be better-off using the money that they have on their savings account to pay off the debt, even though they would lose the 5 interest it brings in. In Appendix C, I show that the 5 rate brings in 75 annually on an equivalent sum of 1,500. In contrast, by paying 18 interest on their debt, they are spending 270 in interest. It is clearly in the Simpsons interest to pay off the debt with the funds in the savings account. This shows that credit card decisions, which typically carry much higher interest rates, have a very strong impact on individuals budget decisions and their financial health.