In the current downward trend in the economy the losing of job is not very unlikely. 5,000 is the Helms combined monthly income. In general, a family should have ample liquidity equivalent to the 4 to 5 months monthly income. Helm required less liquidity because of no family obligation. In case of any urgency or job lost, they should need a liquidity of at least 3 months time. If both lose their job at a time then they will be in a state of financial distress. As a result, 9,500 is not sufficient enough for Helms. In addition, their earning is 5,000 per month and their total saving is 9,500 which gives an idea that their outlay is almost equal to the generated income means at breakeven level. In this scenario, Helms should require a liquid balance of 3 months salary.
Q. Explain the relative risks and potential advantages of CDs. Explain under what condition(s) you would recommend them for the Helms.
The main advantages and pros of CDs are stated below
CDs are much safer in comparison with the investment in the stock market.
CDs pay higher return or high rate of interest in contrast with the Helms current saving account.
CDs are not liquid like the checking account. Initial detachment from CDs attracts penalization. In addition, CDs are paying 4.5 interest while money market is paying interest 4. As a result, CDs are less attractive than the money market. It is not recommended that Helm invest some money in CDs because of less liquidity. Although, the CDs paid the interest at higher percentage but in the end it will not help to achieve the long term goals. At the age of 30, they should pay attention on the long term investment alternatives.
Q. Do you agree with Phil that some of their funds should be invested in the stock market Explain.
Over the years there is a tendency that stock market pays the highest return as compare with any other long term investment. At the age of 30, they should pay attention on the long term investment alternatives which will create wealth. Stock market is the best viable long term option available for them. In the real sense, any person wants to capitalize his income then he should invest in the stock market. At their current saving scenario, they are not in a position to invest in the stock market but they are able to invest almost 15 of their monthly income in the stock market. They should choose the option of mutual fund which is feasible for them to invest in the stock market.
Q. What are your recommendations for a cash management plan for the Helms In other words, considering the options available to them, what action should they take
After the thorough assessment of the case it is concluded that firstly they should cut down their major expenditures which in the end save some money for them and also their liquidity balance is inadequate and insufficient. Now, they should consider the liquidity balance. One should recommend that not to invest any money in CDs and close Mid Citys checking account and invest some money in the money market. It is strongly suggested that they should not invest any money in the stock market from their current saving position rather than they should inject and invest some percentage of their monthly income in the stock market via mutual funds. Moreover, they should contribute in the money market account in order to increase the balance.
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