Question 1: Wealth Grounding – Foundational Part

Answers as follows: –

(a)(i) Mr T should monitor his budget as it aids him to figure out his long terms objectives/goals and provides opportunities to work

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towards them. In addition, it ensures wise expenditure of his funds, sheds light on bad spending habits, prevents overspending, which in turn prepares him for emergencies and leads the path for happy retirement days till 95 years old. The net worth for MR T as of 31st of December 2017 $264,510 highlights a solid financial health.

(a)(ii) Mr T’s balance sheet represents a snap shot of his wealth level (net worth) which is derived based on the difference between his total assets after deducting all his liabilities. The series of financial statements that can be used to evaluate his monetary situation would be as such:

  • Income Statement – highlights the revenues, expenditures and Profit/Loss for a specific period.
  • Balance Sheet – highlights the value of assets, liabilities and net worth at the end of the financial year.
  • Cash Flow Statements – shows the cash flow of the entity for a specific period

(b)(i) FALSE: A person’s investment assets to net worth ratio should logically decrease, as he/she grows older.

         FALSE: Cash management helps you to manage your cash on a day-to-day basis; hence, it has no relation with long -term       

         financial goals.

         TRUE: The rule of “72” says that, at 10% interest, it takes a little more than 7 years to double your money.

         TRUE: Liabilities are normally reported at their current fair market value.

         FALSE: If you can cut your spending by 5% that would be equivalent to getting a 5% raise.

         TRUE: When budgeting monthly income, you should exclude one-off items such as a 3-month year-end bonus

         FALSE: When a person’s cash flow statement shows a surplus, this means that funds are ready to be used.

         TRUE: No one financial ratio tells the whole story, hence we need to look at a few ratios to get an overall

         picture of an individual’s financial health.

(b)(ii) Size and amount of funds needed in times of emergency varies from household expenditure, lifestyle, monthly costs, income

          and dependents. Based on the experts’ advice and rule of thumb, Mr T needs to put aside enough money to cover minimum

          three to six months’ worth of living expenses. Based on the cash assets Mr T have in both his savings and fixed deposit account,  

      he has sufficient emergency funds to sustain his routine lifestyle as per the thumb rule.

(c)   The two primary ratios that is used to determine the appropriate level of Mr T’s debt would be: –

  • Debt to Asset Ratio – Total Liabilities ÷ Total assets

$296,910 ÷ $561,420

= 52.89 %

If the calculated ratio is less than 50%, it denotes that Mr T is considered solvent and he has no issues settling the expenses that is classified under the liabilities column. On the contrary, since his readings are slightly over the 50%-mark, Mr T needs to fine tune his expenses in the upcoming months and years.

  • Debt Service Ratio – Total monthly debt repayments ÷ Monthly take-home income

$55,910 ÷ $109,000

= 51.29%

As the ratio reading is above 45% which is fairly high, thus Mr T should take adequate steps to decrease this reading to the desired levels of below 35%.


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