Further to our recent discussions, the following is a detailed analysis of your current financial position and recommended action plan for achieving your stated financial goals. Key findings are summarized below and detailed supporting financials are provided in Appendices I thru VI.
As at March 31, 2011, your total net worth/equity is estimated at $22,090. In reviewing the details of your assets and liabilities, with all other personal assets fully leveraged, this net worth is comprised primarily of the value of your household contents. While these household items are valued at a replacement cost of $25,000 on the family balance sheet, these items could not be sold for this amount to service your current debt obligations, which today total $22,078. With your financial assets totalling $2,000, your liquidity, that is, your ability to meet your financial obligations in the short term, has been significantly impaired. At the same time, the family’s solvency, which means your ability in the longer term to pay your debt, could also be seriously compromised.
In preparing the detailed cash budget for the preceding 12 month period, I could readily identify the factors that have compromised your liquidity and potentially, your long term solvency. With cash outflows exceeding inflows each month by approximately $850 from April 2010 to February 2011, you have had to fund this shortfall each month by increasing the outstanding balance on your credit cards and line of credit. While I recognize your recent efforts to consolidate some of this outstanding debt, reduce interest charges and lower your monthly payments by taking out a second mortgage with ABC Financial, this second mortgage has your current Total Debt Service Ratio at 47.4%, well in excess of the 40% threshold that the large Canadian financial institutions use as criteria when extending credit to clients. With a 20% interest rate, it will be several years before you begin to pay down the principal on this mortgage. Despite the efforts to consolidate and reduce your monthly payments, in reviewing your projected cash flows for the month of March, 2011, your outflows still exceed your net monthly income by $545. Without a plan of action to close these gaps, the only way to fund this shortfall will be to continue to increase the balances owing on your credit cards and line of credit – both considered demand loans that can be called by the bank at any time.
When we first met to discuss your short and long term financial goals, one of your primary short term goals was to own a home. Three years ago, you were successful in achieving this objective, purchasing a home for $240,000 and financing 75% of the purchase price with a conventional mortgage and a down payment of $60,000. However since that time, not only has the housing market declined, thereby reducing the equity in your home, your spending patterns have significantly increased your short term and long term debt obligations and further eroded the equity you had. At the same time, you have not been able to contribute to your other long term financial goals i.e., saving for retirement and your children’s education. This is why a detailed review of your current financial position, with the goal of developing an action plan to remedy the situation, is so critical.
Once you have had the opportunity to review the attached analysis and recommended plan of action, we will meet again at your earlier convenience to discuss the next steps.
Certified Financial Planner
Key Assumptions and Supporting Backup
Below is a summary of key assumptions supporting the current Chang Family Balance Sheet, 12 Month Cash Budget, as well as the Pro Forma Cash Budget that has been developed based on the recommended action plan.
1. Min Family Balance Sheet as at March 31, 2011 (see Appendix I) • A key assumption underpinning the current...