Essay on "Investment Strategies Investment Recommendations for the Nicholsons"

Essay 4 pages (1446 words) Sources: 0

[EXCERPT] . . . .

Investment Strategies

Investment Recommendations for the Nicholsons

Case Overview

Chris and Faith Nicholson are a young married couple, both with regular salaried jobs and a fair amount of job security as well as stability in their income and their expenses expected over the next several years. Expenses are fairly standard, including rent and utilities payments, child support payments Chris makes to his previous wife for his two children, auto and renters insurance, and miscellaneous expenses such as credit card debt, food and clothing, etc. Chris, a corrections officer, makes $26,000 and has an employer-sponsored 401(k) plan that the employer will annually match contributions of up to six percent of Chris' income; Faith makes $20,000 without additional benefits, and both Faith and Chris' salaries are expected to grow by five percent annually. Inflation of four percent annually will eat away at some of this salary increase, however many costs are expected to stay at the same dollar value -- rent, insurance, child support payments, etc. -- for at least the next five years. The fact that revenue will be increasing for the couple over the next five years without major increases in expenditure means that this is a very good time for the Nicholsons to start considering their investment options and their financial goals quite seriously, as they will have increasing amounts of income to devote to investment and towards other goals.

To that end, a set of general recommendations for the Nicholsons in terms of their financial and investment strategy is provided in the following pages, with a focus on the five-year period starting with the current year of the case (2008) though with long-term recommendations also made. The primary goals the Nicholsons list are purchasing a home and establishing a six-month emergency fund to cover all of their monthly expenses should their income suddenly be cut off or dramatically reduced for some reason (e.g. job loss, injury, etc.). Though the Nicholsons have a good amount of health insurance and Chris has disability insurance, this emergency fund is still desired and shows the Nicholsons to be focused on security more than gain; this is definitely taken into consideration in the recommendations made.

Spending and Saving Habits

It is impossible to discuss investment strategy without touching on spending habits, as it is the balance between income and spending that determines how much can be saved or invested each year, and this amount in turn helps to determine what strategy will be most effective in meeting specified goals. Since the Nicholsons seem to be especially security-minded, with the purchase of a modest ($100,000 current value) home and a six-month emergency fund their only current stated goals, addressing certain spending habits and suggesting ways that they could improve their investment amounts, reach their goals faster, and establish greater financial security should be a part of any comprehensive financial planning strategy. It is thus recommended that the Nicholsons not add at all to their current credit card debt, which at annual payments of $1,800 is certainly not crippling but is still money paid to interest that could go elsewhere. The same is true of the furniture that the Nicholsons purchased at 18% interest with a repayment period of three years; purchasing cheaper furniture or waiting until cash could be paid would create significant savings for the couple. Figures in the accompanying spreadsheet assume that credit card payments must be made at the same level for the next five years, and also assume that the furniture will not be paid off early, however any additional savings that the Nicholsons are willing to forego in the next two years in order to discharge these debts sooner will yield an increased ability to save and invest in later years and in absolute terms, and would definitely be recommended. At any rate, it is most definitely recommended that the Nicholsons not take on any more consumer (or other) debt, and even that they cut their food and clothing budgets if possible (the spreadsheet assumes a ten percent reduction in food and a twenty percent reduction in clothing costs, adjusted up annually for inflation, and it eliminates vacation costs to show the Nicholsons the potential savings/investment they can create).

General Strategy

In addition to recommended change sin spending habits, a part of the general strategy recommendation for the Nicholsons is for Chris… READ MORE

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