( I) S a m p l e C a s e
Mr Wu is 25 years old and has been working in a small trading firm for two years
since graduating from university. His present salary is HK$20,000 (which is expected to
rise at an annual compound rate of 2%). In the evening, he works part-time at a tutorial
school, earning HK$5,000 per month. In addition, he also does some freelance accounting
work at weekends and makes an average of HK$8,000 each month. The reason that Mr
Wu works so hard is that he wants to buy his own flat, as he observed a rapid rise in Hong
Kong＇s property price in the past few years. Mr Wu＇s 48-year-old mother works as a
clerk in a local department store. Her monthly salary is HK$12,000 (which is expected to
rise at an annual compound rate of 2%). Mr Wu now lives with his mother in a rented
private apartment. The rent for this 10-year-old property is HK$6,000 a month. Mr Wu
wants to improve his and his mother＇s living standard, and hopes that in two years＇
time they could move into a bigger apartment of a monthly rent of around HK$10,000.
Then he would buy a 600 sq ft residential unit by mortgage installment 5 years from now,
which would cost about HK$2,500,000 at the current market rate. He would still live with
his mother so that he could take care of her. Mr Wu needs to set aside money to pay for
the first instalment on the purchase of the property. As banks must observe a maximum
loan-to-value ratio, they can only provide a mortgage of 70% of the property value. That
means Mr Wu needs to put up HK$750,000 himself. For a 120-installment mortgage on
the property and other expenses, the monthly repayment amount would come to
HK$16,400. In addition, he estimates decoration of his new home and its furniture would
cost about HK$250,000. Wu＇s mother has also decided that she will take HK$100,000
from her own savings to support her son in purchasing the property.
Mr Wu is extremely confident that he has mastered excellent investment skills. Last
year he made handsome returns on his investments. But due to his busy job, Mr Wu had
suffered from investment loss occasionally. Despite this, he still strongly feels that he
could achieve his aim of saving HK$1,000,000 to buy a house more easily by investment,
instead of by working only. Therefore he plans to increase his investment in Hong Kong
stock market by $20,000 annually, and maintain a cash level of $30,000. After purchasing
his own flat/apartment, he will save $200,000 to continue investing in Hong Kong stock
market, expecting an average annual return rate of 20%. At the moment, Mr Wu gives his
mother HK$4,000 a month as housekeeping money. He estimates that he needs to set aside
only HK$5,000 each month for his own expenses. He will put the surplus into a bank
savings account, after all the other necessary home expenses.
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At the moment, neither Mr Wu nor his mother has any insurance. One of his best
friends, who currently works as a financial consultant in an insurance company, advises
him that he should consider some insurance products which would not only provide him
with protection, but could also be used as a means of saving money. Mr Wu has now been
convinced that insurance is important. His friend recommends a policy which would pay
him HK$1,000,000 when the policy matures in 20 years. But he would need to contribute
HK$3,700 a month. Since taking out the policy would affect his investment resources and
also living standard, Mr Wu needs to think carefully before making any decision.
Please design a sound financial plan for Mr Wu.
Note: As this case assumes no inflation, there is no need to carry out present
value calculations.
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Financial Statement
Expenses
Living Expenses
Personal expenses
Rent
Utility bills
Housekeeping money
Salary tax
MPF contribution
Income surplus
Assets
Investment
Stocks
MPF
Income statement of Mr Wu
＄
Income
$
Principal Income
60,000
Mr Wu (salary plus bonus) 260,000
72,000
Mr Wu (part-time salary) 156,000
18,000
48,000 Investment Proceeds
32,300
Bank interest
100
19,800
Return on stock investment
35,000
201,000
451,100
451,100
Balance Sheet of Mr Wu
$
Liabilities
Current Liabilities
100,000
Credit card balance
80,000
Outstanding utility bills
$
2,500
1,400
(Principal plus return)
Current Asset
Savings account deposits
Cash
Total Assets
120,000 Net Worth
30,000
326,100
330,000 Total Liabilities
330,000
Note:
All the above figures are expressed at present value.
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(2) 2009 Reference Financial Case
Mr Ko is 29 years old. Since graduating from university, he has been working in
an internationally-renowned logistics company. Although the logistics industry is
facing a relatively difficult operating environment at the moment, his employer has no
plans to cut staff. Recently, Mr Ko even got promoted and was awarded a pay rise for
his good performance. His current monthly salary is HK$25,000 and he expects a 2%
increase in salary each year.
He lives with his 58-year-old father and 55-year-old mother in a public housing
unit. The monthly rent is HK$2,300. His father is still working and earns HK$8,000 a
month. As his family’s income exceeds the maximum income limit for public housing
residents, they will have to pay 1.5 times the net rent starting from next year. Mr Ko’s
parents like their present unit very much, but Mr Ko is reluctant to pay 1.5 times the
net rent. Furthermore, now that property prices have fallen quite a bit, he has decided
to buy a flat on the secondary private property market at a price around
HK$1,200,000 and take out a mortgage worth 95% of the property’s purchase price.
He plans to move into the flat when he gets married later. At the moment, Mr Ko
gives his parents HK$6,000 every month to cover the household expenses. After
buying his own property, he intends to reduce that monthly amount to HK$2,000. By
that time, his father will have to take care of the rent for the public housing unit,
which Mr Ko pays for the family at the moment.
Mr Ko’s girlfriend, Miss Chan, is 23 years old and works in an import and export
company. Her monthly salary is HK$18,000, and each year she receives a pay
increment of about 2%. Mr Ko and Miss Chan planned two years ago to get married
in 2011. They have a joint bank account and each of them deposits HK$3,000 into the
account every month. The account has now accumulated a balance of HK$144,000.
They also jointly own some stocks and fund investments. The market value of these
investments is about HK$150,000. They also own HK$60,000-worth of Renminbi
bonds. They estimate that before they get married, besides funding the purchase of the
property, they need to set aside another HK$250,000 for various expenses, including
the wedding, decoration of the flat, honeymoon etc.
Miss Chan has a strong interest in finance and hopes to pursue her future career
in the finance sector. Although the prospects of the financial services industry look
rather grim at the moment, she has confidence in the industry’s long-term prospects.
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To get prepared for the change in career, she intends to take up a distance learning
Masters programme in financial management in a year’s time. The tuition fee for the
two-year programme is HK$180,000. Miss Chan projects that she will be able to
change job and get promoted to a managerial position within three years after
completing the programme. By then, her monthly salary is expected to increase to
HK$35,000.
Since their financial plan requires a substantial amount of cash, Mr Ko and Miss
Chan would like to seek appreciation in capital over the shortest possible time through
investment. They are aware that stock prices have gone down significantly from
previous high levels. Furthermore, stock market commentators are saying on
television that the worst moments are over, and it is time to get into the market. So
they plan to invest all their bank savings and cash in the stock market, hoping to earn
100% return within one or two years, in order to meet their considerable future
expenses.
Please design a sound financial plan for Mr Ko and Miss Chan.
Note: As this case assumes no inflation, there is no need to carry out present
value calculations.
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Financial Statement
Expenses
Living Expenses
Food
Medical Bills
Transport
Housekeeping Money
Salary Tax
Entertainment and Clothing
MPF Contribution
Miscellaneous Expenses
Rent
Savings Account Deposits
Income Surplus
Assets
Investment
Stocks and Funds
Renminbi Bond
MPF
(Principal plus return)
Current Assets
Savings in Bank
Cash
Income Statement of Mr Ko and Miss Chan
Income
＄
Principal Income
36,000
Mr Ko
(salary plus bonus)
4,800
Miss Chan (salary plus bonus)
40,000
72,000 Investment Proceeds
15,000
Stock Trading
110,000
Bank Interest
22,800
22,000
27,600
72,000
151,920
574,120
325,000
234,000
15,000
120
574,120
Balance Sheet of Mr Ko and Miss Chan
$
Liabilities
Current Liabilities
150,000
Credit Card Balance
60,000
156,000
144,000 Net Worth
60,000
Total Assets
$
$
5,500
564,500
570,000 Total Liabilities and Wealth
570,000
Note:
All the above figures are expressed as present value.
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