Financial Plan for Chris

The demise of Chris grandmother leaves him with an inheritance of $150,000. The inheritance is a substantial amount of money for him. The outstanding residence mortgage is $382,000. It does not make financial sense to use the amount from the inheritance to pay off the entire mortgage. The financial plan for Chris on the utilization of the $150,000 is to pay partly the mortgage, invest the part of the amount for retirement and children education and the rest to save in cash saving accounts. The split of the inheritance to the various objectives actives a sound financial plan for him.

            He should give priority to his children post-secondary education and his retirement. These are the most important crucial goals for him. The car loans have already been paid off. The mortgage payment from Assignment#1 are the only liabilities to pay. Their interest rates at 6.5% per annum at a reducing balance is reasonable. The partial payment of the principal amount reduces the monthly interests payments.

The financial plan for the utilization of the $150,000 is as follows:

1. Contribute $ 50,000 to the RESP

2. Contribute $ 20,000 to the TFSA.

3. Contribute $ 25,000 to the RRSP

4. Use the $ 55,000 to pay the mortgage principal amount.

The choices of the financial plan I presume Chris has the mortgage of the house to pay only. Chris made no prior contributions to the RRSP or TFSA. Chris is a loving father and aims to ensure his children get the best education. The assumption makes the contribution to the RESP the first priority to reduce the huge future expenses relating to their education. His retirement is a second option to eliminate the responsibility of his children taking care of him at old age. The mortgage repayment is the last option as it is the only liability available to pay.

Investment Plan

            The repayment of the mortgage principal amount partially aims to reduce the monthly repayments amounts. It, therefore, warrants no further explanation since it is a straightforward decision. The other financial decisions we explain as follows.

Overall view and risk analysis

            The S&P/TSX Composite is a headline index of the equity market in Canada (TMX Money, 2018). Table 1 shows the return of the S&P/TSX Composite index.

Table 1 S&P/TSX Composite Total Return (S&P Dow Jones Indices LLC.,2018)

1 Month

3Months

YTD

1 Year

3Years

5Years

10Years

0.51%

-4.97%

-5.76%

-4.76%

4.66%

2.78%

6.29%

            The following data is the most recent from the S&P Dow Jones website and TMX Money. The returns from the equities are low in the short run. The returns are high in the long return. The suggestion to make for the investment plan is to acquire both debt and equity instruments. The equity instruments to be held by Chris for a time period three years and ten years before they are sold. The debt instruments to be held for a period of three months to one year. The debt instruments are highly volatile and require holding for a shorter period to realize the gains. The equity instruments are less volatile and require to be held for a long period of time to realize its gains (S&P Dow Jones, 2018).

            The Canadian economy is expected to grow by 2.9% in the last quarter of 2018 and fall back to 2% in the first quarter of 2019. The economic outlook of the country implies the gains derived from equity instruments are low in the short run period. The slow economic growth of the country requires an acquisition of equity in Canadian or American blue-chip companies. The acquisition of their equity should be 10% of the total holding of the investment amount. The companies are risky to invest, however, they guarantee the best returns in the long run. My suggestion is to select Facebook or Amazon stocks. Chris to keep off the commodity market because of my inadequate understanding of the market.

RRSP Account

The RRSP is an investment held for a long period of time. Assume that Chris will retire from employment at 65years. The contribution made to the account of $25,000 acquires shares in the Royal Bank of Canada. The company was selected because it is a blue chip company.

            Royal Bank of Canada. It is the most reputable bank in Canada. It offers financial services, insurance services, and wealth management to its customers. The headquarter is situated in Toronto. It reported revenues of $ 42,576 million and a net profit of $12,431 for the year ended October 2018. Its trend in share price is shown in figure 1.

Figure 1 Share Price for Royal Bank of Canada (QuoteMedia, Inc.,2018)

The figure indicates share price increase, except at the end of 2018 and the start of 2019. The numbers indicate a constant dividend payout. The dividend yield is 4.0%. And the analysts’ ratings have been good. It is rated as a moderate buy with an expected share price of $97.59. I would suggest buying 257 shares. This comes to just over $25,000, so some minor reallocation is to be made from other budgeted amounts (QuoteMedia, 2018).

Tax-Free Saving Account

            The TFSA is to holding money to cover vacation expenses or for building equity. It requires the acquisition of investments for a moderate time period. There is no goal attached to the amount of money in this account. The investment is made in Proctor & Gamble company which is blue-chip American Company.

            Proctor & Gamble Company. It is a product based company with a global reach. It has its headquarters situated in Cincinnati, Ohio. It reported revenues of  $66.8 billion and $13.7billion net profit for the financial period ending June 2018. Its share price trend is shown in figure 2.

Figure 1 Share Price for Proctor & Gamble Company (QuoteMedia, Inc.,2018)

The figure shows a share price increase, except, Like Royal Bank, at the end of 2018 and the start of 2009. The dividend yield is 3.07%. And the analysts’ ratings have been good. It is rated as a strong buy with an expected share price of $93.48. I would suggest buying 214 shares. This comes to just over $20,000, so some minor reallocation will have to be made from other budgeted amounts. Overall, I think that P&G is such a solid, reliable company than the possibility of a decline is not great (QuoteMedia, 2018).

References

QuoteMedia. (2018). Procter & Gamble Company (The) (PG). Retrieved from QuoteMedia: https://www.quotemedia.com/portal/quote/?qm_symbol=PG

QuoteMedia. (2018). Royal Bank of Canada. Retrieved from QuoteMedia: https://www.quotemedia.com/portal/quote/?qm_symbol=RY%3ACA

S&P Dow Jones. (2018). S&P/TSX Composite (CAD). Retrieved from S&P Dow Jones: https://us.spindices.com/indices/equity/sp-tsx-composite-index

TMX Money. (2018). Royal Bank of Canada. Retrieved from TMX Money: https://www.tmxmoney.com/en/index.html

TMX Money. (2018). S&P Dow Jones Indices. Retrieved from TMX Money: https://web.tmxmoney.com/assets/docs/indices/TSX/Factsheet_TSX.pdf