[Solution]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…

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

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.

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

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

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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