Case Study - Jane With Answers.docx

Case Study – Rational and Irrational Financial Decision Making Jane is 23 She graduated 2 years ago and has been working for a small accountancy firm for 15 months Her general business degree gave her[.]

Case Study – Rational and Irrational Financial Decision Making.

Jane is 23 She graduated 2 years ago and has been working for a small accountancy firm for

15 months Her general business degree gave her 4 ACCA exemptions and she has now completed a further 3 papers towards her ACCA qualification, and hopes to qualify fully within 2 years Her salary is £22,500pa, equating to around £1500pm take home pay

Jane is currently sharing a rented house with friends, costing £385 pm plus bills She has a student finance debt totalling £27,000, and a £5,000 car loan she is repaying at £150pm until Feb 2017 She has £1,000 on her credit card (interest 18.9%APR) after paying for her skiing holiday and Christmas She has an instant access cash ISA account at 0.6% with Nationwide Building Society with a current balance of £3,200, and tries to save £50 a month in the account if she can, but hasn’t done so for the last 3 months She also has an investment ISA with a current value of £4,500, but this was set up by her parents, who add to it occasionally, and she doesn’t understand it and just leaves it to grow She hopes it will provide the basis for a mortgage deposit one day She has the option to join a defined contribution pension scheme with the firm, but decided to opt out – retirement seems the least of her financial pressures at the present time

Identify Jane’s goals, the strengths and weaknesses in the way she manages her finances and highlight any actions you believe Jane should take to improve her money management Highlight her rational and irrational financial decisions

What actions could Jane take to address the flaws in her financial planning

Jane’s parents Sally and Peter have a mortgage with ‘their bank’ for the last 15 years with 10 years left to go and are currently paying the standard variable rate 4.25% Currently, they have £46,000 in their current account which they have accumulated over recent years This comes partly from an inheritance after Sally’s mum died but the remainder has simply built up over the years The bank offered them various savings accounts but these all offer les than 1% interest so Sally and Peter don’t think they are worth bothering with and they like the money to be available just in case they need it

Comment on Sally and Peter’s money management

Strengths Risks/exposures Goals Actions

Jane :

 Good job,

salary

growth

prospects

 Tries to

save

 Savings

cushion of

£3,200

 ISA £4,500

 Student debt deductions increase as salary rises

 Credit card debt

 Lack of investment knowledge or associated risk

 Hasn’t saved for 3m

 No pension contributions

 £1500 – (385+150 + bills + petrol + credit card +

entertainment + etc… ) – could save more?

 Mortgage deposit

 General Savings

 Debt repayment

 Pension savings

 Pay off cr card from savings if necessary (19.8%

compared to 0.6%)

 Investigate investment ISA

to ensure is appropriately balanced

 Start saving again , increase

if possible to

£150pm (10%)

 Join DC scheme

at minimum level for now (employers contribution , compounding)-

if not affordable, plan to join on gaining professional qualification (pay rise)

 Consider Lifetime ISA

 Budget planning

Irrational

Seems to spend more than she earns on occasions Needs to budget

Has not joined company pension, therefore losing employer contribution of at least 3% of salary In fact, assuming employer is obeying the law regarding pensions, under auto-enrolment she must have been opted in and subsequently have opted out

High interest borrowing v low interest savings

Lack of knowledge of investments

Not maximising returns on savings [or investments?]

Could use Lifetime ISA as saving for mortgage, otherwise missing out on government bonus

Seems to live for the present rather than planning for the future So present bias is influencing her behaviour

As her parents seem to act irrationally with their finances these may an example of a social norm influencing Jane’s behaviour

Rational

Tries to save, raising qualification level,

Sally and Peter

Could shop around for a better mortgage rate

Could reduce mortgage using existing savings

Accounts are available that will pay interest but allow instant access

Could utilise ISAs for tax efficiency

Could add to pensions as tax efficient savings vehicle

Running a separate bills account is a way of budgeting – could be a form of mental accounting But not if you don’t manage it correctly and incur unnecessary fees

Likely to incur costs for overdraft and will for unauthorised overdraft