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Memo To: Mr. and Mrs. Smith From: Alexander Stringfellow, Bryan Blust, Fallan Martin, George Farhat, Yiping Qu Date: 05/06/2010 Subject: Financial Plan _______________________________________________________________________ As requested, we have prepared a financial plan for you. This plan aims to give you guidance with your financial future considering your new found employment. We have lots of recommendations concerning contributions to 401K plans, Roth IRAs, and the creation of emergency funds. In addition, we give insight in your current financial situation and how we suggest you proceed. Congratulations on getting the job, now let’s make sure all the money you earn is allocated appropriately so that you may one day find yourself with wealth and prosperity.

Knowing what you’re working with: Before we begin our analysis, we would like you to have a clear understanding of your expected cash flows into the future. Below you’ll see your average monthly cash flows based on the information that you disclosed with us earlier. Calculation for discretionary income Total Pretax Income (yr) Pretax Income per month less: 401K plan (5%) Pretax Income per month less:Income tax (25%) Take home pay less: living expenses Discretionary income per month

$80,000 $6,667 $333 $6,334 $1,583 $4,751 $3,200 $1,551

A Condo or House? We understand that buying a house or condo can be a stressful situation; however, with some wise planning and thoughtful saving, such stress has a tendency to go away. Buying a condo or house really depends on your lifestyle and occupational goals. If you plan to stay in Baton Rouge for less than five years or plan to travel frequently, our recommendation is that you buy a condo. The advantages of a owning a condo include (1) you pay a smaller down payment and monthly payment, (2) most condo complexes have added security, (3) they are generally easier to clean and maintenance, and (4) if you decide to relocate, you can rent it out with a higher probability of consistently having renters over a house. The disadvantage of a condo is that you forgo the privacy and added personal space that a home offers (Bateman). If you plan to stay in Baton Rouge for more than five years and start your family here, our recommendation is that you buy a house. The advantages of buying a house include (1) future appreciation of the home value, (2) you’ll have more privacy than a condo, and


(3) the mortgage interest and property tax paid on the house are tax deduction expenses. The disadvantages to buying a house include (1) higher gas or transportation costs due to the fact that most of the “nicer” homes tend to be in the suburbs and (2) houses have lower purchase and turnover rates than condos in the case that you would want to sell (Bateman). If you choose to purchase a condo, the median price for a condo in the Baton Rouge area is $67,566 (Zillow). This average is based off of condos sold within the past 7 months in the Baton Rouge area. The fixed mortgage APR is 5.323% for 30 years and 4.817% APR for 15 years. We recommend a 10% down payment (which is $6,757) for buying a condo. To give you an idea of the difference in monthly payments, the estimated monthly payment for the 30 year and the 15 year mortgages are $385.07 and $526.00 respectively. If you choose to purchase a house, the median home price in the Baton Rouge area is $169,000 (Zillow). This average is based off homes sold within the past 7 months. We recommend a down payment of 20% if you choose this route. This would require $33,800 down payment. The average APR for a 30 year fixed mortgage is 5.312%. If you prefer a shorter finance period, the 15 year fixed mortgage APR averages 5.041%.If you wait five years after opening your Roth IRA account, you will be able to withdraw up to $20,000 tax and penalty free for the purchase of your home. This leaves only $13,800 to save elsewhere. To give you an idea of the difference in monthly payments, the estimated monthly payment for the 30 year and the 15 year mortgages are $880.15 and $ 1,202.30 respectively. Also, there are adjustable mortgage rates, which are mortgage rates in which the interest varies with market interest rates. There is a base rate and then after this time your rate may change, depending on the market. The average 7 year adjustable rate 7 year mortgage is 4.159 APR. You may also do a shorter time period with adjustable mortgage rate, such as 5 years, which has an average APR of 3.952%. As we noted, you have credit scores of 680 which is good. We recommend you pay off your existing credit card debt of $1,200 with your signing bonus. This will eliminate any interest expense you would accrue if left unpaid. Also, we suggest paying off any balance left on your card at the end of every month. Using your credit card and paying it off every month improves your credit score which will save you money when you plan to finance your house or any other large purchase.

Investment Options Based on the information you provided, we made different options for different areas. (1) 401K Plan We strongly recommend you take part in the 401K plan for your retirement fund because of the company match. That means, if you contribute 5% of your income to your plan, you will get another 5% from the company. A 401K plan is a defined contribution plan; thus, the amount available at retirement is a “function of how much is contributed, how


long it is invested and how smartly it is invested�. (Rakow) We recommend you contribute 5% each to your 401K plan and you will get maximum 5% match from each company. How your money is invested will have an enormous impact on your return. The type of investments that you choose for your 401K plan will depend largely upon your time horizon to retirement and your risk tolerance. Since you are young, your risk tolerance for all long-term investments is high. And your retirement is more than ten years away, therefore we think you can put your money into different financial vehicles, thus balancing the investment risks. Mutual Funds are really great investment options designed to reduce risks. They allow small investors to put their money in stocks, bonds and other various instruments. An average 401K will offer at least a few mutual funds in which you can invest. In terms of your 401k investments, we recommend the following: If you have a moderate risk tolerance then we recommend the Van Kampen Growth & Income Fund (ACGLX). If you have a higher risk tolerance, we recommend the Pegasus Small Cap Fund (FBRYX). Both funds have done well compared to their peers, and are open to new investors. In addition they are both no-load (meaning they are sold without a commission or sales charge) and if you decide to use Scottrade, these funds have no transaction fee. In addition, they are both rated well by the Lipper Leader Scorecard, an independent securities evaluation process serviced by Thomas Reuter's Company. (2) Emergency fund You may think investing in an emergency fund is unnecessary at times. The reality is that life is so unpredictable that when (and if) you become unable to work and earn income, you will more likely than not be grateful for some cash reserves. In terms of investment strategy, we recommend a three- tiered cash reserve emergency fund. The first tier is that you should have accessible true cash in the amount of approximately $800. As we noted, you will receive $3000 signing bonus from your firms next week. We suggest you put $800 out of $3000 in a safe deposit box somewhere safe in your house. The reason for this is to circumvent possible natural disasters where virtual and voice communication would be nonexistent (i.e. a hurricane or tornado hits the area unexpectedly) and cash is only medium of exchange until proper infrastructure can be put in place again. The second tier is having an emergency repair fund where money would be available for unexpected home and car repairs. We recommend this fund be placed at a local bank or credit union (for the sake that some repairmen don’t accept checks) in the form of an interest bearing saving account with check writing capabilities in the amount of approximately $1000. The third tier of our recommended emergency fund hedges against the probability that you may be unable to earn income for an extended period of time. It was stated that your monthly living requirements were $3200. Projecting into the future, you need to be able to fund these living requirements for a minimum of six months. The conflict of interest here is that when you don’t need the money, you want the highest yield; however, this fund needs to be wisely invested in low risk, highly liquid


securities such as Money Market securities, Certificates of Deposits, or short-term bond funds. Money market accounts (MMAs) can range in its advantages, so you need to look closely at what each account stipulates. For instance you need to be aware of the expense ratio because that will eat into your real return and if you somehow find yourself in a high tax bracket, you should look into some tax-free MMAs. CDs are the standard savings investment, and only implication here is that you may have to pay an early withdrawal fee in you take it out early. When looking for the best rates on the market, we recommend you visit www.Bankrate.com . Short-term bond funds, namely ETFs, may be an option as well (depending on your willingness to make open market transactions). Funds such as SHV allocate themselves to short term sovereign debt investments that are AAA rated. The bonus to this investment is the opportunity to take advantage of short term market changes. For instance, if the economy goes south and you find yourself without a job because of downsizing, you’ll be able to sell your short term bond fund with added gains along with the coupon payments that you would have received along the way. The only implications are (1) you have to be willing to establish a brokerage account via Scottrade or a company of the like, and (2) you would only have the opportunity to sell (i.e. cash out) during standard trading hours (usually 9:30-4:30, Monday through Friday). (3) Roth IRA We suggest you open a Roth IRA immediately. The contributions you make to your IRA will add to your retirement and you can use it to start saving for a down payment on a home. 5 years after opening a Roth IRA, you can withdraw up to $20,000, tax and penalty free, for the purchase of a new home. Unfortunately, you can only contribute a maximum of $5,000 a year per person, totaling $10,000 a year. (IRA)

Because you are considering buying a house in the near future (3-5 years), you all should plan on investing in a low risk or moderate risk mutual fund so that your principle is preserved relative to higher risk investments. The beauty about investing in the Roth IRA is that (1) all of your earnings are tax free and (2) the IRS allows for early withdraws for first time home borrowers (Publication). Our recommendations are the following; if you have a lower risk tolerance, we recommend the Janus Flexible Bond Fund (JAFIX).If you have a moderate risk tolerance then we recommend the Van Kampen Growth & Income Fund (ACGLX). Both funds have done well compared to their peers, and are open to new investors. In addition they are both no-load (meaning they are sold without a commission or sales charge) and if you decide to use Scottrade, these funds have no transaction fee. In addition, they are both rated well by the Lipper Leader Scorecard. Debt instruments are usually yield less than stocks. Since you are young and have many years ahead of them, you should invest in higher yield securities instead of debt securities. Once you get older, you should transition your stock securities into more stable and less risky securities such as t-notes and t-bills.


Sovereign and blue chip debt certainly yield less and expose you to inflationary risks. As ETF columnist put it, “in times of inflation, the minuscule returns offered by Treasuries are often eaten away and go into the red.” (Lydon) We do feel that the “junk bond” market may be a high growth sector (relative other asset allocations). When you look at the “junk bond” market, there are a number of factors that lean to its benefit. The first factor is yield; naturally, as they are “junk” bonds, higher risk companies must issue debt at greater discounts. These higher risk bonds aren’t necessarily “bad” investments, because even if a company goes under, most bond holders recover a reasonable amount of principle. The second factor is the economy. We are at an all time low right now, and companies are very hungry for liquidity because economic growth is right around the corner. Once the economy picks up, these companies will be able to pay back their debts (a plus) and we’ll still be earning the high yield (another plus). Evidence of the economy improving includes: Increases in manufacturing levels, residential real estate activity, consumer spending, and tourism increased as well according to the Federal Reserve’s economic outlook. (FRB) We recommend you invest in junk bonds via ETFs, notably HYG and JNK because they are well diversified with 50 or more securities in each.

How to proceed from here Based on our analysis, we suggest you allocate this month’s income as such: This month: Signing bonus Less: Cash for emergency fund Less: Cash for credit card debt Cash left Add: $2000 from CD Contribution toward emergency fund

$3,000 ($800) ($1,200) $1,000 $2,000 $3,000

Into the future: Discretionary Income per month Distribution 1: Investment in Emergency fund ( 50%) Distribution 2: Investment in Roth IRA (50%)

$1,551 $775.50 $775.50

We suggest you implement your financial plan as soon as possible since time is important. For this month’s finances, we recommend that you first pay down your credit card debt and establish your first tier of the emergency fund. Into the future, always pay down your credit card debit as soon as possible because it ends up eating away at your long term savings potential due to interest payments. We also recommend that you not renew your CD so that you may contribute more funds toward establishing a sufficient emergency fund. We emphasize this emergency fund for two reasons (1) because you are entering into a very competitive job market and (2) because life somehow always presents unexpected situations of which you need to be financially prepared. These are our suggestions for the upcoming month, but you need to keep your eye on the future too.


The earlier you invest not only can you earn more, but you feel more financially secure. While setting up and emergency fund for a rainy day is important, planning for future expenditures, such as a down payment for a house, and retirement are equally important. We suggest splitting your discretionary income 50/50 between the emergency fund and the Roth IRA for the next 2 years. Splitting your income into these two funds puts you in a great position for financial freedom. Looking at the figures at the end of year 1, you can look forward to $10,806 in both your emergency fund and your Roth IRA, including the cash leftover from your bonus and CD. At the end of year 2, you can look forward to $20,112 in both your emergency fund and your Roth IRA; keep in mind that these figures pertain to contributions only, excluding any interest earned, in both accounts. This means that in year 3, you would not need to invest any more money into your emergency fund account because you will be exceeding your target of $19,200. With these first steps toward financial freedom, you should feel confident that you are making strides towards a better tomorrow.


Works Cited Bateman, Mara. "House Living Vs. Condominium Living: Advantages and Disadvantages." Associated Content - Associatedcontent.com. 16 May 2007. Web. 06 May 2010. <http://www.associatedcontent.com/article/242111/house_living_vs_condominiu m_living.html?cat=54>. "Baton Rouge Home Prices and Home Values in LA - Zillow Local Info." Real Estate, Homes for Sale & Real Estate Values - Zillow. 3 Apr. 2010. Web. 06 May 2010. <http://www.zillow.com/local-info/LA-Baton-Rouge-home-value/r_44055/>. "FRB: Beige Book." Board of Governors of the Federal Reserve System. Web. 06 May 2010. <http://www.federalreserve.gov/FOMC/BeigeBook/2010/>. "IRA Withdrawal Rules." Self Directed IRA, Real Estate IRA, and Allowable Investments at Equity Trust Company. Web. 06 May 2010. <http://www.trustetc.com/new/rules-and-regulations/ira-withdrawal-rules.html>. Lydon, Tom. "Why Junk Is On Bond ETF Investors? Minds | ETF Trends." ETF Trends ? Keeping a Grip on Exchange Traded Funds (ETFs). 26 Jan. 2010. Web. 06 May 2010. <http://www.etftrends.com/2010/01/why-junk-is-on-bond-etf-investorsminds.html>. Mutual Fund, Fund Ratings, Fund Research, Investment Tools. Web. 06 May 2010. <http://www.lipperweb.com/Default.aspx>. "Publication 590 (2009), Individual Retirement Arrangements (IRAs)." Internal Revenue Service. Web. 06 May 2010. <http://www.irs.gov/publications/p590/ch02.html>.


Financial Advisory Sample