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1.
a)
Examples
Current Assets Savings A/C, personal assets – TV, clothing
Long‐Term Assets Car, Land, House, Shares
Other Assets clothes, TV equipment
TOTAL ASSETS
Credit card, store credit, overdraft,
Short‐term (Current) Liabilities/Debt No interest loan balance
Long Term Liabilities/Debt Mortgage, HECs
TOTAL LIABILITIES/DEBT
Expenditure
Rent or mortgage repayments, any other
Repayments, contract fees on phone contract,
Fixed expenditure internet, etc.
Fuel, transport (train) because these depend
on how much you use them.
Groceries are variable but could argue there is a
Base amount that is fixed – you need to eat
Variable expenditure Takeaway food
b) Negative cash position is not great. Spending $1,504 more than they are earning. The net
worth is negative as well but given age less concerning. They need to get the expenditure at
least the same as income asap.
c) Basic Liquidity Ratio is 3210/(67504/12) = 0.57 months So they couldn’t keep their current
spending level long (2 weeks) if Felicity lost her job.
d) Liquid ‐ convert the estimated assets value into cash very quickly. Everything can be sold
quickly but some assets would take some time to sell so that we can get a value close to what
we think its worth – say a house, a car. So an asset like a savings account is liquid because if the
balance is $10,000 we can withdraw that $10,000 pretty much straight away.
2. a) The statement is suggesting that a high debt ratio may only be a problem if to “service” it
(that is to make the repayments) you use up a large fraction of your income (which would mean
a high debt service ratio). But you might have a large amount of debt but it doesn’t take up a lot
of your income so it is not burdensome to repay.
b) That’s difficult to answer. The graph shows averages for mortgages. The median (so 50% have
at least this) is 20%. So half of those with a mortgage are using about 20% of their income (after‐
tax so of the amount they have in their pocket) to repay their debts. Those who have a lot of
debt (the red 90th percentile below) have a debt service ratio of about 40%. That sounds a lot –
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so of the money you get after tax is paid you have 60% of it left after debt repayments. Is that
too much? Would that stress you out?
(Source: https://www.rba.gov.au/speeches/2018/sp‐ag‐2018‐02‐20.html)
3. The text is arguing that there needs to be a reason to motivate your saving. The text
argues that deciding your current level of spending and saving should be done by
considering your best estimate of your income in the years ahead and then use long division
to divide that over the number of years needed to smooth the level. So rather than having
your spending track your level of income (adjusting up or down) you determine what is
sustainable as a smoothed level of income.
In reality we know there are a few unknowns.
What is our level of income actually going to be? How long will that be for? How long
will we not be working? We can come up with estimates of an average income.
If income today < less than expected average (smoothed) it would suggest borrow.
When above save the surplus. Save with a purpose.
If you want to save ‐ make it easy, habitual, and automatic. “Pay yourself first” is one phrase
used to emphasise that saving is best made a proactive action, e.g. automatically deducted
from your pay and paid into a separate account.
4. The suggestion is if you let spending increase it will. If you want to do that then that’s
fine. But the suggestion here is to be conscious of what spending level you want. The
Lifestyle creep reading discusses this.
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5. a & b )We can use the SMART or SMARTer guide. Let’s make it Specific – I will deposit $50
into my Savings account every payday. We can make it Measurable – save $1000 by the end
of the year. Is the $1000 Achievable/Attainable – if there are 20 paydays left and we can
afford $50 each pay – yes. Relevant/Realistic? Building the $1000 is relevant if you have a
specific idea in mind – build an emergency fund, saving for a holiday. How is the behaviour
relevant to you? Time bound – let’s add by the end of the year.
To increase the chance we should develop a specific implementation plan. An easy way to
do this is to have the deposit automated by having it automatically deducted from your pay.
And – have a coping plan. If you “fall off the wagon” and one payday you don’t save. Allow
for that, what will you do to make sure the next payday you start again?
c) Phone calls/reminders from a friend? Making commitments public – tell someone.
6. The text is saying that an approach to consider is to save enough so that it allows you to
smooth your spending over your life. This of course assumes that smoothed consumption is
your objective. The text is arguing that this produces better outcomes (more satisfied) but it
is still a question of is this something you want to do. This requires difficult task of
determining the spending level. But we discussed graduate salaries, growth rates and
unemployment rates – so we can forecast. What about spending? That’s also difficult but
we could come up with an average. We can get an idea of at least what other people in your
circumstances do. We can find averages. The major point is – think about it! Just consider
what might happen and develop a plan – start something and be deliberate about it.
The text refers to some software – it’s US based – which is pretty sophisticated and does a
lot of the work for you. https://esplanner.com/purchase indicates that the cost for the basic
model is approx.. $200 so it isn’t cheap. Unfortunately I don’t know of an equivalent
Australian version with the same level of detail.
7. a) If it increased at the inflation rate the $10,000 in 2008 would be $12,348 in 2018 which
is equivlent to an inflation rate of 2.1% p.a. The nominal amount is $12,348 but the real
value is $10,000. In real terms the amount hasn’t changed.
b) Using the RBA calculator $10,000 in 1978 would be $22,702 in 1988 which is equivlent to
an inflation rate of 8.5% p.a., much higher.
c) At the time they both received their inheritance your brother had a higher nominal
amount compared to the $10,000 they originally were told they were getting 10‐years
before. But in real terms – compared to themselves 10 years before when they first got the
money, they are the same position –the $10,000 has just kept pace with inflation so that
bigger dollar value doesn’t make them better off. Compared to each other though the
brother who got the money in 1978 (or 1988) is better off. To see this that $10,000 from
1978 if it just keeps up with inflation would have been $51,676 by 2018.
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