CASE STUDY – YOUNG PROFESSIONAL COUPLE BUYING THEIR FIRST HOME
One of the biggest challenges that I have as a financial adviser, is explaining in a very short period of time, the value that I can add. The thing is, EVERYBODY’S situation is different, and so what I do for each client is very unique and different.
Couple that with the fact that financial advisers can also be different in their specialities, it can be difficult for anyone who has never met with me before to understand what I actually do.
So, over a strong coffee in the park recently we came up with the idea that we could
showcase some of our ‘Case Studies’ of clients that we have helped over the past 2 years so that you can find out what a financial adviser does. We of course have changed names and details slightly for privacy reasons, but this information is taken from real life client situations.
So, if you want to delve into the inner workings of the financial advice process (sounds super fun right?), then follow our ‘Case Study’ series over the next month or so to get an insight into how we do what we do and more importantly why!
Case study 1 – The young professionals buying their first home
So, first up I am going to talk you through one of the most common clients that I see.
Sarah and Dante are both 30-year-old professionals working full time. Sarah is a Lawyer earning $110,000 pa and Dante is a pharmacist earning $88,000 pa. They are married, and have saved up $60,000 over the last few years with the idea of buying a home.
When I met up with Sarah and Dante they knew they wanted to buy a house but that was about it, they had no idea what else they were supposed to be doing. As they put it ‘we earn good money, we just don’t know what we are supposed to be doing with it’.
During this first meeting, we talk about everything. Information about insurances, super, assets, debts, and tax, you know all that boring stuff that most people push to the side. We then talked about what it was they actually wanted out of their life. This is so important because I need to build the financial framework to make that happen.
They wanted to buy a house, and they assumed that they would spend about $500,000 to do so. After further discussion, I uncovered that they also thought that they might start a family in 2 to 3 years and that would mean that Sarah would be on Maternity leave for 6 months. They had a wedding to attend at the end of the year in Bali and wanted to make sure that they could afford that and Dante had 3 superannuation funds from various jobs he didn’t know what to do with.
Firstly, before I start, here are the areas that I have identified that I need to address:
- Cash flow management – ensuring that they can afford Bali, and manage a home loan
- Insurances (they are about to take on debt)
- Forward planning for maternity leave
- Facilitating a Will and Power of Attorney – they are planning a family
- Obtaining a home loan and organising the conveyancing solicitor
- The first step is to work through their budget and figure out what they spend their money on and how much they can afford to put towards a home loan. They may want to purchase a property for $500,000 but we need to figure out if the repayments can be comfortably met whilst including the Bali trip and all of life’s other costs.
- I also needed to project 3 years into the future and see whether they could afford their home loan whilst Sarah was on maternity leave for 6 months, taking into account the maternity leave payments available to her. Luckily for these guys, they have high incomes and don’t tend to blow the budget, so I was able to establish that they could afford a home loan up to $550,000, they could save $138 per week between now and Bali and have $5,000 available for the trip and that they will be able to service their home loan when Sarah goes on maternity leave.
- I addressed their insurance needs. They hadn’t really thought about this before, but when we spoke about the idea that they are about to get a huge loan and that they wanted to have kids, they understood why they needed it. We put in place Income Protection insurance which would ensure that their income would continue if they were unable to work. We also put in place life insurance and total disability insurance. This pays a lump sum if something happens to either one of them. We made sure to cover the expected home loan amount of $550,000 and they also wanted to make sure that if something happened they would have excess money to fund any medical treatments, so we added on $200,000 for that.
- Sarah and Dante want their children to go to private school, so chose to add on an additional $100,000 ($50k x 2 children) to ensure that if something happens to either one of them, they could still send their children to school. So we applied for $850,000 worth of Death and Disability cover for each of them. These premiums were paid for from their superannuation funds. We also applied for Trauma insurance which covers events like cancer, stroke or heart attack. They wanted to have enough to support 1-year worth of salary in these type of events, so we applied for $110,000 for Sarah and $88,000 for Dante. We fit this into their budget so they could easily afford this.
- We looked at Dante’s 3 super funds and Sarah’s super fund. As discussed above, we set up a facility to fund the majority of the insurances through superannuation to ensure that it didn’t have a negative effect on their budget. Dante had a great benefit in one of his superannuation funds in particular, so we chose to keep that account and roll over the 2 others into this account. Whilst the fund had a great benefit, the investments were not appropriate, so we changed the investments within the super fund and made sure that if something happened to Dante, Sarah would automatically get all of the super balance and insurances.
- We also assessed Sarah’s superannuation fund and decided that it was costing her way too much. We recommended a new superannuation fund that was lower cost but that had so much more investment options available to her. Again we set it up so that the insurance premiums could be paid from the super balance and if something happens to her, Dante would receive the money.
As part of our service we look after this ongoing for our clients and continue to adjust and make investments within their super fund. We charge a fee for this, which again has been set up to be paid for out of their superannuation funds, so that they don’t have to pay us out of their take home pay.
We have set up a foundation for them (budget, super and insurance), meaning we are now ready to facilitate step 2 of their plan. We contacted the mortgage broker to ensure that our clients were able to get a pre-approval on a home loan so that they are armed ready to go into the purchasing world. During the property buying process we ensured that they had the correct loan, insurance and conveyancing solicitor to make it all go smoothly. They had never bought a property before, so we like to give them a helping hand with this kind of thing. We also spoke to our preferred solicitor who set up a Will and a Power of Attorney. This was important because they were about to get a large asset and they also had a good level of insurance. This was also taken into account so that if something happens the money can be transferred from one to the other very quickly.
Once they had bought their home, we caught up with them again to just workshop the new budget and make sure that they had taken into account all of the extra expenses that go along with home ownership. We figured that they had an extra $150 per week to pay towards the home loan, so we directed that towards the offset account. This means that they are able to pay off the home loan 7 years’ sooner and gives them an extra buffer should Sarah take extra time off when she goes on maternity leave.
There you have it. This is the initial situation for Sarah and Dante. We have an ongoing relationship with them where they can call us whenever anything changes. We have an annual formal review to make sure everything is going smoothly and make changes to the strategy where necessary. I am continuously managing the superannuation investments and insurances to ensure that they are getting the best bang for buck and I am there to monitor legislation changes and adjust our strategies in a timely manner.
With our projections we aim to have them commencing an investment portfolio in the next 1½ years which will be for the purpose of funding the private education of their children. We have some special investments ready to go that will ensure there is no tax payable on the investments when they need it for their children.
This post is from our resident Financial Planner Cara Brett, check out her details in the About Us section.