D S Debt Management Report Financial Mappers is not intended to offer, or be a substitute for, financial advice. Its purpose is to provide a dynamic mathematical model which shows the cause and effect of various financial transactions which are based on the information provided by you and assumptions of future values. Default assumptions used by Financial Mappers for returns on investments are based on the approximate average returns in Australia for the fifteen (15) years from the year 2000 where information is readily available in the public domain; except that the program has taken the view that it should not give advantage to one investment class over another. Therefore the income and capital growth for both Shares and Real Estate (both of which are considered Growth Assets) have been allocated the same returns. We consider these assumptions are reasonable for the purposes of working out the estimates provided. Where an estimate produced by Financial Mappers is an amount payable at a future time, such amount takes into account an assumed change in the cost of living between the time of preparation of the estimate and the future time. The program has elected to use the Default Inflation Rate of 2.75% to calculate changes in the cost of living. This rate is the estimated average rate for the 15 year period from the year 2000. This rate may be changed by the user and the same rate is used for every year of the program. At times, the program will identify results as being in Present Value. These values have discounted the Future Value by the nominated Inflation Rate. In the Summary Data and the Retirement Plan, the user may choose to view results in either Future Value or Present Value. All Account Balance graphs are displayed in both Future Value and Present Value. When using Historical Data, there may be some limitations in that Managed Funds assume an allocation of 20% for Cash and 40% each for Property and Shares, while the Employer Pension Fund assumes an allocation of 30% Cash, 40% Shares and 30% Real Estate. Not all funds will have this type of allocation. The change in value of real estate is based on the Australian Residential property, whereas real estate held by a Managed Fund or Pension Fund is more likely to be commercial or industrial with some international component. The income for real estate is not based on historical data has been fixed at 5.00% Gross (4.25% Net with 15% of Income allocated to Expenses) and does not change. Normally one would expect the rental income to change from year to year. When using any of the four 10-Year Economic Cycles, the method of calculating Capital Growth for Managed Funds is the same as for Shares. As Managed Funds may have only a small component of Australian Shares, this will be a less reliable indicator. Income earned in the Cash Accounts, Term Deposits & Bonds are the same as the Cash Rate. Normally one would expect a variation in the return of each asset class. For the purpose of this software, the Cash Account Rate is the 90 Day Bank Bill plus 1%. Income is always 4.25% for Dividends on Shares and Managed Funds as there is no reliable data over this time period. Gross Income of 5% for Investment Properties remains the same as for Historical Data. Return on the Employer Pension Fund is always Actual Inflation Rate + 4%. Gross Rent is increased at the rate of Inflation. Rents may not rise in value at the same rate as Inflation. The application of taxation due for income and capital gains is limited in its use. The user may select a number of options for taxation. However, where progressive tax rates are used, the future tax is based on the assumption, the percentage tax charged will remain the same, taking into account value of the tax brackets will be inflation-linked. Future tax rates are likely to change from time to time and no account has been made for this possible change. Please ensure the information that you provide is complete and accurate. If the information you provide is incomplete or inaccurate, any information or advice provided is, or may be, based on incomplete or inaccurate information relating to your relevant personal circumstances. For that reason, you should, before acting on the information or advice consider the appropriateness of it having regard to your objectives, financial situation and needs. All assumptions made and forecasts produced using Financial Mappers are based on past performance. Past performance is not a reliable indicator of future performance. You should not rely on Financial Mappers for the purpose of making a decision in relation to any financial product and you should consider obtaining advice from a financial services licensee before making any financial decision. Page 1 of 10
Financial Mappers is designed to model wealth creation and management in both the Savings and Retirement phases. A common thread in most traditional financial planning advice, is the concept of Good Debt and Bad Debt. Good Debt allows you to acquire your home and income producing assets using someone else's money, while benefiting from any future capital gain. However, this debt can change to Bad Debt, if your debt levels become too high and you cannot meet your loan repayments. Bad Debt is borrowing for present consumption. You are increasing the cost of your purchases through adding interest costs. These costs will take away your ability to fund Good Debt. The worst form of Bad Debt is usually Credit Card Debt. You should make this a priority to repay these debts as quickly as possible. If you want to move to the Wealth Creation phase of your life, do not accumulate any further Bad Debt. Warning on Fixed Interest Loans: Seek professional advice from your advisor or lender, where you have Fixed Interest Loans and wish to make additional payments. Additional Fees may be incurred. F A Debt Management Report Financial Mappers does not give financial advice. The information in this report allows you to consider your current plan for reduction of debt over the first 5 years of your plan. All federal governments will provide consumer information on debt management. In addition, there are voluntary organizations which will assist you in managing your loan payment schedules and if necessary, aid in negotiating a consolidation of loans with a reduced interest rate. For example, in Australia the following websites may be of assistance: Money Smart by ASIC (www.moneysmart.gov.au) : Provides a wealth of information on all matters relating to Personal Finance, including Personal Debt. National Financial Literacy Strategy by ASIC (www.financialliteracy.gov.au). Lists information on Programs for Financial Literacy, provided in the community, usually free of charge. Your Bank, Financial Planner and Superannuation Fund: Check out the websites for organizations you are currently using. They are likely to provide you with some sound advice free of charge. You may be entitled to a free consultation. It is recommended that you seek professional advice if you have serious issues with Debt Management. D R P For some people, reducing debt to manageable levels may be required before they can proceed to creating wealth. It is recommended you make a five or ten year Debt Reduction Plan. A good starting point may be to review the Sample, Part A and B. If you do have problems with money management, it is recommended that the first step is to make a detailed Personal Budget. It is important to tick the items which are Optional. This may be a time consuming exercise, but you should make the effort as it will allow you to see where you can find extra money to reduce your debt and spend your money more wisely. Page 2 of 10
Debt Management Report S Financial Mappers will allow you to consider a number of Debt Reduction Strategies: Create a detailed Personal Budget. Consider which are your Optional Expenses in the Personal Budget. These are items you can manage without, if absolutely necessary. Repaying your Credit Cards debt quickly. Increasing the amount of money allocated to the Savings Plan. Making Additional Payments to your loans to reduce debt and save on interest costs. Sell Assets to repay debt. Take a Second Job to increase your ability to repay debt. In addition, there are Advanced Strategies which include: Allocate additional payments to have most benefit. For example, repay debts which are either Personal Debts or debts with the Highest Interest Rate. This could be followed by repaying the Home Loan Debt which is not tax deductible. Consider if your Debt Serving Ratio is appropriate. Use the Interest Rate Risk Assessment Tool to evaluate the monetary effect of increased interest rates on loans with Variable Interest Rates. Use the Loan Modulator to assess the effect of changes in interest rates to your loan repayments and cash flow. Use Historical Data to consider the effect on Interest Rates from other historical periods. For example, in Australia the Average Home Loan Rate for the 10 year period prior to the GFC was 7.3%. Could you manage your loan repayments if interest rates returned to this level? D S R (DSR) The Debt Servicing Ratio in Financial Mappers calculates what percentage of your After-Tax Income is allocated to the repayment of loans. The Program will include two calculations, one with your Regular and Additional Payments in the calculation and the second without your planned Additional Payments. Other Debt Servicing Ratios: Different organizations will use different formulae and if a ratio from another source, you need to know the formula used. For example, some ratios will use the Pre-Tax Income or Minimum Payment Requirement. In your case, the DSR in the first year is 32.30%, including Additional Payments. That is, you are allocating 30.34% of your After-Tax Income to the repayment of debt, using both your regular payments only. The report describes your level of Debt according to the DSR. In your case, the Debt Level in Year 1 is Very High. The following is your Report on your Debt Serving Ratio: DSR (Including Planned Additional Payments) Debt Serving Ratio (Incl. Credit Cards) 32.30% 27.79% 26.82% 25.57% 25.77% Debt Levels Very High High High High High DSR (Excluding Planned Additional Payments) 30% or More 25% - 29.9% 25% - 29.9% 25% - 29.9% 25% - 29.9% Debt Serving Ratio (Incl. Credit Cards) 30.34% 25.84% 24.93% 17.92% 17.42% Debt Levels Very High High Moderate Moderate Moderate 30% or More 25% - 29.9% 15% -24.9% 15% -24.9% 15% -24.9% Page 3 of 10
I R R A (H I L ) The aim of this section is to calculate the amount of additional money you will need if interest rates rise by your nominated Increase in Interest Rates for loans with variable interest. The program discounts the Increase in Loan Payments by any Additional Payments you have previously planned for any loans. With Interest Rates currently at very low levels, it is extremely important to ensure to can meet additional loan costs, when these rates return to what have been traditional average rates. It is recommended you consider a rise in interest rates of between 2% and 4%. An aid to protecting yourself against a 2% rise in interest rates is to try and make additional payments which voluntarily raise your loan payments to this margin. This will ensure that you can afford the additional costs when they occur. In the meantime, you are reducing your debt at a much faster rate, because of these additional payments. How do the calculations work? Debt Management Report Loans with Variable Interest are identified for each year. The program automatically runs the Loan Modulator for Variable Loans using the nominated percentage for each year. The program calculates the Increase in Loan Payments for each year. The program subtracts the value of the Additional Payments you have already planned to make in future years. The Net Annual Increase in Loan Payments is Total Increase in Loan Payments less the Additional Payments currently planned for future years. The Net Monthly Increase in Loan Payments is the annual amount divided into 12 equal amounts. Current Loan Balances (Variable Loans Only) $180,000 $175,718 $171,126 $166,203 $153,529 Required Loan Payment Increase $2,688 $2,688 $2,688 $2,688 $2,688 Additional Payments (currently planned) $0 $0 $0 $7,160 $8,025 Net Annual Increase in Loan Payments $2,688 $2,688 $2,688 $0 $0 Net Monthly Increase in Loan Payments $224 $224 $224 $0 $0 Caution: This calculation is an APPROXIMATION ONLY, based on the assumption that your lender does not take into consideration any previous additional payments you have made or that you are in advance of your Loan Payment Schedule and the lender does not raise your compulsory payment. You need to ask your lender, what is their policy in relation to this matter. Page 4 of 10
Debt Management Report R D L (U O E ) If you have excessive debt, it is critical that you make the decision to act NOW, if you want to create wealth. Without making sacrifices for past indulgences, you will delay any possibility of moving towards your Wealth Creation Goals. The Program assumes that you have already made adjustments to your plan by increasing loans payments, refinancing loans, selling assets and maybe taking on a second part-time job. However, if all these measures are not sufficient to get your debts to Manageable Levels within 5 years, you should consider the effect of using part of your Optional Expenses to pay down more debt How do the calculations work? The program has calculated your Average Interest Rate for each year. The program calculates the amount of additional payments you could make each year based on the amount of your Optional Expenses and the Percentage Allocated to Debt Reduction. The program calculates the cumulative amount of Additional Payments. This is the amount of by which your Debt is Reduced. For each year, the program estimates the Savings in Interest by calculating the amount of interest which would have been paid on the cumulative additional payments. These two calculations are just a guideline to savings, as this calculation does not take into account the Compound Effect of interest saved by making additional payments. That is, the results underestimate the savings. In your case, if you paid 50% of your Optional Personal Budget Expenses to pay down debt, at the end of Year 5, the following is an approximation of the outcome: Your debt would be reduced by a further $12,500. The interest saved would be further $2,652. The following shows the outcome for each year: Current Optional Spending $5,000 $5,000 $5,000 $5,000 $5,000 Optional Spending (Personal Budget) $2,500 $2,500 $2,500 $2,500 $2,500 Reduction in Debt Additional Capital Payments $2,500 $2,500 $2,500 $2,500 $2,500 Cumulative Capital Payments $2,500 $5,000 $7,500 $10,000 $12,500 Savings in Interest Savings in Interest (Approximate) $182 $361 $534 $700 $875 Cumulative Savings in Interest $182 $543 $1,077 $1,777 $2,652 Page 5 of 10
P B E Debt Management Report The following is a summary of your Personal Budget. It is recommended that you leave at least 5% unallocated for unplanned expenses. If you have Insufficient Funds in any year, you should review your expenses and adjust where necessary Your Personal Budget Summary is: Income $120,000 $120,000 $120,000 $120,000 $120,000 Total Tax & Investment Expenses $52,496 $52,506 $52,519 $58,532 $58,545 Tax Due on Budget Income $34,496 $34,506 $34,519 $34,532 $34,545 Savings Allocation to Investments $18,000 $18,000 $18,000 $24,000 $24,000 Personal Loan Expenses $11,016 $7,604 $7,227 $0 $0 Personal Expenses $57,580 $57,580 $57,580 $57,580 $57,580 Commitments $400 $400 $400 $400 $400 Home $6,000 $6,000 $6,000 $6,000 $6,000 Utilities $10,000 $10,000 $10,000 $10,000 $10,000 Education $0 $0 $0 $0 $0 Health $6,000 $6,000 $6,000 $6,000 $6,000 Shopping $22,280 $22,280 $22,280 $22,280 $22,280 Transport $5,000 $5,000 $5,000 $5,000 $5,000 Entertainment $3,900 $3,900 $3,900 $3,900 $3,900 Savings $0 $0 $0 $0 $0 Miscellaneous $4,000 $4,000 $4,000 $4,000 $4,000 Unallocated Funds -$1,092 $2,310 $2,675 $3,888 $3,875 Total Income Tax Due on Budget Income Savings Allocation to Investments Financial Commitments Home Utilities Education Health Shopping Transport Entertainment Eating Out 1/2 $150,000 Expenses $100,000 $50,000 $0 Y e a r o f P l a n S S Salary (PV) $120,000 $120,000 $120,000 $120,000 $120,000 Loan Expenses as per Savings Plan $16,746 $16,746 $16,746 $23,906 $24,772 Loan Expenses as % of Salary 13.96% 13.96% 13.96% 19.92% 20.64% Page 6 of 10
L B L R S Loan Balance Start of Year (Including New Loans) Total Loans $203,000 $189,679 $178,368 $166,203 $153,529 Home 1 [Loan] P&I $180,000 $175,718 $171,126 $166,203 $153,529 Personal Loan 1 P&I $20,000 $13,961 $7,242 $0 $0 Credit Card 1 Credit Card $3,000 $0 $0 $0 $0 Bank Account Bank Overdraft (Excluded from Calculations) $0 $0 $0 $0 $0 Loan Payments (Regular) Total Loans $26,082 $22,833 $22,654 $16,746 $16,746 Home 1 [Loan] P&I $16,746 $16,746 $16,746 $16,746 $16,746 Personal Loan 1 P&I $6,087 $6,087 $5,908 $0 $0 Credit Card 1 Credit Card $3,249 $0 $0 $0 $0 Additional Loan Payments Debt Management Report Total Loans $1,680 $1,726 $1,721 $7,160 $8,025 Home 1 [Loan] P&I $0 $0 $0 $7,160 $8,025 Personal Loan 1 P&I $1,680 $1,726 $1,721 $0 $0 Page 7 of 10
Debt Management Report I R, C I P $40,000 Interest & Capital Payments Capital Interest $20,000 $0 Y e a r o f P l a n The following table displays your Capital and Interest Payments over the first 5 years. Interest Rates Average Interest Rate 7.29% 7.22% 7.12% 7.00% 7.00% Home 1 [Loan] 7.00% 7.00% 7.00% 7.00% 7.00% Personal Loan 1 10.00% 10.00% 10.00% N/A N/A Credit Card 1 6.62% N/A N/A N/A N/A Capital Payments Total Capital Payments $13,371 $11,311 $12,165 $12,673 $14,484 Home 1 [Loan] $4,282 $4,592 $4,924 $12,673 $14,484 Personal Loan 1 $6,039 $6,720 $7,242 $0 $0 Credit Card 1 $3,050 $0 $0 $0 $0 Interest Payments Total Interest Payments $14,391 $13,248 $12,211 $11,233 $10,288 Home 1 [Loan] $12,464 $12,155 $11,823 $11,233 $10,288 Personal Loan 1 $1,728 $1,094 $388 $0 $0 Credit Card 1 $199 $0 $0 $0 $0 Page 8 of 10
Debt Management Report P L M N L R L New Loans Investment Property $0 $0 $0 $0 $0 Home Loan $0 $0 $0 $0 $0 Share Portfolio $0 $0 $0 $0 $0 Unlinked Loan $0 $0 $0 $0 $0 Personal Loan $0 $0 $0 $0 $0 Refinanced Loan (Including Additional Loan Amount) Investment Property $0 $0 $0 $0 $0 Home $0 $0 $0 $0 $0 Share Portfolio $0 $0 $0 $0 $0 Unlinked Loan $0 $0 $0 $0 $0 Refinanced Loan - Additional Loan Amount Investment Property $0 $0 $0 $0 $0 Home $0 $0 $0 $0 $0 Share Portfolio $0 $0 $0 $0 $0 Unlinked Loan $0 $0 $0 $0 $0 Page 9 of 10
Debt Management Report G $300,000 Loan Balance at Start of Year Personal Loans Investment Loans Home Loans Total Loans $200,000 $100,000 $0 Debt Servicing Ratio 40% Y e a r o f P l a n $40,000 Loan Payments Additional Payments Regular Payments Total Payments $20,000 $0 Y e a r o f P l a n Page 10 of 10