Question 1. Praveena has just completed her degree in Physics and has found a job as an employee in a nanotechnology research laboratory. She is thinking of moving out of her parents’ house into a rented one-bedroom flat in the city centre to be closer to her friends and job. As her life is about to change significantly, she wants to plan ahead by calculating what her monthly budget will look like. She would also have to spend another i?? 300 during the first month in order to decorate her flat and buy some kitchen appliances. Her parents have agreed to lend her i?? 420 with no interest to cover installation costs.
She will use monthly surplus to pay them back. They will also put down the six weeks’ deposit for the flat so she does not have to budget it. Praveena will pay her council tax in ten instalments and her utility bills every three months, the first of each of these instalments starting in the first month of rent. Given her monthly budget and provided she sticks to it, she would need 7 months before she can repay her parents, as she has just over i?? 72 surplus each month following the first, where she has only 2 surplus. 1 mark b) Praveena’s budget shows that on average she can live within her income. With i??
67 left each month to cover unexpected costs, after first year she will be have i?? 804. Praveena is able to face the inflation rises, that causes increasing in rent, energy, food, etc. However, she is not able to face the loss of employment or earnings significantly reduced taking into account its existing savings. Then she could use the four-stage financial planning model as a guide to systematically making her final options. The same refers to the situation when she decides to take a debt at the end of the year. Fair points. Praveena will have a rather small amount of surplus at the end of the first year (859-420 = i 439, that is a mere 3% of her annual net earnings).
She might want to reduce some of her expenditure such as entertainment or make sure she works hard and get a promotion quickly. One year after moving into her flat, the main client of the laboratory withdraws their contact and the lab has had to cut down on wages. Praveena will have to work part-time from now on and see her gross salary halved. Her friend Natasha is also struggling and they decide to share Praveena’s flat for a while. Natasha earns i?? 1000 a month gross and they agree to pool both their after-tax money to try to make ends meet.
The new household net monthly income is 1571,25. The standard of living based on equivalised income Praveena’s and Natasha’s is now the same as a childless couple with an income of i?? 17,622. Natasha’s moving in has compensated for Praveena’s loss income, as the household income has increased by 18,2 %. Sound calculation but the income equivalence calculator needed discussion. If her gross salary is divided by two (=i?? 9,750 pa), Praveena would now earn i?? 8,651 net per year while Natasha earns i?? 10,204 net per year. Their total household net income is thus 18,855, or 1571 monthly.
This is more than Praveena’s past annual net earnings of 15,379. However, given that two adults now live together, they benefit from economies of scale in sharing some of the costs (mainly rent and council tax) but they also are likely to spend more on some goods such as food, water and leisure. Using the income equivalence calculator, the total net income this household should have to grant Praveena a similar standard of living as before (and provided their pooling system really implies equal sharing of resources), is 25,211 (assuming they are partners; or i?? 26,976 otherwise), way more than their current 18,855.
So, unless Praveena takes more than half of that income for her personal spending, she is still worse off than before, but less so than if she had continued living on her own with her reduced salary. Casper is in the process of paying i?? 2000 for a three-week hiking expedition in the Karakoram Range. He has three main ways of paying for this and is considering what to do. The travel agency has offered him a loan that charges 20% APR. This can be paid back after 1 year, either as a lump-sum or by fixed monthly repayments. This third option is to use a credit card which would charge 15% APR over 2 years (with fixed monthly repayments).
The APR is the measure used to compare the cost of borrowing, so lowest cost is the credit card loan at 15% APR and it has the lowest total payment. The total interest costs of the loan is the highest for the Travel company with option to paid back as a lump-sum at 20% APR. The monthly payments are highest for the Travel Company and lowest on the credit card where payments are being spread over a longer period. However, the first option with a lump-sum repayment has none monthly payments and the only one payment is necessary after one year.
The total interest paid under the first option with a lump-sum to pay back from the travel company is different and that difference is due to a different flexibility of both loans. If 2000 is borrowed and no repayments of this principal sum are made during the year, and the interest rate is 20 per cent p. a. with interest being paid once a year at the end of the year, the interest charge for that year is i?? 400 (Upton 2006). A fixed rate is determinated at the start of the loan and the interest charged is calculated average balance of the principal outstanding and this is the reason for what that option is not so expensive for a lender.
Although the monthly charge is higher per month for a shorter loan, the total cost of repayment is less. A fair attempt. The one-off payment of the loan from the travel company yields an interest of i?? 400 (20% of i?? 2,000). In total, the repayment will be higher than with monthly repayments (2,400 versus 2,204. 52). This is because with monthly repayment, the amount of outstanding debt is reduced every month, which then reduces the compound interest charged on the remainder.
