Financial plan for Chris and Maggie

Chris from Assignment #1 has now turned 35. (S)he has two children aged five and seven. From the passing away of her grandmother, Chris has inherited $150,000. With this inheritance Chris will pay any outstanding loans, pay down all or part of the mortgage, contribute to an RRSP, contribute to a TFSA, contribute to an RESP, and put the money in a cash account. The money will be spread among all these loans and accounts. The outstanding mortgage is a reasonable amount based upon the amount in Assignment #1. Choose an appropriate interest rate for the outstanding balance. The contribution limit for his/her RRSP is $25,000. His/her contribution limit to a TFSA is $20,000. The RESP total contribution limit is $50,000 maximum per child, but only the first $2,500 in any year receives the twenty-percent Canada Education Savings Grant (CESG). The account has joint beneficiaries, specifically the two children. However, there is a carry-forward provision that allows an additional $2,500 (for years 2007 to present) contribution to be made that would be eligible for the CESG provided there is contribution room. The are no contribution limits to the cash account, all gains are taxed.

1. If you decide to pay a lot down towards the mortgage, your choice needs to make sense financially. You would need to consider if the reduction in the mortgage would allow him/her to pursue other opportunities. You would also have to consider the interest rate of the mortgage compared to the rates of return (s)he could receive elsewhere. If there are any other loans, such as a car loan, they should, normally, be paid off completely, as they often have a high interest rate. However, there are car loans that now carry a very low interest rate (under 1 percent), so this should not be considered a universal rule.

2. When investing in each of the accounts, determine if the amount is needed in the short or long term. Typically, short-term investments are made in debt securities because of their low volatility. And long-term investments are made in equities because, in the long run, the return is far higher that with debt. However, risky equities may have poor, or even negative returns. You may choose riskier investments, but these should be limited to 10 or 25 percent (The number varies with investment advisors).

3. The price at which you bought it. If you are buying stocks, you must show the share price and the date of that share price. If you are purchasing American securities, calculate the cost in Canadian funds by looking at the exchange rate. You can go to to calculate Canadian dollar amounts for quite a number of foreign currencies.

4. Give a reason for your purchase. Examples would be the stability of the investment, the expected long-term gain, the dividends paid by the company, the speculative quality of the investment, the diversity, and so on. 5. You can only buy stocks, bonds, or mutual funds. You can also decide to have a portion of your portfolios as cash and not invested in anything. However, because this is an assignment about stocks, bonds, and mutual funds, you cannot buy real property or any other investment that is not a stock, bond, or mutual fund. 6. Your answer should be about 1,000 words.

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