Liam Chan is 25 years and a recent graduate of JMSB. He works for the Bank of Montreal as a junior account manager earning $40,000 a year. Liam wishes to return to university to undertake a Masters degree in 5 years' time. He would have applied right away, but he has a $20,000 student loan that he feels that he should focus his energies on repaying. He has agreed to repay the loan over 10 years at a rate of 6%, compounded monthly.

Liam does not own either a home or car, but has nevertheless accumulated assets of $50,000. His only debt is his student loan. His deductions at source, including both federal and provincial taxes and contributions, amount to 30% of his gross pay. His total living costs, excluding his loan payment, are $20,000 a year.

Question 1:

Calculate Liam's savings ratio, debt ratio and debt-payments ratio.

Question 2:

a) What federal tax credit will Liam receive in the first year if his student loan charges a rate of 6%, compounded monthly. Assume the first 12 payments will fall within a calendar year.

b) Will Liam likely have any other education-related federal tax deductions or credits? Please explain.

Question 3:

Liam is undecided whether to invest $5,000 of his surplus income in a TFSA or RRSP. Analyse the outcome given the assumptions under the following 2 scenarios. What do you conclude?

Scenario 1:

Funds invested will earn an effective annual return of 3% before tax in interest income.

Liam's marginal tax rate now and at retirement in 35 years will be 30%.

Any tax refund will be received in 1 year's time and invested in a non-registered account to earn 3% EAR in interest income.

Scenario 2:

All assumptions remain, except that Liam's marginal tax rate will be 50% until he retires.

Question 4:

Explain 2 strengths and 2 weaknesses in Liam's current financial situation.

Question 5:

Research and recommend a credit card for Liam. Quote your sources. Explain why you have recommended the card given its specific characteristics and Liam's debt management skills.