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Derek and Erica Brown, aged 36 and 33, have two young children, aged 3 & 7, and live in Dunedin. They own a

small coffee roastery business in which they work together full-time for the past 9 years. The business is doing reasonably well. They rent a shop premises and own equipment worth $36,000. After covering basic living expenses, Derek and Erica can put aside $2,200 as savings each month. They have managed to save $90,000 so far during their working lives and this money is earning 3.85% annual interest, compounded monthly, in a bank fixed deposit. As self employed, they have no KiwiSaver funds. Derek and Erica are currently renting a house but wish to purchase a home in the future. Their goal is to put down a 20% deposit on a $800,000 home in three years' time. They find that on average, residential properties in Dunedin rise by 10% per annum, making it difficult as they are chasing a moving target.

The couple has a credit card on which they owe $7,500 according to their last bill. They are trying not to use the card anymore but tend to only pay off the minimum amount (2% of the balance) each month. The interest rate on the card is 19.95% compounded monthly. In addition, they also owe $10,200 from taking a small business loan to fund their equipment purchase, of which they are paying an interest rate of 9.5% compounded quarterly.

Derek and Erica have somewhat different ideas about the best way to manage their money going forward. Erica is happy to keep their present and future savings in their bank earning a moderate rate of interest. However, Derek has started to take a more active interest in finance and investment and has come to the conclusion that if they are to have any chance of achieving their goal of saving for the house deposit, they must take a much more aggressive approach. He has been doing some intensive research on the internet and find that FRXME, a foreign exchange trading firm, claimed to make an average return on investment of 60% per annum over the last two years. Derek hopes he will be able to persuade Erica to invest their $90,000 savings in FRXME for a period of three years, while investing any additional future monthly savings in the bank. Erica laughs at his idea and insists that their money should stay in the fixed deposit.

After a lot of heated discussion, Derek and Erica decide to get investment advice from their friend, Spencer, who commenced work as a financial adviser two months ago. They ask Spencer to provide them with more information on investing, and what he thinks about the merits of their respective approaches. During the course of a one-hour meeting, Spencer agrees that a more aggressive investment approach is required to help them achieve their goal. He also states that sources of information on the investment process are somewhat limited and that Derek and Erica have made the right decision in approaching him for advice. Spencer recommends that they invest in a recently listed technology-based firm established by a friend of his, called DUITWISE. DUITWISE shares cost $4.50 each and the prospectus promises a dividend of 15 cents per quarter. Being a start-up, DUITWISE has never made a profit in its 3 years of existence. Its share price has fluctuated by 18%, -12%, and 30% over the last three years respectively. 


What do you think Derek and Erica should do to improve their current financial health? What should the couple consider in their financial planning over short term and long-term?

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