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# Personal Financing

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### Personal Financing

1. 1. Personal Financing: What shall I do? Situation: Christine has finally got into University and will be starting this coming fall. The only problem that she has is that she lives all the way in West St. Paul, which is the opposite ends of the city from the University. What is she going to do?
2. 2. Option 1 Christine can buy a car that is worth \$18,500.00 and put a down payment of \$2000.00 with a loan of 8% per annum compounded monthly and pays it for the next five years.
3. 3. Option 2 Christine can also lease the car with no down payment and pay \$300.00 per month for 5 years and then purchase the car outright at it's lease end value of \$8000.00
4. 4. Christine and three of her friends decided that they should purchase a small home close to the university so they can either walk or bus easily to school. She analysed their monthly income and came up with \$4000.00. The monthly property tax on the house that they are looking at is approx. \$423/year. The heating bill is \$92/month. With the three of them, they can manage a mortgage rate of 8%. Together, all of them came up with a down payment of \$8000.00. Option 3
5. 5. Questions. 1. If Christine were to buy the car in option one, what would be her monthly payment be? 2. What did she pay in total in option two? 3. Out of the first two option, which one will Christine pay the least amount of money and by how much if she decides to get the car. 4. For option three, what is the maximum affordable purchase price that can be considered if they take out a 30-year mortgage.
6. 6. 1. If Christine were to buy the car in option one, what would be her monthly payment be? When you want to find out what is Christine's monthly payments would be, then you would have to use the TVM solver from your calculator to solve this. But before we solve this you must know how to get there and know what the different commands mean CALCULATOR DEMANDS N is the number of payments being Turn on your calculator. (Make sure that the home made.(# of years)(# times screen is blank so you will be able to work on it and payments / year) understand what you are doing) I is the Annual Interest rate (%) PV is the present value To get into your TVM Solver, you then must click the PMT is the payment being made APPS button on your calculator. The applications on FV is the future value your calculator should show up. P/Y is the number of payments per year What you want to do next is highlight the finance C/Y is the compounding periods button and press enter. per year. PMT: this depends when the Once you press enter, your screen should pop up to payments are made each this compounding period. To solve for what ever you are looking for, just press [ALPHA] [SOLVE]
7. 7. 1. If Christine were to buy the car in option one, what would be her monthly payment be? To answer the question you would go to the TVM solver and enter these numbers. N = (5 x 12) 60 18 500 – 2000 = 16 500 ( place this in the present value) I%=8 PV = 16 500 Then Press [ ALPHA ] [SOLVE ] PMT = FV = 0 P/Y = 12 C/Y = 12 PMT = END N = (5 x 12) 60 I%=8 PV = 16 500 The monthly payments PMT = - 334.6 FV = 0 that Christine has to make P/Y = 12 is \$334.60 C/Y = 12 PMT = END
8. 8. 2. What did she pay in total in option two? Since Christine wants to pay \$300.00 per month for 5 years, You would have to multiply 300 x 60 This shows you how much you paid every month for five years. 300 x 60 = \$18 000 Christine then wanted to purchase the car at the end of its lease. The value is \$8000. So you take \$18 000 + \$8000 = \$26 000 In total, Christine paid \$26 000 just for leasing the car.
9. 9. 3. Out of the first two option, which one will Christine pay the least amount of money and by how much if she decides to get the car. Option 1 =\$ 344.60 x 60 + \$2000 = \$20 676 + 2000 = \$22 676 Christine paid \$22 676 to buy the car. Option 2 = \$26 000 to lease and then buy the car. Finding the difference : \$26 000 - \$ 22 676 = \$3324 So you see that buying a car is cheaper than leasing it. Option 1 cost \$3324.00 less than option 2.
10. 10. 4. For option three, what is the maximum affordable purchase price that can be considered if they take out a 30-year mortgage. GDSR = Mo. Mortgage Pmt. + Mo. Heating Costs + 0.5 of Condo Strata Fees Gross Monthly Income This is the formula that is being used in this question. What we know : You should know \$423 + \$92 = \$ 515 that GDSR is 32%. This only 0.32 = Mo. Mortgage Pmt. + \$515 applies if you Her and her friends \$4000 plan on buying have a monthly a condo. income of \$4000. 0.32(\$4000) -\$515 = Mo. Mortgage Pmt. The property tax is \$423 and the heating \$765.00 = Monthly Mortgage Payment. (maximum) bill is \$92. They can manage a mortgage rate of 8% And will be able to put a \$8000.00 payment.
11. 11. Once you have found the maximum monthly mortgage payment, then you can plug in the numbers into your TVM Solve to find out what the maximum amount that you can purchase on a home. N = 360 N = 360 I%=8 [ALPHA] [SOLVE] I % = 8 PV = 0 PV = 104 256.873 PMT = - 765 PMT = -765 FV = 0 FV = 0 P/Y = 12 P/Y = 12 C/Y = 12 C/Y = 12 PMT = END PMT = END The maximum amount that Christine and her friends can afford on the house is \$104 256.87
12. 12. In the end after a lot of hard work and thinking, Christine came to the conclusion that if she were to get a car, she would buy it than lease it. When it came to thinking about buying the house with the state she's in right now, then she had to make sure that she was getting a house with room mates.