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PFI 3341 Mini Case Study
- 1. 1 Alex Agnew PFI 3341 MiniCase Study Introduction Samuel and Maria Anderson live in Lubbock, TX where Samuel works full time for XYZ Oil and Gas. Maria works part time from home and cares for the couple’s two young children. For this assignment, I will build and examine the Anderson’s financial statements, calculate their ratios and explain what they mean, create a monthly budget they can use that will be in line with reaching their goals, and discuss turning their goals into smart goals and how to achieve them. The Anderson’s have compiled the following data to complete the tasks above. Assets& Liabilities Income & Expenses Cash onhand $ 200 Homeownersinsurance $ 2,000 Samuel'sCar $ 20,000 Clothing $ 2,100 Real Estate Property $ 100,000 Samuel'sGrossSalary $ 85,000 JointMoneyMarket Account $ 1,580 Medical Expenses $ 8,000 Medical bills $ 4,200 Internet $ 900 Mortgage $ 140,000 IRA Contributions $ 5,000 JointSavingsAccount $ 3,000 InterestandDividend Received $ 700 Samuel's401k $ 37,650 Utilities $ 4,000 Personal Property $ 13,500 Food $ 5,200 Creditcard debt $ 13,351 Phone $ 2,400 Autoloans $ EmergencySavings $
- 2. 2 15,263 (contribution) 1,800 JointCheckingAccount $ 1,600Income Taxes $ 25,691 House $ 165,000 Maria's Part Time Gross Salary $ 26,000 Maria's Traditional IRA $ 9,000 Gas for Transportation $ 1,800 Maria's Car $ 25,000 ProfessionalServices $ 1,500 Mortgage (includingtaxes) $ 15,600 AutoLoans $ 9,000 Maintenance (autoand home) $ 4,000 Charitable Contributions $ 11,170 Medical Insurance Premiums $ 4,800 Life Insurance premium $ 1,500 Gifts $ 3,000 Autoinsurance/registration $ 1,750 CreditCard Payment $ 1,250 Miscellaneous $ 1,250 The Anderson’s believe the following assumptions: Inflation will be 3.5%. Their mortgage is a 30 year loan at an interest rate of 6.5%. Their investments are earning a rate of return of 7% a year. The savings and checking accounts each earn 0.05% a year. The Money Market earns 0.75% a year.
- 3. 3 Cash FlowStatement Income Earned Income Samuel’sGross Salary: $85,000 Maria’s Gross Salary: $26,000 Other Income Interest and other Dividends received: $700 Total Income: $111,700 Expenses Fixed Expenses Mortgage (including taxes): $15,600 Auto Loans: $9,000 Homeowners Insurance: $2,000 Medical Insurance Premiums: $4,800 Life Insurance Premium: $1,500 Auto Insurance/registration: $1,750 Income Taxes: $25,691 IRA Contributions: $5,000 Emergency Savings (contribution) $1,800 Variable expenses Food: $5,200 Utilities: $4,000 Medical Expenses: $8,000 Clothing: $2,100 Internet: $900 Phone: $2,400 Gas for transportation: $1,800 Professional Services: $1,500 Maintenance (auto & home): $4,000 Charitable Contributions: $11,170 Gifts: $3,000 Credit Card Payments: $1,250 Miscellaneous: $1,250 Total Expenses: $113,711 Surplus (Deficit) ($2,011)
- 4. 4 New WorthStatement Assets: Cash onhand: $200 Joint Checking Account: $1,600 Joint Savings Account: $3,000 Joint Money Market Account: $1,580 Samuel’s 401K: $37,650 Maria’s Traditional IRA: $9,000 Real Estate Property: $100,000 Samuel’s Car: $20,000 Maria’s Car: $25,000 Personal Property: $13,500 House: $165,000 Total Assets: $376,530 Liabilities Credit Card Debt: $13,351 Medical Bills: $4,200 Auto Loans: $15,263 Mortgage: $140,000 Total Liabilities: $172,814 Net Worth: $203,716
- 5. 5 Ratios 1. Basic LiquidityRatio = Monetary Assets / Monthly Expenses = 6,380 / 9,475 = .673 The basic liquidity ratio is used to determine the number of months that you could continue to meet your expenses using only your monetary assets if all income ceases. A high ratio is desirable. This financial ratio suggests that the Andersons may have insufficient monetary assets, unable to support them for even a month. It is recommended that people have somewhere between three to six months expense in emergency cash reserves. 2. Asset-to-Debt Ratio = Total Assets / Total Debt = 376,530 / 172,814 = 2.18 The asset to debt ratio compares total assets with total liabilities. This ratio measures solvency and ability to pay debts. A high ratio is desirable. The calculations based on the figures in the Anderson’s balance sheet show that the couple has ample assets compared with their debts because they own items worth more than two times what they owe. 3. Debt Service-to-Income Ratio = Annual debt repayments / Gross income = 24,600 / 111,700 = .22
- 6. 6 The debt serviceto income ratio provides a view of your total debt burden by comparing the dollars spent on gross annual debt repayments with gross annual income. A ratio of .36 or less is desirable. The Anderson’s percentage of 22% indicates that their gross income is adequate to make debt repayments, including housing costs, and implies that they usually have some flexibility in budgeting for other expenses. 4. Debt Payments-to-Disposable income ratio = Monthly nonmortgage debt repayments / Monthly disposable income =750 / 6767.42 = .11 The debt payment to disposable income ratio divides monthly disposable personal income into monthly debt repayments. Considering a ratio of 14 percent or less is desirable, the Anderson’s debt payments to disposable income ratio of 11% good. This shows that the Anderson’s would be secure if a disruption in income occurred because they could probably continue to make their debt payments. 5. Investment Assets-to-Total Assets = Investment assets / total assets = 146,650 / 376,530 = .39 The investment assets to total assets ratio compares the value of your investment assets with your total assets. This ratio reveals how well an individual or family is advancing toward their financial goals for capital accumulation, especially
- 7. 7 as related toretirement. Considering that a ratio of 11% to 30% is desirable for people in their 30s, the Anderson’s ratio of 39% is good considering that they are both 30 years old. Monthly Budget Income Samuel’s Gross Salary: $7,083 Maria’s Gross Salary: $2,167 Interest and Dividends: $58 Total Income: $9,308 Expenses Fixed Expenses Mortgage (including taxes): $1,300 Auto Loans: $750 Homeowners Insurance: $167 Medical Insurance Premiums: $400 Life Insurance Premium: $125 Auto Insurance/registration: $146 Income Taxes: $2,141 IRA Contributions: $242 Emergency Savings (contribution): $1,513 Vacation account: $194.77 Variable expenses Food: $320 Utilities: $333 Medical Expenses: $667 Clothing: $75 Internet: $75 Phone: $200 Gas for transportation: $150 Professional Services: $0 Maintenance (auto & home): $333 Charitable Contributions: $0 Gifts: $90.23 Credit Card Payments: $104 Miscellaneous: $0
- 8. 8 Goals When you setgoals for yourself, it’s best to make sure your goals follow the acronym for “S.M.A.R.T” goals. This assures that your goals are specific, measurable, achievable, realistic, and time-bound. Each of these goals needs to be re-examined and altered into S.M.A.R.T goals. 1) We want to have 9 months worth of income in an emergency fund within 3 years. We want to have income in an emergency fund to cover 9 months expenses so we could live comfortably if a loss of income were to occur. We want to have this income saved for within 3 years. We will do this by placing $1,513 each month into an investment account earning 7% interest. This will allow us to save $60,407.5 in 3 years. Samuel’s Gross Salary: $85,000 Samuel’s Gross Salary in 3 years (15% increase) $97,750 Maria’s Gross Salary: $26,000 Anderson’s total gross salary: $123,750 Anderson’s 9 months income (in 3 years) $92,812.50 = 123,750/12*9 For an emergency fund, it’s recommended you only save for necessary expenses. Not to the extent that you don’t pay your debts or luxuries such as utilities, phone, and Internet, because you want to still live comfortably if a sudden absence of income occurs. Therefore, our desired 9-month income emergency savings excludes
- 9. 9 the following expenditures:IRA contribution, clothing, professional services, charitable contributions, gifts, miscellaneous expenses, the previous emergency funds contribution, and the amount already built up in emergency savings. Once we subtract these, our 9-month emergency savings goal is: $60,407.5 Using our investment account earning 7%, the calculation is as follows: FV=-60,407.5, N=36, I/Y=.583(7/12), CPT>PMT: $1,513 / month 2) We want to take a family vacation to Disneyland for one week in a year and a half. We anticipate this to cost about $3,500. We want to take a family vacation to Disneyland for one week in a year and a half. We anticipate this to cost about $3,500. We will reach this goal by investing $194.77 each month into our investment account over the next 18 months. Anticipated vacation cost: $3,500 Anticipated vacation cost in 1-½ years (3.5% inflation) PV=-3,500, I/Y=3.5, N=1.5, CPT>FV $3,685.3 We can invest each month at 7% to meet this goal FV=-3,685.3, N=18, I/Y=.058(7/12), CPT>PMT $194.77 / month 3) We want to give 15% of our income to a charity each year.
- 10. 10 We wantto give 15% of our income to a charity each year once we have paid off our auto loans and re-financed our house into more affordable payments in 2 years. When we begin contributing this money to charity, we will invest $1,352 each month into an investment account earning 7% interest. This will allow us to accumulate $16,755 (15%) over the course of 12 months. Anderson’s 15% gross salary: $16,755 If we save over the course of the year, we can invest each month at 7% FV=-16,755, N=12, I/Y=.058(7/12), CPT>PMT $1,352 / month 4) We want to start saving $3,000 for retirement in an IRA. We want to save $3,000 for retirement in an IRA in one year by saving $242.08 each month in an investment account earning 7% interest. FV=-3,000, N=12, I/Y=.058(7/12), CPT>PMT $242.08 / month Conclusion After reviewing the data, in order to attain your goals, you have to cut monthly variable expenses such as food, clothing, professional services, charitable contributions, gifts, and miscellaneous expenses. In order for you to meet your goals without cutting expenses such as these, I suggest you first re-finance your house. Your interest rate of 6.5% on your mortgage is much higher than it should be. This is
- 11. 11 just accumulating moreunnecessary debt, which takes away from other areas you would rather have your money spent. Try to find a 30-year mortgage that is no higher than 3.5% interest. This will lower your monthly payments. Furthermore, you could drastically lower your monthly expenditures if you downgraded on each of your cars. This could free up $750 in your monthly budget. For the time being, I suggest that you not expense for charitable contributions. Your budget does not currently allow the room for this expense, but once you have less debt and have saved up money in your emergency fund increasing your monetary assets, you will have plenty of room to contribute to this expense. The last suggestion I have is that you pay your credit card debt off soon, paying the highest interest rates first. This will allow you to alleviate the debt quicker and prevent unnecessary interest charges.