mini case summary pfp 3341

PFP 3341 Mini Case Study1

Mini Case Study

Dustin Freeman

Texas Tech University


Financial SummaryAlex and Debbie Smith

Client Information:

Alex Smith – 35 Years Old, works FT for XYZ Oil and GasDebbie Smith – 35 Years Old, works PT and takes care of their children

Client’s Goals:

Personal:Retirement TravelCharitable Contributions

Financial:IRA Savings within 2 yearsEmergency FundCharitable Contributions

Client’s Concerns:

Retirement SavingsDeveloping S.M.A.R.T GoalsDeveloping a budget/spending planUnderstanding their financial health and progress

Summary:

Your financial health is in good shape, although there are some areas that need some improvement. Your monetary assets are below my recommended three to six month grace period. However, one of your main goals is to increase your emergency funds to at least six months income which will help boost your monetary assets. I have included some important statements and ratios, as well as a monthly budget plan in the following pages that you will find helpful in gaining a better picture of your financial situation along with my recommendations to help you meet your financial goals and concern. You will also need to prioritize your goals in order to help you decide on which recommendations you feel will help you best reach them.


ANNUAL CASH FLOW ANALYSISAlex & Debbie Smith

Friday, July 25, 2014

Income

Alex's Salary $95,000Debbie's Salary $30,000Interest and Dividends $800

Total Income $125,800

Expenses

Variable FixedFood $6,200 IRA Contributions $5,000Gifts $3,600 Internet $900Gas for Transportation $2,400 Auto Insurance/Registration $1,750Utilities $5,000 Income Taxes $25,691Medical Expenses $12,000 Auto Loans $8,000Charitable Contributions $11,170 Phone $2,400Clothing $2,500 Emergency Savings $1,500Maintenance (auto & home) $4,000 Life Insurance Premium $2,500Professional Services $1,500 Mortgage (including taxes) $15,600Miscellaneous $2,250 Homeowner's Insurance $2,500

Medical Insurance Premiums $5,800Credit Cards $1,200

Total Variable Expenses $50,620 Total Fixed Expenses $72,841

SummaryTotal Income $125,800Total Variable Expenses $50,620Total Fixed Expenses $72,841

Surplus/Deficit $2,339


WEALTH ANALYSIS


Alex & Debbie SmithFriday, July 25, 2014

Current Assets Current Liabilities

Monetary Short TermCash on Hand $250 Credit Card Debt $12,859Joint Money Market $2,500 Medical Bills $6,500Joint Checking $1,565 Total Short Term $19,359Joint Savings $5,000

Total Monetary Assets $9,315

Tangible Long TermResidence $165,000 Mortgage $125,000Real Estate Property $120,000 Auto Loans $17,263Alex's Car $15,000 Total Long Term $142,263Debbie's Car $14,000Personal Property $17,500

Total Tangible Assets $331,500Total Liabilities $161,622

Investment Alex's 401K $42,650Debbie's IRA $12,000 Summary

Total Investment Assets $54,650 Assets $395,465Liabilities $161,622

Total Assets $395,465 Net Worth $233,843

FINANCIAL RATIOSAlex & Debbie Smith



Asset to Debt RatioDo I Have Enough Assets to Meet My Debt Obligations?

Total Assets Total DebtMonetary Short TermCash on Hand $250 Credit Card Debt $12,859Joint Money Market $2,500 Medical Bills $6,500Joint Checking $1,565 Total Short Term $19,359Joint Savings $5,000

Total Monetary Assets $9,315Tangible Long TermResidence $165,000 Mortgage $125,000Real Estate Property $120,000 Auto Loans $17,263Alex's Car $15,000 Total Long Term $142,263Debbie's Car $14,000Personal Property $17,500 Total Liabilities $161,622

Total Tangible Assets $331,500Investment Alex's 401K $42,650Debbie's IRA $12,000

Total Investment Assets $54,650Total Assets $395,465

Asset ¿Debt Ratio=Total AssetsTotal Debts

=$395,465$ 161,622

=2.45

The Asset to Debt Ratio compares your total assets with your total liabilities. It provides you with a broad measure of your financial liquidity. This ratio tells your ability to pay down your debts. A high ratio, usually greater than 2.00, is desirable.

You have an Asset to Debt ratio of 2.45. This means that you have $2.45 in assets for every $1.00 of debt. This is a fair ratio.

Basic Liquidity RatioDo I Have Enough Liquid Assets to Pay for Emergencies?

Liquid Monetary Assets Monthly ExpensesCash on Hand $250 Annual Variable Expenses $50,620


Joint Money Market $2,500 Annual Fixed Expenses $72,841Joint Checking $1,565 Total Annual Expenses $123,461Joint Savings $5,000

Total Liquid Monetary Assets $9,315 Average Monthly Expenses $10,288

Basic Liquidity Ratio=Liquid Monetary AssetsMonthly Expenses

= $ 9,315$ 10,288

=0.91

The 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. You currently have a liquidity ratio of 0.91, which means that you could not survive one month if you are faced with a loss of income. This ratio is poor, and I recommended having at least three to six months’ expenses in emergency cash reserves.

Debt Service to Income RatioIs My Total Debt Burden Too High?

Annual Debt Repayments Gross SalaryMortgage $15,600 Alex's Salary $95,000Auto Loans $8,000 Debbie's Salary $30,000

Interest and Dividends $800Total Annual Debt Repayments $23,600 Gross Salary $125,800

Debt Service ¿ Income Ratio= Annual Debt RepaymentsGross Salary

= $23,600$125,800

=18.76 %

The Debt Service to Income Ratio provides a view of your total debt burden by comparing the dollars spent on gross annual debt repayments (including rent or mortgage payments) with gross annual income. A Debt Service to Income Ratio of 36% or less is desirable. You have a Debt Service to Income Ratio of 18.76%. This suggests that your gross income is adequate to make your debt repayments, including housing costs, and implies that you usually have some flexibility in budgeting for other expenses. This is a great ratio and should continue to decrease as your age increases.

Debt Payments to Disposable Income RatioIs My Non-Mortgage Debt too Stressful?

Non-Mortgage Debt Repayments Disposable IncomeAuto Loans $8,000 Gross Salary $125,800


Credit Cards 1200 (Taxes) $25,691 Total Non-Mortgage Debt $9,200 (Medical Prem.) $5,800

Annual Disposable Income $94,309Monthly Non-Mortgage Debt $767 Monthly Disposable Income $7,859

Debt Payment¿Disposable Income Ratio=Monthly NonMortgage DebtMonthly Disposable Income

= $767$7,859

=9.76%

Your monthly non-mortgage debt repayments are your monthly debt repayments excluding your home mortgage and homeowner’s insurance. Your disposable income is the amount of income remaining after taxes and withholdings are taken out of your monthly gross income. A ratio of 14% or less is desirable. You currently have a 9.76% Debt Payment to Disposable Income Ratio. This is a fair ratio, meaning that you have funds available for your debt repayments, but this ratio should continue to be reduced as you pay off your debt.

Investment Assets to Total Assets RatioAm I Saving/Investing Enough?

Investment Assets Total AssetsAlex's 401K $42,650 Monetary $9,315Debbie's IRA $12,000 Tangible $331,500

Investment $54,650Total Investment Assets $54,650 Total Assets $395,465

Investment Assets¿Total Assets Ratio= Investment AssetsTotal Assets

= $54,650$395,465

=13.82%

You have an Investment Asset to Total Asset Ratio of 13.82%. Although you are near the bottom of the scale, this is typical for your age range. You are doing a great job increasing your investment assets and I would recommend keeping to this strategy.

MONTHLY BUDGET PLANAlex & Debbie Smith

Investment Assets to Total AssetsAge Percentage (%)

20-29 0% > 10%30-39 11% > 30%40 + > 30%



INCOME Budget ActualDifferenc

eAlex's Salary 7,916.67 7,916.67 0Debbie's Salary 2,500.00 2,500.00 0Interest & Dividends 66.67 66.67 0Other

Total INCOME10,483.3

310,483.3

3 -

Expenses Budget ActualDifferenc

e Expenses Budge

t Actua

lDifferenc

eHome Expenses Savings

Mortgage 1300.00 $ 1,300.00 Emergency Fund 125.00 $ 125.00 Homeowner's Ins 208.33 $ 208.33 Transfer to Savings $ - Utilities 375.00 $ 375.00 Retirement (IRA) 416.67 $ 416.67 Phone 200.00 $ 200.00 Investments $ -

Internet 50.00 $ 50.00 Education $ -

Maintenance (A&H) 250.00 $ 250.00 Other $ -

Transportation ObligationsVehicle Payments 666.67 $ 666.67 Credit Cards 100.00 $ 100.00

Auto Insurance 145.83 $ 145.83 Federal Taxes2140.9

2 $ 2,140.92 Fuel 200.00 $ 200.00 CharityRepairs $ - Gifts Given 150.00 $ 150.00

HealthCharitable Donations 930.83 $ 930.83

Health Insurance 483.33 $ 483.33 MiscellaneousLife Insurance 208.33 $ 208.33 Professional Fees 125.00 $ 125.00 Medical Expenses 700.00 $ 700.00 Postage $ -

Daily Living Misc 125.00 $ 125.00 Groceries 400.00 $ 400.00 Other $ - Clothing 150.00 $ 150.00 Financial GoalsDining/Eating Out $ - Emergency Fund 450.00 $ 450.00 Pet Food $ - Family Vacation 200.00 $ 200.00 Other $ - Charity 230.00 $ 230.00

IRA 150.00 $ 150.00

Column Totals 5337.50 0.00 5337.50 Column Total5143.4

2 0.00 5143.42 Budget Summary Budget Graph

Total Income 10,483.33

Budget Reduction

Total Expenses 10,480.92 Budget Increase

NET 2.42


With this budget, you can see that with certain budget reductions, you will be able to meet your financial goals more quickly. The areas shaded in light red indicate areas that I suggest you reduce your spending to accommodate the increases for your financial goals in light green. The “Actual” column is for what you actually spend per month.

S.M.A.R.T GOALS

The S.M.A.R.T goal planning process is a process of setting up the details of a goal by

following the S.M.A.R.T acronym. S.M.A.R.T goals essentially clarify what is expected and

gives an idea of what the measurements are in determining if the goal is accomplished.

S.M.A.R.T goals are essentially just that, goals with all the necessary details. The more precise

the details are, the better the chance of attaining the goal.

Specific – Who? What? Measureable – How? (How we are going to accomplish the goal and how we can determine if it gets accomplished.) Attainable – Reasonable? Relevant/Realistic – Expected Result? Time bound – By when?

S – We want to build our emergency fund to $31,450, which is three months of income, by October 1st, 2019M – We will be able to do this by depositing $450 per month into a money market account that earns 0.7% APR compounded monthly. The money will come from the extra money we saved through the use of the budget.A – This is reasonable because we reduced our monthly expenses by $850R – I expect to have a minimum of $31,450 in our emergency fund by October 1st, 2019T – If the money market account earns 0.7% APR and I put a minimum of $450 per month into this account, I can expect to have a minimum of $31,450 in 5.2 years.

FV= 31450, PV= -2500, i= .0583, PMT= -450

S – Contribute an additional $5,000 to Debbie’s IRA account by April 1st, 2017M – We will be able to do this by depositing $150 per month into a money market account that earns 0.7% APR compounded monthly. This money will come from the extra money we saved through the use of the budget.A – This is attainable because we reduced our monthly expenses by $850R – I expect to have $5,000 to put into Debbie’s IRA by April 1st, 2017


T – As long as the money market account earns a minimum of 0.7% APR each year, then I can expect to have at least $5,000 in 2.75 years

FV= 5000, PV= 0, i= .0583, PMT = -150S – We would like to contribute an additional $2,760 to charity by August 1st, 2015M – We will be able to do this by giving $230 per month to a charity of our choice. This money will come from the extra money we saved through the use of our budgetA – This is reasonable because we reduced our monthly expenses by $850R – I can expect to be able to give an additional $230 at the end of each monthT – As long as we continue to stick to our budget, we will be able to contribute the additional $230 each month. This will add $2,760 to our total charitable contributions each year.

FV= 2760, PV= 0, i= 0, PMT= 230

S – We would like to take a one week family vacation to Disney Land in California by January 1st, 2017 M – We will be able to do this by depositing $200per month into a money market account that earns 0.7% APR compounded monthly. This money will come from the extra money we saved through the use of the budget.A – This is reasonable because we reduced our monthly expenses by $850R – I can expect to have $6,000 in a money market account by January 1st, 2017T – If the money market account earns 0.7% APR and I put a minimum of $200 per month into this account, I can expect to have a minimum of $6,000 in 2.5 years.

FV= 6000, PV= 0, I= .0583, PMT= 200

Financial Statements

Your cash flow statement shows that your family has a gross income of $125,800. Your current annual variable expenses are ($50,620) and annual fixed expenses are ($72,841) which give you a surplus of $2,339. You currently have total assets of ($395,465) and current total liabilities of ($161,622). Your assets are more than your liabilities which give you a Net Worth of $233,843. Your Net Worth is good for your age group.

Financial Ratios

According to the Basic Liquidity Ratio, you currently only have enough liquid monetary assets to cover a little over three weeks of your expenses. If you were faced with an income loss,


unexpected maintenance expense, or even unexpected taxes, you might find yourself in serious financial trouble trying to meet your monthly expenses. I recommend that you have at least 3-6 months worth of monetary assets in an emergency fund in the event of a job loss. This would mean that you would need to have a minimum of $31,450 in emergency monetary assets.

Under each ratio, you will find additional helpful information and my recommendations on how to better each ratio.

Financial Suggestions

Financial Goals:

I have rewritten the financial goals that you had come up with as a family in a way that will better suit your current financial conditions. The new S.M.A.R.T Goals that I have written for you will take a little bit longer than you had anticipated. If you follow the recommendations as closely as possible, this will give you the quickest avenue to reaching your financial goals.

Retirement:

Your currently are not eligible to receive Social Security Benefits from the Federal Government. 62 years of age is the minimum retirement age, however, retiring at the age of 62 or anytime before the full retirement age will result in reduced benefits. Neither of you are at the recommended age (59.5) to start taking the benefits from either of your 401K penalty free. If you do decide to take the benefits before you turn 59.5 years old, you will incur a 10% penalty fee. You currently have 2.34% of your total assets in monetary assets. I recommend that you have at least 15-20% in monetary asset form and this ratio should increase as retirement draws closer.

Charity:

One of your financial goals was to give 15% of your income to charity. Your current financial state at this time, in my opinion, does not allow you to give this percentage to charity. Once Alex receives his 15% salary raise, then you will be more capable of committing the full 15% of income to charity. Reducing the amount of money that is given to charitable contributions would also be a great idea at this time to increase the amount of money that they could put towards their monetary assets/emergency fund, or vacation. While this is very important to some people, it is also important to note where your priorities lie, and what the best avenue to get out of debt is.

Paying off you remaining debts:


Step 1: Make only the minimum monthly payments on your credit cards or cut back on fancy restaurant meals until you've socked away some money in your emergency fund. People with higher incomes or who expect big emergencies down the road might consider saving more. This small reserve fund will help you pay for unexpected expenses so you can stop relying on credit cards. A good place for your emergency fund is in a bank money-market account or a money-market mutual fund.

Step 2: Pay off all your debts (except your mortgage), one at a time. This step could take you a while to complete, depending on how much debt you carry. Many financial planners advise their clients to pay off their highest-interest-rate loans first. If that appeals to you, make it your plan.

Step 3: Build up your emergency fund with three to six months of living expenses. Now is the time to go beyond the starter fund of Step 1. Expect the unexpected. You might face a medical emergency, a family member could lose a job, or the car might need a new transmission. A great way to boost your emergency account is to tuck your tax refund or an unexpected bonus into a money-market fund.

Summary:

By sitting down together and deciding where the best places are for you as a family to reduce your expenses is very important. Once you have decided to reduce certain areas, make sure that you stick to the budget as closely as you can. This will help you reach your goals the fastest. Your emergency fund is probably one of the most important funds for you to establish. You never know when you could lose your job, or when unexpected emergency situations could pop up out of nowhere. It is important that you have money put away to pay for normal monthly expenses until you can figure something else out. Try not to take money out of your emergency fund unless it is absolutely necessary. While keeping each financial goal in separate money market or savings accounts will help keep confusion to a minimum, it might be more beneficial for you to put all of your non-emergency funds (Disney vacation, etc.) into the same account. This will allow you to earn more interest by having more principal in one account, rather than broken up into separate accounts. This will also allow you to reach your financial goals more quickly. It will be important that you keep detailed records of the amount of principle you put into the account for each non-emergency goal.

You are on the right track to preparing yourself and your family for financial success. You have completed the hardest step, gathering all of the information! As long as you stick to the plans and budgets that you have set forth, you will be able to accomplish any goal you set out to undertake.

mini case summary pfp 3341

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