BUDGETING

 

 

For this exercise we will look at a hypothetical that will hopefully mirror some of the decisions you will be faced with in your life.  First is the description of the family involved, then comes the basic facts, and last are the issues the family is faced with.  Your job will be to use the learnings from this class and answer the basic questions posed.  If something is not possible under the current scenario, please suggest a way in which the goals can be met.  This is the area in which a creative financial planner earns their keep.  We will assume 3.5% inflation, and that Ed and Marta earn an average of 8.5% on their investment accounts. (moderately conservative) over time.  Questions include the mortgage calculation, and the rest are all found in the “Goals” section.

 

Ed and Marta Gilliam

 

He’s 43, she’s 37.  Children are Cynthia who’s 8, and Jeremy who’s 6.  Ed is an engineer making $57,000 and Marta is a teacher making $34,000.  They have the following assets:

 

Asset                                       Value                          Debt                            Net

Home                                      235,000                       138,000                       97,000

’10 Lexus                                22,000                         17,000                         5,000

’02 Subaru                               7,000                           0                                  7,000

His 401k                                 58,000                                                             58,000

Her TSA                                 34,000                                                             34,000

His IRA                                  19,000                                                             19,000

Her IRA                                  17,000                                                             17,000

College fund                            22,000                                                             22,000

 

Their personal assets are all use assets (things you need to run your life, like furniture, dishes, clothes) and total no more than $50,000.  They use and pay their credit card bills in full each month and are comfortable with their lifestyle.  Now to their cashflow.

 

Income:

Ed’s net pay is $3,417 per month (gross pay less taxes and other stuff deducted from his paycheck).  He makes a 6% contribution to his 401k (his employer matches at 50%) and pays $230 for the families health insurance as well as federal and state taxes from his gross of $4,750.  Marta’s net pay is $2,090 per month.  She makes an 8.5% contribution to her TSA and has federal and state tax taken from her gross of $2,833 (also deducted from her gross pay).

 

Expenses:

The mortgage was taken out on $165,000 at 6% over 30 years 10 years ago.  Their payment includes principal and interest with $211 in taxes and $54.17 insurance each month for a total of $______________.  Use your financial calculator to figure the mortgage payment then add the taxes and insurance to find the monthly payment.

 

The Lexus payment is $596 over 5 years at 7.2%.

Other bills are:

Credit Cards (they don’t keep track of categories they spend on)                1,300

Food                                                                                                                460

Utilities (ph, elect, H2P, garbage and water)                                                  233

Entertainment (cable, paper, movies, dining out)                                           190

Transportation (gas, maintenance, tolls, parking)                                          450

Allowances (kids are 86, Ed and Marta are 200)                                            286

College savings                                                                                                200

IRA’s                                                                                                              500

 

Goals:

Ed and Marta want to pay 75% of VA public college expenses for each child.  Today that costs $13,000 per year increasing at 5.5% per year.  Will their current balance and savings level accomplish this?  Yes or No and show your work.

 

They want to retire when he’s 66 and she’s 60.  They would like $45,000 per year on top of Social Security and their pensions, in today’s dollars.  Will their current savings allow this at 5.5% withdrawals?  Remember, you have to do a future value on the 45K and then project their savings to get the withdrawal rate.

 

If possible, they would like to buy a beach house when Ed turns 59 and the kids are out of college.  Assuming the kids use $8,000 each of the budget (above), and college savings are no longer required, how large a mortgage could they afford at 8% over 30 years?  Amend their budget and calculate their mortgage possibility.

 

When you adjust cost for inflation, use annual compounding.  When you work with saving money or estimating future investment values use monthly compounding.  Don’t forget to look for all the changes in cash flow when the kids are away from home.