Q2+Q3 Case Study: The Becker\'s Version of Financial Planning Terry and Evelyn B
ID: 2394446 • Letter: Q
Question
Q2+Q3
Case Study: The Becker's Version of Financial Planning Terry and Evelyn Becker are a married couple in their mid-20s. Terry has a good start as an electrical engineer and Evelyn works as a sales representative. Since their marriage four years ago, Terry and Evelyn have been living comfortably. Their income has exceeded their expenses, and they have accumulated an enviable net worth. This includes $10,000 that they have built up in savings and investments. Because their income has always been more than enough for them to have the lifestyle they desire, the Beckers have done no financial planning. Evelyn has just learned that she's two months pregnant. She's concerned about how they'll make ends meet if she quits work after their child is born. Each time she and Terry discuss the matter, he tells her not to worry because "we've always managed to pay our bills on time." Evelyn can't understand his attitude because her income will be completely eliminated. To convince Evelyn that there's no need for concern, Terry points out that their expenses last year, but for the common stock purchase, were about equal to his take-home pay. With an anticipated promotion and an expected 10 percent pay raise, his income next year should exceed this amount. Terry also points out that they can reduce luxuries (trips recreation, and entertainment) and can always draw down their savings or sell some of their stock if they get in a bind. When Evelyn asks about the long-run implications for their finances, Terry says there will be "no problems" because his boss has assured him that he has a bright future with the engineering firm. Terry also emphasizes that Evelyn can go back to work in a few years if necessary Despite Terry's arguments, Evelyn feels that they should carefully examine their financial condition in order to do some serious planning. She has gathered the following financial information for the year ending December 31, 2016 Salaries Terry Evelyn Take-home Pay $52,500 29,200 Gross Salary $76,000 42,000 Food Spending Clothing Spending Mortgage payments, including property taxes of $1,400 Travel and entertainment card balances Gas, electric, water expenses Household furnishings Telephone bill paid Auto loan balance Common stock investments Amount $5,902 2,300 11,028 2,000 1,990 4,500 640 4,650 7,500Explanation / Answer
Answer -
1a) Preparation of Balance Sheet
1b) INCOME AND EXPENSE STATEMENT
** (Assuming that taxes and social security deducted), (There is slight mismatch with figures of takehome pay provided)
(There is difference of=(81461-(52500+29200))= $239
2. Comments
(a) Solvency: Their total current asset is $18,570 which is approximately 6 months expenses. This is adequate
(b)Liquidity: They have current assets of $18570 against current liabilities of$2,675. They have adequate liquidity
(c) Savings: The annual saving is approximately 43 % of annual take home pay. They are managing their expenses prudently.
(d)Ability to pay debts promptly: They have adequate current assets and annual savings. This will enable them to pay debts promptly.
Since they have $34,761 savings per year , they should build up their wealth through systematic savings for long term
3. Critical Evaluation
They should keep in mind that inflation will be eating into their wealth. They have not planned their finances yet.
They need to set short term and long term goals. They should calculate amount required for their goals taking into account inflation.Then they should plan how they are going to achieve their goals and make investments accordingly
ASSETS: A Cash on hand $85 B Checking account balance $485 C Money market account balance $3,000 (2500+500) D Common stock $15,000 (7500+7500) E=A+B+C+D Total Current assets $18,570 F 2012 Nissan Sentra $10,500 G Estimated value of Home $185,000 H=F+G Total Fixed assets $195,500 I=E+H TOTAL ASSETS $214,070 LIABILITIES J Bank Credit card balance $675 K Travel and entertainment card balance $2,000 L=J+K Total Current Liabilities $2,675 M Auto loan balance $4,650 N Mortgage on home $148,000 P=M+N Total long term liabilities $152,650 Q=L+P Total Liabilities $155,325 R=I-Q Net Worth $58,745 S=Q+R Total liabilities & Net worth $214,070Related Questions
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