Just Q2 + Q3 Case Study: The Becker\'s Version of Financial Planning Terry and E
ID: 2620112 • Letter: J
Question
Just 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
Income and Expenditure Statement as on Dec 31,2016
Balance Sheet as on Dec 31,2016
a) Solvency- AS it can be seen they don't have much Balance left with them as solvency
inc: Cash and bank balance:675+85=760
Money Market=3000
Excluding entertainment and house furnishing, almost $63327 they require as just to fullfill their mandatory expenditure. Also, as said by Terry they will minimise their expenses in future. hence they can have control on clothing, food habits little bit but also not for long run possibility. Hence, in future medical expenditure (600) will increase for sure.
Hence there is only 3760.00 amount they carry as current assets and balances. which is not suffice as per their future expenditure which is fixed p.a,. In long run if Evelyn starts to work then they could actually come up with their financial distress which they have build up otherwise they won't be able to go back to their previous situation as they had extra income and less expenditures.
This is clear that for 2-3 years they actually need to follow a very strict plan and need to save as much as possible by reducing expenses.
Also, for savings as it is not clearly mentioned but near around $2500 they had (10000-7500) aftre excluding investment in stocks as mentioned above.
As said by Ferry, that their expenses are as similar as his salary and in future it will increase by 10%, wjhich will become 57750 next year, but he didn't considered the contingency which can be occured as Evelyn is pregnant. Also, next year the expenses for the children willl need to be added. Anything regarding medical expenditure is not mentioned in the entire case hence if they have so then they can save something otherwise they also require to add on medical insurance premium in their fixed yearly expenses.
Expenditure Amount income Amount Food 5902 Terry's salary (Net) 52500 clothing 2300 Evelyn's Salary(Net) 29200 Mortgage payment 11028 gas & water 1990 Household Furnishing 4500 telephone bills 640 federal Income tax 22472 state income tax 5040 Social security contribution 9027 Medical expenses 600 Insuramnce premiums:home 1300 Insuramnce premiums:vehicle 1600 Transportation 2800 TV bills 680 Trips and Travels 5000 Entertainment 4000 Loan payments: Auto 2150 Net Balance t/f to B/S 671 81700 81700Related Questions
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