Pam Jenkins recently married Josh Brock. Pam continues to work as a sales repres
ID: 2759323 • Letter: P
Question
Pam Jenkins recently married Josh Brock. Pam continues to work as a sales representative for a clothing manufacturer, and her monthly income has averaged $2,840 a month over the past year. Josh is employed as a computer programmer and earns $3,000 a month. Their combined monthly income allows them to live comfortably. Yet they have been unable to save any money for emergencies. According to Josh, "It's hard to believe, but we don't even have a savings account because we spend almost everything we make." Every month, they deposit each of their paychecks in separate checking accounts. Josh pays the rent and makes the car payment. Pam buys the groceries and pays the utilities. They use the money left over to purchase new clothes and the other "necessities" for enjoying life. In an effort to make wise use of credit, the Brocks have examined various sources that could serve their current and future financial needs. In the assessment process, they compared the APR along with various fees and potential charges. Josh and Pam are also learning about various actions that might be useful if they encounter credit troubles. Their discussions with friends and money management advisers provided expanded knowledge of credit counseling and bankruptcy alternatives. Questions Q1. What is the minimum amount that the Brocks should have in an emergency fund? What actions might be taken to increase the amount in this fund? Q2. What other money management and financial planning activities would you recommend for the Brocks? Q3. List other actions that the Brocks might consider to reduce the cost of using credit. Q4. What information sources might be useful when comparing various sources of credit?
Explanation / Answer
Q1. The minimum amount brocks should have in their emergency fund is equal to 6 months of expenses. If they have an expense of about $4,000 a month, then the amount that they should have in the emergency fund will be necessary if one or both of them lose their job and then it will take some time to take up another job. This money in the emergency fund will help with their expenses.
Hence the amount of money in the emergency savings account should be 4000*6 = $24,000 assuming that they have an expense of about 4,000 USD per month. If they have lower expense, they can lower the emergency fund.
Since they have no money saved at all, they should keep an account to write their expenses and check which ones are not necessary and eliminate them. After this, they will have some money left over and can start building their emergency fund.
Q2: As a money manager i would suggest them to save enough money so that they could meet all their long term and short term goals. They may have kids in future and will have to save money for their education.
Secondly, they are at a rented place and should take steps to own a property which they can call home. Lastly, they need to start planning for retirement which is some years away. So as a financial advisor, I would stress on the importance of these three goals and advise them to start investing in a range of equity mutual funds to meet these long term needs
Q3:
1. To reduce the cost of using credit, they should save more and take less credit.
2. Secondly, they should improve their credit rating and this would lower their borrowing costs.
3. They should have only one credit card reduce certain expenses that they deem are necessary to enjoy life
Q4: We have to look the annual percentage rates of all the credit card companies and check which one among them is best suited for their needs. Hence in conclusion, financial planning is critically important and sooner it is done the better it is and they do not have to worry about financial distress at a later stage in life.
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