Question: The Financial Statements of Harry and Belinda
The Financial Statements of Harry and Belinda
Johnson Suggest Budgeting Problems Harry has worked at a medium-size interior design firm for five years and earns a salary of $4,080 per month. He also receives $3,000 in interest income once a year from a trust fund set up by his deceased father’s estate. Belinda earns a salary of $6,400 per month, and she has many job-related benefits including flexible benefits program, life insurance, health insurance, a 401(k) retirement program, workplace financial education, and a credit union. The Johnsons live in an old apartment located approximately halfway between their places of employment. However, their rent will increase by $100 a month in July. Harry drives about ten minutes to his job, and Belinda travels about 15 minutes via public transportation to reach her downtown job. Harry and Belinda’s apartment is very nice, but small, and it is furnished primarily with furniture given to them by some of his friends. Soon after getting married, Harry and Belinda decided to begin their financial planning. Fortunately each had taken a college course in personal finance. After initial discussion, they worked together for three evenings to develop the financial statements presented below. Note that the cash flow statement covered the first six months of their marriage.
Required:
(a) Briefly describe how Harry and Belinda probably determined the fair market prices for each of their tangible and investment assets.
(b) Using the data from the cash-flow statement developed by Harry and Belinda, calculate a liquidity ratio, asset-to-debt ratio, debt-to-income ratio, debt payments-to-disposable income ratio, and investment assets-to-total assets ratio. What do these ratios tell you about the Johnsons’ financial situation? Should Harry and Belinda incur more debt, such as credit cards or a new vehicle loan?
(c) The Johnsons enjoy a high income because both work at well-paying jobs. They have spent parts of three evenings over the past several days discussing their financial values and goals together. As shown in the upper portion of Figure 3-5, they have established three long-term goals: $6,000 for a European vacation to be taken in 2020, $5,000 needed in October 2021 for a down payment on a new automobile, and $30,000 for a down payment on a home to be purchased in December 2023. As shown in the lower portion of the figure, the Johnsons did some calculations to determine how much they had to save for each goal—over the near term—to stay on schedule to reach their long-term goals as well as pay for two vacations and an anniversary party. After developing their balance sheet and cash-flow statement (shown below), the Johnsons made a budget for the year (shown in Table 3-6 on page 97). They then reconciled various conflicting needs and wants until they found that total annual income was close to the total of planned expenses. Next, they created a revolving savings fund (Table 3-8 on page 99) in which they were careful to include enough money each month to meet all of their short-term goals. When developing their cash-flow calendar for the year (Table 3-7 on page 98), they noticed a problem: substantial cash deficits in November and December. Make specific recommendations to the Johnsons on how they could make reductions in their budget estimates. Do not offer suggestions that would alter their new lifestyle drastically, as the couple would reject such ideas.
Table 3-6:
Table 3-7:
Table 3-7:
Figure 3-5:
Transcribed Image Text:
Balance Sheet for Harry and Belinda Johnson January 1, 2018 ASSETS Monetary Assets $ 1,100 1,200 4,000 2,260 2,100 $10,660 Cash on hand 3.8% Savings (First Credit Union) Savings (Far West Savings Bank) Savings (Homestead Credit Union) Checking (First Credit Union) Total Monetary Assets 4.1% 13.7% 7.7% 7.2% 36.5% Tangible Assets Automobile (3-year old Toyota) Personal property $11,000 2,300 1,700 37.6% 7.9% Furniture 5.8% Total Tangible Assets $15,000 51.3% Investment Assets $ 1,170 2,400 S 3,570 $29,230 Harry's retirement account 4.0% Belinda's retirement account 8.2% Total Investment Assets 12.2% Total Assets 100.0% LIABILITIES Short-Term Liabilities Visa credit card $ 390 1.3% Target credit card 45 0.2% Dental bill 400 1.4% $ 835 Total Short-Term Liabilities Long-Term Liabilities Vehicle loan (First Credit Union) Student loan (Belinda) 2.9% $13,800 8,200 $22,000 $22,835 $ 6,395 $29,230 47.2% 28.1% Total Long-Term Liabilities 75.3% Total Liabilities 78.1% 21.9% Net Worth Total Liabilities and Net Worth 100.0% Cash-Flow Statement for Harry and Belinda Johnson July 1-December 31, 2017 (First Six Months of Marriage) Cash Flow Dollars Percent INCOME Harry's gross income Belinda's gross income Interest Harry's trust fund $24,000 36,600 180 3,000 S63,780 37.6% 57.4% 0.3% 4.7% Total Income 100.0% EXPENDITURES Fixed Expenses Rent $ 9,600 1,800 15.1% Health Insurance 2.8% Life insurance 120 0.2% 220 Renter's insurance Automobile insurance Auto loan payments Student loan payments 0.3% 600 6.3% 2,940 1,800 4.6% 2.8% 1.5% 1.5% 1.8% 3.8% 16.0% 4.7% Cable TV and Internet 960 Savings/emergencies Harry's retirement plan Belinda's retirement plan 960 1,170 2,400 10,200 3,000 4,640 Federal income taxes State income taxes Social Security taxes Automobile registration Total Fixed Expenses Variable Expenses 7.3% 300 0.5% $40,710 63.8% Savings money market fund Food (home) Food (out) $ 3,000 3,800 4.7% 6.0% 1,860 2.9% Utilities 1,320 2.1% Cell phones Auto gas/maintenance/repairs Doctor's and dentist's bills 660 1,150 1,140 1.0% 1.8% 1.8% Medicines 350 0.5% 1,200 Clothing and upkeep Church and charity 1.9% 550 1,070 0.9% Gifts 1.7% Public transportation 940 1.5% Personal allowances 2,400 3.8% Entertainment 960 1.5% 780 Family holiday trip Summer vacation 1.2% 1,200 1.9% 0.9% 36.0% Miscellaneous 560 Total Variable Expenses Total Expenses $22,940 $63,650 99.8% SURPLUS (DEFICIT) $130 0.2% Table 3-6 2018 Unfinished Annual Budget Estimates for Harry and Belinda Johnson Yearly Monthly Jan. Feb. Mar. Аpг. May June July Aug. Sept. Oct. Nov. Dec. Total Averages INCOME Harry's salary 4,080 4,080 4,080 4,080 4,080 4,080 4,080 4,080 4,080 4,080 4,080 4,080 48,960 4,080.00 Belinda's salary 6,400 6,400 6,400 6,400 6,400 6,400 6,400 6,400 6,400 6,400 6,400 6,400 76,800 6,400.00 Interest 30 30 30 30 30 30 30 30 30 30 30 30 360 30.00 Income from trust 3,000 3,000 250.00 TOTAL INCOME 10,510 10,510 10,510 10,510 10,510 10,510 10,510 13,510 10,510 10,510 10,510 10,510 129,120 10,760.00 EXPENSES Fixed Expenses Rent 1,600 1,600 1,600 1,600 1,600 300 1,600 1,700 1,700 1,700 350 1,700 350 1,700 1,700 19,800 1,650.00 Health insurance 300 300 300 300 300 350 350 350 350 3,900 325.00 Life insurance 20 20 20 20 20 20 20 20 20 20 20 20 240 20.00 Home purchase fund Renter's insurance Automobile insurance 500 500 500 500 500 2,500 208.33 220 220 18.33 600 600 1,200 100.00 Auto loan payments Student loan payments Savingslemergencies Harry's retirement plan 490 490 490 490 490 490 490 490 490 490 490 490 5,880 490.00 300 300 300 300 300 300 300 300 300 300 300 300 3,600 300.00 100 100 100 100 100 100 100 100 100 100 100 100 1,200 100.00 195 195 195 195 195 195 195 195 195 195 195 195 2,340 195.00 Belinda's retirement plan 400 400 400 400 400 400 400 400 400 400 400 400 4,800 400.00 Cable TV and Internet 160 160 160 160 160 160 160 160 160 160 160 160 1,920 160.00 Federal income taxes 1,700 1,700 1,700 1,700 1,700 1,700 1,700 1,700 1,700 1,700 1,700 1,700 20,400 1,700.00 State income taxes 500 500 500 500 500 500 500 500 500 500 500 500 6,000 500.00 Social security taxes 800 800 800 800 800 800 800 800 800 800 800 800 9,600 800.00 Automobile registration Total fixed expenses Variable Expenses 300 300 25.00 6,565 6,565 6,565 6,565 6,565 7,165 6,715 7,435 7,215 7,215 7,515 7,815 83,900 6,991.67 Savings money market Revolving savings fund Food (home) 400 3,000 3,400 283.33 250 250 210 250 190 240 200 190 1,780 148.33 S50 SS0 S50 S50 S50 S50 S50 S50 S50 S50 550 S50 6,600 550.00 Food (out) 300 300 300 300 300 300 300 300 300 300 300 300 3,600 2,640 300.00 Utilities 220 220 220 220 220 220 220 220 220 220 220 220 220.00 Cell phones Auto gas repairs 110 110 110 110 110 110 110 110 110 110 110 110 1,320 110.00 220 220 220 220 220 220 220 220 220 220 220 220 2,640 220.00 Doctor/dentis 100 100 100 100 100 100 100 100 100 100 100 100 1,200 100.00 out-of-pocket Medicines 60 60 60 60 60 60 60 60 60 60 60 60 720 60.00 Clothing and upkeep Church and charity 170 170 170 170 170 170 170 170 170 170 170 170 2,040 170.00 100 100 100 100 100 60 100 100 100 100 100 100 1,160 96.67 Gifts 80 80 110 75 140 120 60 60 400 300 1,475 122.92 Public transportation 160 160 1,920 6,000 1,800 160 160 160 160 160 160 160 160 160 160 160.00 Personal allowances 500 500 500 500 500 500 500 S00 S00 500 S00 500 500.00 Entertainment 150 150 150 150 150 150 150 150 150 150 150 150 150.00 European vacation 400 400 400 400 400 400 200 200 200 200 200 200 3,600 1,200 300.00 100.00 Summer vacation 200 200 200 200 200 200 Anniversary dinner party 42 42 42 42 42 42 42 42 42 42 40 40 S00 41.67 Miscellaneous 100 100 100 100 100 100 100 100 100 100 100 100 1,200 100.00 Total variable 3,712 3,712 3,702 3,707 3,712 3,342 3,742 6,042 3,242 3,222 3,380 3,280 44,795 3,732.92 expenses TOTAL EXPENSES 10,277 10,277 10,267 10,272 10,277 10,507 10,457 13,477 10,457 10,437 10,895 11,095 128,695 10,724.58 Difference (available 233 233 243 238 233 53 33 53 73 -385 -585 425 for spending. saving, investing. and donating Revolving savings withdrawals 385 585 Jable 3-7 Cash-Flow Calendar for Harry and Belinda Johnson 2 3 Estimated Estimated Surplus/ Deficit (1-2) Cumulative Surplus/Deficit $ 233 Month Еxpenses $ 10,277 $ 10,277 Income January $ 10,510 $233 February 10,510 233 $ 466 March 10,510 10,267 243 $ 709 April 10,510 10,272 238 $ 947 May 10,510 10,277 233 $1,180 June 10,510 10,507 3 $1,183 July 10,510 10,457 53 $1,236 August 13,510 13,477 33 $1,269 September 10,510 10,457 53 $1,322 October 10,510 10,437 73 $1,395 November 10,510 10,895 -385 $1,010 December 10,510 11,095 -585 $ 425 Total $129,120 $128,695 $425 Table 3-8 Revolving Savings Fund for Harry and Belinda Johnson Large Expenses Amount Deposit Into Withdrawal Fund Fund Balance Month Needed From Fund January $ 250 $ 0 $ 250 $ 500 $ 710 $ 960 February 250 March 210 April 250 May 190 $1,150 June $1,150 July Summer 1,200 240 $1,390 vacation August $1,390 September 200 $1,590 October 190 $1,780 November Gifts/Other 385 460 $1,320 December Dinner 585 220 $1,100 Party/Other Total $2,170 $1,780 $680 -$390 Figure 3-5 Goals Worksheet for Harry and Belinda Johnson Date worksheet prepared January 1, 2018 2 LONG-TERM GOALS AMOUNT NEEDED MONTH/YEAR NEEDED MONTHS TO SAVE DATE TO START SAVING MONTHLY AMOUNT TO SAVE (2/4) Home down payment $30,000 Aug. 2023 60 Aug. '18 $500 Date worksheet prepared January 1, 2018 2 AMOUNT MONTH/YEAR NEEDED INTERMEDIATE-TERM GOALS MONTHS DATE TO START MONTHLY AMOUNT NEEDED TO SAVE SAVING TO SAVE (2/4) European vacation $6,000 Jul. 2020 30 Jan. '18 $200 New vehicle down payment 5,000 Oct. 2021 45 Jan. '18 Date worksheet prepared January I, 2018 2 5 AMOUNT NEEDED MONTH/YEAR NEEDED MONTHS DATE TO START SAVING SHORT-TERM GOALS MONTHLY AMOUNT TO SAVE TO SAVE (2/4) House fund $6.000 Dec. 2018 Jun. '18 $S00 European vacation fund 2400 Dec. 2018 12 Jan. '18 200 Summer vacation fund Anniversary dinner party Emergency fund 1,200 Jul. 2018 Jan. '18 200 Dec. 2018 Jan. '18 Jan. '18 S00 12 42 2400 Dec. 2018 12 200 Goaks requiring five years or more to achieve require consideration of investment return and after-tax yield, which will be discussed in Chapter 4.
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