The Lawrences’ Version of Financial Planning
Rob and Lisa Lawrence are a married couple in their mid-20s. Rob has a good start as an electrical engineer and Lisa works as a sales representative. Since their marriage four years ago, Rob and Lisa 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 Lawrences have done no financial planning. Lisa 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 Rob discuss the matter, he tells her not to worry because “we’ve always managed to pay our bills on time.” Lisa can’t understand his attitude because her income will be completely eliminated.
To convince Lisa that there’s no need for concern, Rob 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. Rob 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 Lisa asks about the long-run implications for their finances, Rob says there will be “no problems” because his boss has assured him that he has a bright future with the engineering firm. Rob also emphasizes that Lisa can go back to work in a few years if necessary. Despite Rob’s arguments, Lisa 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, 2015: Salaries
The Essay on Interpreting Financial Results
The financial statement of a business provides details of a company and if they are successful or if they are failing financially. The calculation of financial rations is use to determine the numbers and percentages that can affect the business profitability. The following financial ratio analysis will describes the financial status of CTAS, Cintas Corporation based on three years financial ...
Take-home Pay
Gross Salary
Rob
$52,500
$76,000
Lisa
29,200
42,000
Item
Amount
Food
$ 5,902
Clothing
2,300
Mortgage payments, including property taxes of $1,400
11,028
Travel and entertainment card balances
2,000
Gas, electric, water expenses
1,990
Household furnishings
4,500
Telephone
640
Auto loan balance
4,650
Common stock investments
7,500
Bank credit card balances
675
Federal income taxes
22,472
State income tax
5,040
Social security contributions
9,027
Credit card loan payments
2,210
Cash on hand
85
2009 Nissan Sentra
15,000
Medical expenses (unreimbursed)
600
Homeowner’s insurance premiums paid
1,300
Checking account balance
485
Auto insurance premiums paid
1,600
Transportation
2,800
Cable television
680
Estimated value of home
185,000
Trip to Europe
5,000
Recreation and entertainment
4,000
Auto loan payments
2,150
Money market account balance
2,500
Purchase of common stock
7,500
Addition to money market account
500
Mortgage on home
148,000
Critical Thinking Questions
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Consumer credit can be defined as a debt that someone incurs for the purpose of purchasing a good or service. Common forms of consumer credit include credit cards, store cards, motor (auto) finance, personal loans (installment loans), consumer lines of credit, retail loans (retail installment loans) and mortgages. The spread of credit card ownership and usage across developing Asia Pacific ...
1. Using this information and Worksheets 2.1 and 2.2, construct the Lawrences’ balance sheet and income and expense statement for the year ending December 31, 2015. 2. Comment on the Lawrences’ financial condition regarding (a) solvency, (b) liquidity, (c) savings, and (d) ability to pay debts promptly. If the Lawrences continue to manage their finances as described, what do you expect the long-run consequences to be? Discuss. 3. Critically evaluate the Lawrences’ approach to financial planning. Point out any fallacies in Rob’s arguments, and be sure to mention (a) implications for the long term, as well as (b) the potential impact of inflation in general and specifically on their net worth. What procedures should they use to get their financial house in order? Be sure to discuss the role that long- and short-term financial plans and budgets might play. 2.2Alex Mikhailov Learns to Budget
Alex Mikhailov recently graduated from college and moved to Atlanta to take a job as a market research analyst. He was pleased to be financially independent and was sure that, with his $45,000 salary, he could cover his living expenses and have plenty of money left over to furnish his studio apartment and enjoy the wide variety of social and recreational activities available in Atlanta. He opened several department-store charge accounts and obtained a bank credit card. For a while, Alex managed pretty well on his monthly take-home pay of $2,893, but by the end of 2015, he was having trouble fully paying all his credit card charges each month. Concerned that his spending had gotten out of control and that he was barely making it from paycheck to paycheck, he decided to list his expenses for the past calendar year and develop a budget. He hoped not only to reduce his credit card debt but also to begin a regular savings program. Alex prepared the following summary of expenses for 2015:
Item
Annual Expenditure
Rent
$12,000
Auto insurance
1,855
Auto loan payments
3,840
Auto expenses (gas, repairs, and fees)
1,560
Clothing
3,200
Instalment loan for stereo
540
Personal care
424
Phone
600
Cable TV
440
Gas and electricity
The Business plan on Manage Budget And Financial Plans
Planning a Budget Davis Service Group is a large public limited company employing around 17,000 people. Its shares are quoted on the London Stock Exchange.The business is based on service contracts to source, clean and maintain industrial textiles, such as protective clothing and linens. This is across four key sectors: workwear, healthcare, hotels and restaurants, and general facilities, such as ...
1,080
Medical care
120
Dentist
70
Groceries
2,500
Dining out
2,600
Furniture purchases
1,200
Recreation and entertainment
2,900
Other expenses
600
After reviewing his 2015 expenses, Alex made the following assumptions about his expenses for 2016:
1. All expenses will remain at the same levels, with these exceptions:
a. Auto insurance, auto expenses, gas and electricity, and groceries will increase 5 percent.
b. Clothing purchases will decrease to $2,250.
c. Phone and cable TV will increase $5 per month.
d. Furniture purchases will decrease to $660, most of which is for a new television.
e. He will take a one-week vacation to Colorado in July, at a cost of $2,100.
2. All expenses will be budgeted in equal monthly installments except for the vacation and these items:
a. Auto insurance is paid in two installments due in June and December.
b. He plans to replace the brakes on his car in February, at a cost of $220.
c. Visits to the dentist will be made in March and September.
3. He will eliminate his bank credit card balance by making extra monthly payments of $75 during each of the first six months.
4. Regarding his income, Alex has just received a small raise, so his take-home pay will be $3,200 per month. Critical Thinking Questions
1. a.Prepare a preliminary cash budget for Alex for the year ending December 31, 2016, using the format shown in Worksheet 2.3.
b.Compare Alex’s estimated expenses with his expected income and make recommendations that will help him balance his budget.
2. Make any necessary adjustments to Alex’s estimated monthly expenses, and revise his annual cash budget for the year ending December 31, 2016, using Worksheet 2.3.
3. Analyze the budget and advise Alex on his financial situation. Suggest some long-term, intermediate, and short-term financial goals for Alex, and discuss some steps he can take to reach them.
