Memo
To:Mr. Christopher De Maline
From:
Date:02/17/2014
Re:Personal Budget, Balance Sheet, and cash flow Statement
Dear Mr. De Maline
Saving money is extremely important however; some people do not have healthy savings thus leading them to financial instability. Therefore, being a good steward over your finances should be consistent and begin at an early age and progress as you age. This will provide an effective growth pattern to allow future financial security.
The purpose of this memorandum is to evaluate my client’s financial outlook, their personal budget, balance sheet, and cash flow statement and provide recommendations for improvement of their financial situation.
My client, Chauncey Latham is 51 years old and a police officer. He is married and has one dependent. Kyle Latham, Chauncey’s wife is 47 years old and is currently not working. Prior to her unemployment, Kyle annual earnings were $96,000 a year. They live is a nice 4-bedroom house, in a great community with a sought after school district. The family has a comfortable looking life, though their financial outlook is pretty grim. Together Chauncey and Kyle earn $85,000 a year, which includes Chauncey’s off duty work and Kyle’s unemployment benefit. Their life savings have dwindled down the emergency fund is very low, and their credit card debt is high.
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The balance sheets show my clients assets and liabilities and verify their net worth. Any property including jewelry or saleable items is considered assets and can produce income. The asset value should have a fair market value, which means the amount of money they would have today if sold.
Conversely, liabilities are debts that decrease the net worth.
PERSONAL BALANCE SHEET:
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Balance Sheet of December 31st, 2013
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Assets
Liquid assets
Checking account balance $ 4,000
Savings $ 5,000
Money market account $ 11,000
Cash value of life insurance $ 250,000
Total liquid assets $ 270,000
Household assets
Current market value of home $ 235,000
Market value of vehicles $ 28,000
Jewelry $ 25,000
Studio/Stereo equipment $ 15,000
Total household assets $ 303,000
Investment assets
Individual retirement accounts $ 150,000
College certificate $ 10,000
Total investment assets $ 160,000
Total assets $ 733,000
Liabilities
Current Liabilities
Credit card balances $ 20,000
Car loan $ 16,000
Student loans $ 120,000
Personal loan $ 15,000
Mortgage $ 201,000
Total Liabilities $ 372,000
Net worth (assets minus liabilities) $ 361,000
To improve my client’s understanding of their finances, I am recommending that a cash flow statement be created. Because some people are unaware of their financial outlook, creating a cash flow statement will provide the structure needed, thus providing information such as where the money is going and how much is remaining at the end of the month. A plus to developing a cash flow statement is the ability to analyze the fixed expenses with the income and savings and modify as needed.
Latham’s cash flow statement.
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Monthly cash flow statement for December 31st, 2013
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Cash Outflows:
Mortgage $ 1,400
Property taxes $ 3,063
Car loan payment $ 565
Students loan $ 485
Credit card payments $ 600
Car/house/life insurance $ 250
Power $ 200
Water $ 70
Telephone $ 265
Gas/Transportation $ 400
Food $ 800
Clothing $ 100
Medical expenses $ 150
Entertainment $ 100
Gifts/donations $ 300
Total Outflows $ 8,748
Allocation of surplus:
Savings (Emergency Fund) $ 800
Saving Goal $ 300
Surplus $1,100
The next recommendation would be to develop a personal budget for the Latham’s. This will allow them to have the proper foundation to establish strong financial understanding, develop strong money management skills that will pave the way long time financial security. Hence, I will determine their monthly income and show expenses to determine where modifications need to take place.
IncomeActual Amt.PercentageProj Amount
Salary $7,083 $7,083
Expenses
Mortgage $1,400 $1,400
Property Tax $250 $250
Car Loan Payment $565 3% $548
student loan $485 4% $465
CC Payment $600 10% $540
House/Car/Life Ins $250 $250
Power $200 2%
Water $70 $70
Telephone $265 10% $239
Gas/Transportation $400 $400
Food $800 10% $720
Clothing $100 50% $50
Med Exp. $150 $150
Entertainment $100 50% $50
Gift/Donation $300 30% $210
Saving/Emergency $500 $1,000
Savings Goal $300 $600
Based on the data, there is room for financial improvement. I would advise my clients to request lower interest rates on both their credit cards and car loan, and request student loan consolidation. Also, reducing the power usage in the home, change telephone plans to something more cost effective, and attempt to use coupons for grocery shopping when at all possible. Lastly reduce any spending on gifts, entertainment, and clothing would help in improving the overall financial outlook. If the plan is followed, the Latham’s, would be able to increase the money deposited into the saving goal and emergency saving accounts. After a while, the money could be used to reduce the other debt. Having a personal budget is the blueprint for managing and spending finances. Use of the personal budget, gives you control over timely bill paying, monthly expenses, and provide an overall financial picture, so you know where you are each month. Utilizing a budget will allow better forecasting in long-term financial needs, which will help in better long-term savings, student loans can be paid sooner, and liquid cash can be readily available when needed. A personal budget is key in improving financial health.
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References
eHow. (2014).
Retrieved from http://www.ehow.com/how_4475033_start-personal-budget.html Jack R. Kapoor, L. R. (2009).
Personal Finance. In L. R. Jack R. Kapoor, Personal Financial Planner (pp. 1-69).
McGraw-Hill Company.
