Your friend, Cindy Brady, has come to you for advice. She graduated from college a three years ago. She was hired right out of college by a firm she had interned with the summer before her senior year. Her salary is $50,000/year. She has health and dental insurance through her employer (premiums are deducted from paycheck). They also offer a 401(k) that she is eligible for. During college, she had always planned to begin contributing to a 401(k) with her first paycheck, but she was not eligible with this employer until she worked there for one full year. By the time she was eligible, she had purchased a new car, so still didn’t begin contributing. She was able to pay her credit cards off, but shortly after that, she moved to a nicer (and more expensive) apartment with some friends, so she still doesn’t seem to have any of her paycheck left, and still has not started saving for retirement. She knows that the longer she waits to begin saving, the harder it will be so she has come to you for advice on how she can get her budget under control and start saving.
Cindy has previously written out her budget and expects to have almost $300 left over that she would use to begin saving, but her savings accounts never seems to grow. Also, a few years ago, Cindy found herself with rising credit card debt and she was beginning to have difficulty making even the minimum monthly payments. She made some spending changes and began making higher than minimum payments a few months ago and has reduced the balance somewhat, but they are taking longer to pay off than she expected.
Cindy knows you can help her to get her financial house in order. She has brought you her paycheck stub, the budget she did when she began working and other statement information. She tells you that she wants to start saving for retirement and pay off her credit cards, but doesn’t really know where to start. She has also heard that you are supposed to have an Emergency Fund, but doesn’t know is she really needs one or how much it should be. She asks you what she can do to help her build financial security. Read through and assimilate the following information and help Cindy reach her goals:
Monthly Paycheck:
Gross Salary 4,167
FICA Tax XXXXXXXXXX
Fed w/h XXXXXXXXXX
State w/h XXXXXXXXXX
Health Insurance XXXXXXXXXX
Dental Insurance XXXXXXXXXX
Net Paycheck 3,293
Budget:
Paycheck XXXXXXXXXX3,293
Expenses:
XXXXXXXXXXRent XXXXXXXXXX,200
XXXXXXXXXXStudent Loan payment 300
XXXXXXXXXXAuto Payment XXXXXXXXXX
XXXXXXXXXXAuto Insurance & Fuel 250
XXXXXXXXXXUtilities XXXXXXXXXX
XXXXXXXXXXGroceries XXXXXXXXXX
XXXXXXXXXXMisc Exp/Entertainment 300
Surplus XXXXXXXXXX293
Statement Balances:
Auto Loan XXXXXXXXXX,000
Student Loan XXXXXXXXXX,000
Credit Card Balance XXXXXXXXXX,500
Checking Account XXXXXXXXXX,500
Savings Account XXXXXXXXXX
Other Assets (Market Value):
Car XXXXXXXXXX,000
Personal Property XXXXXXXXXX,000
Cindy has tracked her spending using her checking account and credit card statements. Below are her ACTUAL average Monthly Expenses:
Rent XXXXXXXXXX1,200
Student Loan payment (income-driven plan XXXXXXXXXX
Car Payment XXXXXXXXXX400
Auto Insurance & Fuel XXXXXXXXXX
Renter’s Insurance XXXXXXXXXX50
Food (groceries) XXXXXXXXXX350
Utilities XXXXXXXXXX350
Entertainment/ Miscellaneous (includes eating out) 500
Clothing XXXXXXXXXX125
ATM withdrawals XXXXXXXXXX160
Credit Card Payment XXXXXXXXXX100
(More than minimum, but doesn’t pay in full)
Financial Statements & Analysis:
1. Assemble Cindy’s Net Worth Statement. Be sure to label categories, subcategories and accounts as appropriate. (use a separate sheet of paper)
2. Assemble Cindy’s monthly Budget. (use a separate sheet of paper)
3
4. Current Ratio?
5. Debt Ratio?
6. What is Cindy’s monthly Surplus/Deficit?
7. Is Cindy’s monthly rent payment in-line with accepted recommendations? Explain.
8. Savings Rate (use gross income)
9. Is Cindy meeting her stated monthly budgeting goals? Support your answer.
10. If not, give at least two specific suggestions to correct this.
Liquidity & Debt Management:
11. Is Cindy’s Emergency Fund sufficient? If not, what amount should he be working towards? Explain.
12. Why is it taking Cindy so long to pay off her credit cards? (give at least 2 primary reasons)
13. Comment on Cindy’s student loan repayment plan and any concerns or suggestions you have for her.
Retirement Savings:
14. Since Cindy was not eligible for her company’s 401k during her first year of employment, what could she have done to stick with her plan of beginning to save for retirement with her first paycheck?
Writing Assignment
It should be in essay form and a minimum of 500 substantive words. Cindy’s three stated goals are to 1) save for Retirement, 2) pay off Credit Cards, and 3) build a Safety Fund. Make SPECIFIC recommendations to Cindy that will enable her to achieve these and begin building financial security. Support your recommendations. Your answer should include, but is not limited to, the following:
- Summarize Cindy’s current situation, pointing out flaws and why they are detrimental.
- Why are each of Cindy’s goals important and what can she do to achieve them? Make specific recommendations – make sure recommendations are realistic and remember SMART guidelines.
- What are the consequences of Cindy not starting to save for retirement early?
- How much should Cindy be saving for retirement?
- Once Cindy has a plan to improve her situation, how can she make sure she stays on track?
- If available, should Cindy contribute to a Traditional or Roth 401(k)? Compare the two alternatives and explain your conclusion.
- Could Cindy also fund an IRA? Explain the pros and cons, versus a 401(k).
- Any other goals/recommendations you have for Cindy and why you are recommending them.