Mini Case #1

The case is solved in several steps. The first step includes calculation of available funds as the sum of excess budget (growing by the inflation rate each year), difference between Denises full time and part time wages (also subject to inflation effect), merit increase of Mannys wage over the years 2 to 11 (subject to inflation effect), and excess amount of re-mortgage loan received in year 1.

The second stage is devoted to defining mortgage expenses (annual payments) if the family decides to re-mortgage its house. Such decision appears to be appropriate as they will bear less monthly cash outflows for mortgage which decline from USD 1,867 to USD 1,799 per month. Besides, the family will receive excess funds remaining after the old mortgage repayment with the new loan in the amount of USD 94,831 in year 1. Besides, other expenses of USD 11,400 per year such as medical insurance, real estate tax, etc. were deducted. It provides the amount available for investment in any of the three goals or putting it on the fully taxable bank account.

Analysing goal 1, it can be mentioned that the balance of James bank account will reach necessary amount when he turns 18, while Marcus needs additional funds to cover future education expense (subject to inflation). Thus, USD 10,000 in year (received as excess re-mortgage funds) into Marcus bank account were arranged in the following table.

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Table 1. Goal 1. Education of Children

James

Marcus

Necessary amount

James account

Marcus account

Marcus account, with investment

5

8

$38 500,00

$34 200,00

$20 500,00

$30 500,00

6

9

$39 462,50

$36 765,00

$22 037,50

$32 787,50

7

10

$40 449,06

$39 522,38

$23 690,31

$35 246,56

8

11

$41 460,29

$42 486,55

$25 467,09

$37 890,05

9

12

$42 496,80

$45 673,04

$27 377,12

$40 731,81

10

13

$43 559,22

$49 098,52

$29 430,40

$43 786,69

11

14

$44 648,20

$52 780,91

$31 637,68

$47 070,70

12

15

$45 764,40

$56 739,48

$34 010,51

$50 601,00

13

16

$46 908,51

$60 994,94

$36 561,30

$54 396,07

14

17

$48 081,22

$65 569,56

$39 303,39

$58 475,78

15

18

$49 283,25

$70 487,28

$42 251,15

$62 861,46

16

19

$50 515,34

$75 773,83

   

17

20

$51 778,22

$81 456,86

   

18

21

$53 072,68

$87 566,13

   

As investing in a vacation home requires down payment of 20% and consequent outflows for mortgage and tax expenses, the family has to save money for at least 10 years in order to afford this mortgage. Thus, the second goal is attainable but should be postponed.

Also, the family has problems with attaining goal 3 related to providing certain level of income after retirement. Therefore, it is necessary that Denise invests part of its current salary into her tax deferred account now. With the current level of income, the family can afford investing up to 5% of Denises part time salary into this account.

During the last stage, we calculate full taxable account balance and interest income received on it for the family. Summary of the resulting financial position is presented below.

Table 2. Financial Plan of Manny and Denise

Manny / Denise

James

Marcus

Year

Total excess budget

Other expenses

Cash outflow on remortgage

Goal 1

Goal 2

Goal 3

Balance

Annual interest

Bank account balance

43

5

8

1

118 831

-11 400

-21 586

-10 000

 

-5 270

70 575

260

104 403

44

6

9

2

27 245

-11 400

-21 586

   

-5 521

-11 262

233

93 373

45

7

10

3

27 941

-11 400

-21 586

   

-5 659

-10 705

207

82 875

46

8

11

4

28 655

-11 400

-21 586

   

-5 802

-10 133

182

72 925

47

9

12

5

29 388

-11 400

-21 586

   

-5 947

-9 546

158

63 537

48

10

13

6

30 139

-11 400

-21 586

   

-6 097

-8 944

136

54 730

49

11

14

7

30 910

-11 400

-21 586

   

-6 250

-8 326

116

46 519

50

12

15

8

31 700

-11 400

-21 586

   

-6 407

-7 693

97

38 923

51

13

16

9

32 511

-11 400

-21 586

   

-6 568

-7 043

80

31 960

52

14

17

10

33 342

-11 400

-21 586

 

-21 931

-6 733

-28 308

9

3 661

53

15

18

11

112 280

-11 400

-21 586

 

-21 931

-22 749

34 615

96

38 372

54

16

19

12

111 527

-11 400

-21 586

 

-21 931

-22 962

33 649

180

72 201

55

17

20

13

114 316

-11 400

-21 586

 

-21 931

-23 536

35 863

270

108 334

56

18

21

14

117 173

-11 400

-21 586

 

-21 931

-24 124

38 133

366

146 833

57

19

22

15

120 103

-11 400

-21 586

 

-21 931

-24 727

40 459

468

187 761

58

20

23

16

123 105

-11 400

-21 586

 

-21 931

-25 345

42 843

577

231 181

59

21

24

17

126 183

-11 400

-21 586

 

-21 931

-25 979

45 287

691

277 159

60

22

25

18

129 338

-11 400

-21 586

 

-21 931

-26 628

47 793

812

325 764

61

23

26

19

132 571

-11 400

-21 586

 

-21 931

-27 294

50 360

940

377 065

62

24

27

20

135 885

-11 400

-21 586

 

-21 931

-27 976

52 992

1 075

431 132

63

25

28

21

139 282

-11 400

-21 586

 

-21 931

-28 676

55 690

1 217

488 039

64

26

29

22

142 764

-11 400

-21 586

 

-21 931

-29 393

58 455

1 366

547 860

65

27

30

23

146 334

-11 400

-21 586

 

-21 931

-30 127

61 289

1 523

610 673

66

28

31

24

149 992

-11 400

-21 586

 

-21 931

-30 881

64 195

1 687

676 554

67

29

32

25

153 742

-11 400

-21 586

 

-21 931

-31 653

67 172

1 859

745 586

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Mini Case #2

In order to define the amount of life insurance needed to be purchased by Manny and Denise, we first calculate total expenses born by the family using the data of case #1 for their income and excess budget. Then, we adjust the amount of expenses by possible decline in costs related to death of one of the parent and by future decreases in expenses due to the fact that children graduate from colleges. Finally, two cases were calculated: if either Manny or Denise is left as a single parent with his/her adjusted income and added social security. The amount of life insurance to be purchased is defined as the difference between the family income (in case one of the parents dies) and family expenses, which is defined as shortage in the table below.

Table 3. Life Insurance Calculation

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James

Mar-cus

Excess budget

Total expenses

Expenses in case of death / graduation

Denise salary

Manny's salary

Social security

 

Income if Manny dies

Shortage

 

Income if Denise dies

Shortage

5

8

24 000

-90 000

-83 500

28 000

86 000

18 400

 

46 400

-37 100

 

54 400

-29 100

6

9

24 480

-91 800

-85 300

28 560

87 720

18 400

 

46 960

-38 340

 

73 888

-11 412

7

10

24 970

-93 636

-87 136

29 131

89 474

18 400

 

47 531

-39 605

 

93 766

6 630

8

11

25 469

-95 509

-89 009

29 714

91 264

18 400

 

48 114

-40 895

 

114 041

25 032

9

12

25 978

-97 419

-90 919

30 308

93 089

18 400

 

48 708

-42 211

 

134 722

43 803

10

13

26 498

-99 367

-92 867

30 914

94 951

18 400

 

49 314

-43 553

 

155 816

62 949

11

14

27 028

-101 355

-94 855

31 533

96 850

18 400

 

49 933

-44 922

 

177 333

82 478

12

15

27 568

-103 382

-96 882

32 163

98 787

18 400

 

50 563

-46 319

 

199 279

102 398

13

16

28 120

-105 449

-98 949

32 806

100 763

18 400

 

51 206

-47 743

 

221 665

122 716

14

17

28 682

-107 558

-101 058

33 463

102 778

18 400

 

51 863

-49 196

 

244 498

143 440

15

18

29 256

-198 232

-191 732

113 928

113 560

18 400

 

132 328

-59 405

 

131 960

-59 772

16

19

29 841

-202 197

-195 697

116 206

115 832

9 200

 

125 406

-70 291

 

125 032

-70 665

17

20

30 438

-206 241

-199 741

118 530

118 148

9 200

 

127 730

-72 010

 

127 348

-72 392

18

21

31 047

-210 365

-203 865

120 901

120 511

9 200

 

130 101

-73 765

 

129 711

-74 154

19

22

31 667

-214 573

-203 073

123 319

122 921

   

123 319

-79 754

 

122 921

-80 151

20

23

32 301

-218 864

-207 364

125 785

125 380

   

125 785

-81 579

 

125 380

-81 984

21

24

32 947

-223 242

-211 742

128 301

127 887

   

128 301

-83 441

 

127 887

-83 854

22

25

33 606

-227 706

-211 206

130 867

130 445

   

130 867

-80 339

 

130 445

-80 761

23

26

34 278

-232 260

-215 760

133 484

133 054

   

133 484

-82 276

 

133 054

-82 706

24

27

34 963

-236 906

-220 406

136 154

135 715

   

136 154

-84 252

 

135 715

-84 690

25

28

35 663

-241 644

-225 144

138 877

138 430

   

138 877

-86 267

 

138 430

-86 714

26

29

36 376

-246 477

-229 977

141 655

141 198

   

141 655

-88 322

 

141 198

-88 779

27

30

37 104

-251 406

-234 906

144 488

144 022

   

144 488

-90 419

 

144 022

-90 884

28

31

37 846

-256 434

-239 934

147 377

146 903

   

147 377

-92 557

 

146 903

-93 032

29

32

38 602

-261 563

-245 063

150 325

149 841

   

150 325

-94 738

 

149 841

-95 222

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