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.
Place New Order
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 |