Jack and Jill Smith live in the Midwestern suburb of Pleasantville. They have two children, ages 5 and 7. Jill is 39 years old and Jack is 40. Jack works as a marketing manager for a toy manufacturing company. Jack has been with this company for 10 years and his career is progressing well. He makes $72,000 per year (before taxes). Jill worked part-time at a department store for many years but quit her job after their second child was born.
Assume that their total income taxes (including Federal, State and FICA / Medicare) are $12,000 per year. Jack’s company offers a 401(K) plan (they do not however match any of his contributions). Jack contributes $12,000 per year to the 401(K) and he plans to continue contributing this amount every year until he retires. He has built up a balance of $40,000 in the 401k account so far. After excluding his 401(k) contribution Jack’s take home pay is $4000 per month.
They have a mortgage of $200,000 (monthly payment is $1000) on their home. Their home is worth $220,000. They own two cars – an SUV (worth about $12000) and a sedan (worth about $5000). They have a $10,000 car loan on the SUV, on which the monthly payment is $500. Their Property taxes on the home are $400 per month. Home insurance costs $400 per year and Auto Insurance is $1200 per year. The health insurance provided by Jack’s employer costs $100 per month. They spend $1100 per month on food and household items, $400 on Gas (plus maintenance for the cars), $200 per month on personal care (e.g. haircuts), clothing (and other personal needs) and $200 on entertainment (e.g. movies, eating out). They also spend $500 per month on utilities (including gas heating, electric/AC, phone, water etc).
Two years ago, Jack got interested in investing, opened an internet brokerage account, and bought $10,000 of a mutual fund. Jack carries a Term Life insurance policy with a Death benefit of $100,000 that is provided by his employer. Jill does not carry Life Insurance. Jack and Jill have often talked about preparing a will but have not gotten around to doing so. They have a Savings and Checking account at the bank with a balance of $6,000.
In answering the questions, assume that the description above covers their ENTIRE financial situation. If something that you think should be included is missing, it is because the Smiths have not set it up or considered it. You should include this in your recommendations.
Question 1 – General situation and expenses
Comment on their personal financial situation. If you were advising them as a friend (who is now becoming a Personal finance expert!),
List some things you would complement them on ?(i.e. good things they have done from a Personal Finance standpoint)
Calculate their liquidity ratio (use the formula from the text. Do not include the 401k in their liquid assets). Show your calculation. Analyze it. Do they have a sufficiently high emergency fund?
Calculate their savings ratio (use the formula from the text. Assume that 401k contributions are part of their savings). Make sure to consider their take-home after taxes and to compare that to what they are spending, while also factoring in the monthly 401k contribution. Show your calculation. Analyze it. Are they saving enough?
List (and briefly justify) 3 recommendations you would make to them, to improve their financial situation (now or in the future). Use the following format. The more detailed your justification, the better your chance of earning the full points.
Recommendation 1: ______________. Justification (2 – 3 sentences): ______________
Recommendation 2: ______________. Justification (2 – 3 sentences): ______________
Recommendation 3: ______________. Justification (2 – 3 sentences): ______________
