Can You Afford a New Car?

Suppose you have your eye on a new car, and your monthly after-tax income is $2,000. Your monthly expenses are as follows:

▲ Car insurance: $100

▲ Rent: 900

▲ Groceries: 300

▲ Entertainment: 200

▲ Utilities: 200

▲ Credit card payment: 100

▲ Other: 100 What is your net cash flow? Can you afford that new car? Why or why not?

What’s Wrong with This Picture?

Melody and Charles Verona have been married for less than one year and currently live in a one-bedroom apartment. They would like a bigger place to live and, with two incomes, they think they could afford to make mortgage payments on a small home or condominium.

Unfortunately, they don’t have enough money for a down payment yet, so they want to begin saving for this purpose. Over the past few months, Melody has been dismayed to find that they always seem to be a little short on cash at the end of the month. She decides to sit down with Charles to look more carefully at their spending habits and begin making a plan that will enable them to buy a house. The Veronas have collected the following financial information in preparation for evaluating their current finances and determining how much to save:

Cash Inflows Gross Income After-Tax Income Melody $22,000 $18,000 Charles 28,000 22,400 Cash Outflows Monthly Groceries $400 Eating out 200 Rent 950 Credit card payments 200 Telephone 50 Utilities 150 Car loan payments 360 Car expenses and fuel 160 Clothing 100 Entertainment 150 Health club membership 60 Travel and vacations 100 Assuming that these cash flows are accurate and complete, what is the Veronas’ net monthly cash flow? If the Veronas allocate their net cash flow to savings each month and they can earn 4 percent after taxes, how much will they have in the account after two years?

What is a possible explanation for why the Veronas are having cash flow problems each month? What would you suggest they do to identify the reasons for this problem?

Net Worth Construct a personal balance sheet by itemizing your assets and debts. You can use the blank forms in the Personal Financial Planner to do this. If you aren’t sure of an item’s value, estimate as best as you can. What is your net worth as of today?