Ashton and Melody Webb are a married couple in their mid-20s. Ashton has a good start as an electrical engineer and Melody works as a sales representative. Since their marriage four years ago, Ashton and Melody have been living comfortably. Their income has exceeded their expenses, and they have accumulated an enviable net worth. This includes $10,000 that they have built up in savings and investments. Because their income has always been more than enough for them to have the lifestyle they desire, the Webb’s have done no financial planning.

Melody has just learned that she’s pregnant. She’s concerned about how they’ll make ends meet if she quits work after their child is born. Each time she and Ashton discuss the matter, he tells her not to worry because “we’ve always managed to pay our bills on time.” Melody can’t understand his attitude because her income will be completely eliminated. To convince Melody that there’s no need for concern, Ashton points out that their expenses last year, but for the common stock purchase, were about equal to his take-home pay. With an anticipated promotion and an expected 10 percent pay raise, his income next year should exceed this amount. Ashton also points out that they can reduce luxuries (trips, recreation, and entertainment) and can always draw down their savings or sell some of their stock if they get in a bind. When Melody asks about the long-run implications for their finances, Ashton says there will be “no problems” because his boss has assured him that he has a bright future with the engineering firm. Ashton also emphasizes that Melody can go back to work in a few years if necessary.

Despite Ashton’s arguments, Melody feels that they should carefully examine their financial condition in order to do some serious planning. She has gathered the following financial information for the year ending December 31, 2020

1. Using this information construct the Webb’s balance sheet and income and expense statement for the year ending December 31, 2020.

2. Comment on the Webb’s financial condition regarding 

(a) Solvency, 

(b) Liquidity, 

(c) Savings, 

(d) Ability to pay debts promptly. 

If the Webbs continue to manage their finances as described, what do you expect the long-run consequences to be? Discuss.

3. Critically evaluate the Webb’s approach to financial planning. Point out any fallacies in Ashton’s observations, and be sure to mention (a) implications for the long term, as well as (b) the potential impact of inflation in general and specifically on their net worth. What procedures should they use to get their financial house in order? Be sure to discuss the role that long- and short-term financial plans and budgets might play.

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Salaries Ashton Melody Item Food Take-home Pay $52,500 29,200 Clothing Mortgage payments, including property taxes of $1,400 Travel and entertainment card balances Gas, electric, water expenses Household furnishings Telephone Auto loan balance Common stock investments Bank credit card balances Federal income taxes State income tax Social security contributions Credit card loan payments Cash on hand 2015 Nissan Sentra Medical expenses (unreimbursed) Homeowner's insurance premiums paid Checking account balance Auto insurance premiums paid Transportation Cable television Estimated value of home Trip to Europe Recreation and entertainment Auto loan payments Money market account balance Purchase of common stock Gross Salary $76,000 42,000 Addition to money market account Mortgage on home Amount $ 5,902 1,990 22,472 2,300 11,028 2,000 85 4,500 640 4,650 7,500 675 5,040 9,027 2,210 10,500 600 1,300 485 1,600 2,800 680 185,000 5,000 4,000 2,150 2,500 7,500 500 148,000