2.1 The Gordons' Version of Financial Planning Burt and Emily Gordon are a married couple in their mid-20s. Burt has a good start as a bank manager and Emily works as a sales representative. Since their marriage 4 years ago, Burt and Emily have been living comfortably. Their income has exceeded their expenses, and they have accumulated an enviabie net worth. This includes the $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 Gordons have done no financial planning Emily has just learned that she's 2 months pregnant. She's concerned about how they'll make ends meet it she quits work after their child is born. Each time she and Burt discuss the matter, he tells her not to worry because we've always managed to pay our bills on time." Emily can't under- stand his attitude, because her income will be completely eliminated. To convince Emily there's no need for concern, Burt 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 to a managerial position and an expected 10% pay raise, his income next year should exceed this amount. Burt 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 Emily asks about the long-run implications for their finances, Burt says there will be no problems" because his boss has assured him that he has a bright future with the bank. Burt also emphasizes that Emily can go back to work in a few years it necessary Despite Burt's arguments, Emily 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, 2010. Salaries Take-home Pay Gross Salary Bart $44.200 $54.000 Emily 25,048 35,000 Item Amount Food $5,902 Clothing 2300 Mortgage payments, including property taxes of $1,400 11.028 Travel and entertainment card balances 2.000 Gas, electric water expenses 1.990 Household furnishings 4,500 Telephone 840 Auto loan balance 4,650 Common stock investments 7.500 Bank credit card balances 575 Federal income taxes 19.044 State income tax 4,058 Social security contributions 7.650 Credit card loan payments 2210 Cash on hand 85 2007 Nissan Sentra 15.000 Medical expenses (unreimbursed} 800 Homeowner's insurance premiums paid 1.300 Checking account balance 485 Auto insurance premiums paid 1.800 Transportation 2.800 Cole won 600 Estimated value of bome 185.000 This to Europe 5000 Formation and entertawa 4000 Auto loan payments 2150 Meny market account balance 2500 Puchase of common stock 7.520 Addition to money market account 520 Mortgage an dome 148.000 Critical Thinking Questions 1. Using this information and Workshouts 2.1 and 22 construct the Gordons" balance sheet and income and expense statement for the year ending December 31, 2010 2. Comment on the Gordons financial condition regarding insolvency, b) liquidity, (c) savings, and Id) ability to pay debts promptly. If the Gordons continue to manage their finances as described, what do you expect the long run consequences to be? Discuss 3. Critically evaluate the Gordon's approach to financial planning, Point out any fallacies in Burt's argu- ments, and be sure to mention (a) implications for the long term as well as 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 plons and budgets might play 2.2 Jim Pavlov Learns to Budget Jim Pavlov graduated from college in 2009 and moved to Atlanta to take a job as a market research anolyst. He was pleased to be financially independent and was sure that with his $45,000 salary, he could cover his living expenses and have plenty of money left over to furnish his studio apartment and enjoy the wide variety of social and recreational activities available in Atlanta. He opened several department-store charge accounts and obtained a bank credit card For a while, Jim managed pretty well on his monthly take home pay of $2.893, but by the end of 2010, he was having trouble fully paying all his credit card charges each month. Concerned that his sponding had gotten out of control and that he was barely making it from paycheck to paycheck, ho decided to list his expenses for the past calendar year and develop a budget . He hoped not only to reduce his credit card debt but also to begin a regular savings program Jim prepared the following summary of expenses for 2010, Item Annual Expenditure Font $12.000 Auto insurance 7.855 Autolon games 3.840 Auto perseguei andes 1.560 Clothing 3.2220 Interfon or store 50 Person Phone 500 Cable TV 440 Gas and actricity 1.080 Medical care 120 Det 20 Groceries 2.500 Diving out 2.500 Fumine purchases 1.200 Record entram 2.900 Otherapies 500 After reviewing his 2010 expenses, Jim made the following assumptions about his expenses for 2011 1. All expenses will remain at the same levels, with these exceptions Auto insurance, auto expenses, gas and electricity and groceries will increase 5% b. Clothing purchases will decrease to 52,250, 3 Read the attached case study case 2-1 The Gordons' Version of Financial Planning and answer the following questions 1- Using this information and Worksheets 2 1 and 22 construct the Gordons balance sheet and income and expense statement for the year ending December 31, 2010 2 Comment on the Gordons financial condition regarding (a) solvency, (b) liquidity. (c) savings, and (d) ability to pay debts promptly If the Gordons continue to manage their finances as described, what do you expect the long-run consequences to be? Discuss 3. Critically evaluate the Gordon's approach to financial planning Point out any fallacies in Burt's arguments, and be sure to mention () 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