9. Preparing a budget A cash-flow budget uses the same format as a cash-flow statement. It is prepared on a monthly basis and it reflects budgeted income and expenses. In addition to the cash-flow statement, Deon and May made a list of budget assumptions, listed for you here: Deon's income will increase by 5%, effective January 1. His bonus is generally 10% of his income in the previous year, and he receives it in January, May's raise will be 3%, effective January 1. Interest and dividend income will conservatively be the same in 2017 as it was in 2016 and will be received on a monthly basis. Mortgage payments will be the same in 2017 as they were in 2016. Federal income taxes are estimated at 20%, state income taxes at 6%, and social security taxes at 7.65% of wages, including Deon's bonus. Property insurance and property taxes are paid every six months, in June and December. The amount is expected to be the same in 2017 as it was in 2016. May will contribute $60 per week for the employee portion of their medical insurance. Auto insurance is paid at the end of each calendar quarter and should not be more than it was in 2016. Deon and May would like to purchase a new car in the next few years and will put $500 a month away specifically for that purpose. Deon and May don't expect the amount of variable expenses to change in 2017 except that they would like to double their charitable contributions. Gift purchases are made mostly around the holidays, so Deon and May are planning to pay half of the gift expense in December and half in January when the credit card bill comes in. Water and sewer is billed quarterly, in January, April, July, and October. The cost of heat should be spread over six months from November to April. All other variable expenses can be spread evenly every month at 2016 amounts. Use the information from their cash-flow statement (listed in the first column of the following annual budget) and their budget assumptions to fill in the missing amounts for the first six months of Deon and May's monthly budget for 2017. (Note: Be sure to fill in every blank space with a value. Round each answer to the nearest dollar.) Annual Budget Name: Deon and May Daley 2017 Cash-Flow Statement 2016 Jan. Feb. Mar. 4,900 4,900 4,900 INCOME Deon's salary May's salary Deon's Bonus Interest and dividends 4,326 4,326 4,326 56,000 50,400 5,000 150 0 0 13 13 13 $111,550 $9,239 $9,239 Total Income EXPENDITURES Fixed Expenses Mortgage 1,176 1,176 1,176 14,112 12,200 980 980 3,660 294 294 375 375 4,667 10,080 3,024 865 865 865 260 260 260 331 14488800908 331 331 0 0 0 0 3,856 4,600 1,200 2,400 700 0 Deon's federal income taxes Deon's state income taxes Deon's social security taxes May's federal income taxes May's state income taxes May's social security taxes Property taxes Property insurance Medical insurance Automobile insurance and registration Savings for auto purchase Total Fixed Expenses Variable Expenses Food Entertainment Dining out Electric 0 0 240 240 240 0 500 500 500 $60,499 $5,021 158 158 158 1,896 3,000 4,700 250 250 250 392 392 392 350 29 29 29 Water and sewer 800 0 0 Heat 1,250 208 208 208 Cable TV 3,000 250 250250 250 Telephone 600 50 50 50 Cell phone 900 75 75 75 2,000 600 50 50 50 Gifts Personal care Medical expenses Vehicle gas and maintenance 3,700 308 308 308 2,530 211 211 211 1,500 250 250 250 Charitable contributions Vacation Total Variable Expenses $26,826 $2,231 $87,325 Total Expenses SURPLUS (DEFICIT) : $2,231 $7,252 $1,987 $7,427 $24,225 $1,812 Deon and May have an emergency fund of $40,000. They would like to start saving for retirement, but they have not signed up for their companies' 401(k) plans. Neither company matches 401(k) contributions. What do you suggest for Deon and May based on their goals and the budget that they have put together? The $40,000 that the Daleys have saved for an emergency is three months of expenses. They have not, however, taken advantage of the employer 401(k) plans that are available to them. If an employer does not match contributions, it is advantageous to contribute to a company-sponsored retirement savings plan because the contributions to the plan are invested with earnings. If the Daleys invest part of their surplus in their 401(k) plans, they will save the designated amount plus another of that amount because of the tax savings. 9. Preparing a budget A cash-flow budget uses the same format as a cash-flow statement. It is prepared on a monthly basis and it reflects budgeted income and expenses. In addition to the cash-flow statement, Deon and May made a list of budget assumptions, listed for you here: Deon's income will increase by 5%, effective January 1. His bonus is generally 10% of his income in the previous year, and he receives it in January, May's raise will be 3%, effective January 1. Interest and dividend income will conservatively be the same in 2017 as it was in 2016 and will be received on a monthly basis. Mortgage payments will be the same in 2017 as they were in 2016. Federal income taxes are estimated at 20%, state income taxes at 6%, and social security taxes at 7.65% of wages, including Deon's bonus. Property insurance and property taxes are paid every six months, in June and December. The amount is expected to be the same in 2017 as it was in 2016. May will contribute $60 per week for the employee portion of their medical insurance. Auto insurance is paid at the end of each calendar quarter and should not be more than it was in 2016. Deon and May would like to purchase a new car in the next few years and will put $500 a month away specifically for that purpose. Deon and May don't expect the amount of variable expenses to change in 2017 except that they would like to double their charitable contributions. Gift purchases are made mostly around the holidays, so Deon and May are planning to pay half of the gift expense in December and half in January when the credit card bill comes in. Water and sewer is billed quarterly, in January, April, July, and October. The cost of heat should be spread over six months from November to April. All other variable expenses can be spread evenly every month at 2016 amounts. Use the information from their cash-flow statement (listed in the first column of the following annual budget) and their budget assumptions to fill in the missing amounts for the first six months of Deon and May's monthly budget for 2017. (Note: Be sure to fill in every blank space with a value. Round each answer to the nearest dollar.) Annual Budget Name: Deon and May Daley 2017 Cash-Flow Statement 2016 Jan. Feb. Mar. 4,900 4,900 4,900 INCOME Deon's salary May's salary Deon's Bonus Interest and dividends 4,326 4,326 4,326 56,000 50,400 5,000 150 0 0 13 13 13 $111,550 $9,239 $9,239 Total Income EXPENDITURES Fixed Expenses Mortgage 1,176 1,176 1,176 14,112 12,200 980 980 3,660 294 294 375 375 4,667 10,080 3,024 865 865 865 260 260 260 331 14488800908 331 331 0 0 0 0 3,856 4,600 1,200 2,400 700 0 Deon's federal income taxes Deon's state income taxes Deon's social security taxes May's federal income taxes May's state income taxes May's social security taxes Property taxes Property insurance Medical insurance Automobile insurance and registration Savings for auto purchase Total Fixed Expenses Variable Expenses Food Entertainment Dining out Electric 0 0 240 240 240 0 500 500 500 $60,499 $5,021 158 158 158 1,896 3,000 4,700 250 250 250 392 392 392 350 29 29 29 Water and sewer 800 0 0 Heat 1,250 208 208 208 Cable TV 3,000 250 250250 250 Telephone 600 50 50 50 Cell phone 900 75 75 75 2,000 600 50 50 50 Gifts Personal care Medical expenses Vehicle gas and maintenance 3,700 308 308 308 2,530 211 211 211 1,500 250 250 250 Charitable contributions Vacation Total Variable Expenses $26,826 $2,231 $87,325 Total Expenses SURPLUS (DEFICIT) : $2,231 $7,252 $1,987 $7,427 $24,225 $1,812 Deon and May have an emergency fund of $40,000. They would like to start saving for retirement, but they have not signed up for their companies' 401(k) plans. Neither company matches 401(k) contributions. What do you suggest for Deon and May based on their goals and the budget that they have put together? The $40,000 that the Daleys have saved for an emergency is three months of expenses. They have not, however, taken advantage of the employer 401(k) plans that are available to them. If an employer does not match contributions, it is advantageous to contribute to a company-sponsored retirement savings plan because the contributions to the plan are invested with earnings. If the Daleys invest part of their surplus in their 401(k) plans, they will save the designated amount plus another of that amount because of the tax savings