Case Study

Jamie Lee and Ross are in their late 40s and their twins are about to start college. They have been researching the best way to invest their recent $50,000 inheritance. They are concerned that buying individual corporate stocks might be too risky, as they don't want to 'put all of their eggs in one basket. When speaking to a professional investment advisor, it was suggested to them that mutual funds might be the best choice to reduce that risk, as they would be investing in a variety of securities chosen by a professional fund manager. They are looking for a mutual fund that will provide both growth and income while maintaining a moderate risk since they still have some time before retirement.

Current Financial Situation

Assets (combined):

Checking account: $7,500

Savings account: $83,000 (includes the $50,000 inheritance)

Emergency fund savings account: $45,000

House: $410,000

IRA Balance: $78,000

Life insurance cash value: $110,000

Investments (stock, bonds): $230,000

Car: $18,500 (Jamie) and $24,000 (Ross)

Liabilities (combined):

Mortgage Balance: $73,000

Annual Income:

Jamie Lee: $45,000 gross ($31,500 net after taxes)

Ross: 135,000 gross ($97,200 net after taxes)

Monthly Expenses (combined):

Mortgage: $1,225

Property Taxes: $500

Homeowner's insurance: $300

IRA Contribution: $300

Utilities: $550

Food: $600

Gas/maintenance: $275

Entertainment: $300

Life insurance: $375

Directions

Read the above case study and answer the questions below. Upload your work to Canvas by the deadline.

Questions

1. Jamie Lee and Ross are considering investing their recent $50,000 inheritance in mutual funds. Answer the following:

• • Based on the narrative above, what different types of stock funds would you recommend they invest their inheritance in?
  • They are also curious about if managed funds or index funds would be a better choice. Briefly compare managed funds to index funds. Which fund type do you recommend for them and why?

1. The twins are about to start college and their rent for dorm rooms will be $7,500 per student, per year, for 4 years. Jamie Lee and Ross are also considering buying a small house instead of paying for dorm rooms. Answer the following:
   • What will be the total cost of rent for the twins if they stay in dorms for the entire 4 years?
   • If Jamie Lee and Ross purchased a small house near the college instead, what are some of the financial benefits of that decision?
   • What are some of the liabilities they can expect that are directly connected to owning a second home that might make them second-guess the purchase?