Chapter 2 Critical Thinking Case 1 The Beckers' Version of Financial Planning

Terry and Evelyn Becker are a married couple in their mid-20s. Terry has a good start as an electrical engineer and Evelyn works as a sales representative. Since their marriage four years ago, Terry and Evelyn 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 Beckers have done no financial planning.

Evelyn 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 Terry discuss the matter, he tells her not to worry because "we've always managed to pay our bills on time." Evelyn can't understand his attitude because her income will be completely eliminated. To convince Evelyn that there's no need for concern, Terry 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. Terry 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 Evelyn asks about the long-run implications for their finances, Terry says there will be "no problems" because his boss has assured him that he has a bright future with the engineering firm. Terry also emphasizes that Evelyn can go back to work in a few years if necessary.

Despite Terry's arguments, Evelyn 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, 2017.

Salaries		Take-home Pay		Gross Salary
Terry		$52,500		$76,000
Evelyn		29,200		42,000
Item				Amount
Food				$5,902
Clothing				2,300
Mortgage payments, including property taxes of $1,400				11,028
Travel and entertainment card balances				1,900
Gas, electric, water expenses				1,990
Household furnishings				4,500
Telephone				780
Auto loan balance				4,650
Common stock investments				8,000
Bank credit card balances				575
Federal income taxes				22,472
State income tax				5,040
Social security contributions				9,027
Credit card loan payments				2,210
Cash on hand				85
2012 Nissan Sentra				15,200
Medical expenses (unreimbursed)				600
Homeowner's insurance premiums paid				1,300
Checking account balance				485
Auto insurance premiums paid				1,600
Transportation				2,800
Cable television				680
Estimated value of home				185,000
Trip to Europe				5,100
Recreation and entertainment				4,000
Auto loan payments				2,150
Money market account balance				2,800
Purchase of common stock				7,000
Addition to money market account				400
Mortgage on home				148,000

Using this information and Worksheet 2.1 and Worksheet 2.2, construct the Beckers' balance sheet and income and expense statement for the year ending December 31, 2017. Enter all expense amounts as positive values.

Balance Sheet
Name(s): Terry & Evelyn Beckers				Date: December 31, 2017
ASSETS				LIABILITIES
Liquid assets:				Current liabilities:
Cash on hand	$			Bank credit card balances	$
In checking				Travel & entertainment card balances
Money market funds and deposits
Investments:				Long-term liabilities:
Stocks				Primary residence mortgage
				Auto loans
Real Property:
Primary residence
Auto(s): 2012 Nissan				(II) TOTAL LIABILITIES	$
Household furnishings
				NET WORTH [(I) - (II)]	$
(I) TOTAL ASSETS	$			TOTAL LIABILITIES & NET WORTH	$

Income & Expense Statement
Name(s): Terry and Evelyn Beckers
For the Year	Ending		December 31, 2017
INCOME			AMOUNT
Terry		$
Evelyn
	TOTAL INCOME	$
EXPENSES
Mortgage payments		$
Gas, electric, water
Phone
Cable TV
Food
Auto loan payments
Transportation expense
Medical expenses - unreimbursed
Clothing expense
Homeowner's insurance premiums
Auto insurance premiums
Income and Social Security taxes paid
Vacation (Trip to Europe)
Recreation and entertainment
Credit card loan payments
Purchase of common stock
Addition to money market account
	TOTAL EXPENSES	$
	CASH SURPLUS (DEFICIT)	$

Comment on the Beckers' financial condition regarding (a) solvency, (b) liquidity, (c) savings, and (d) ability to pay debts promptly. Round the answers to two decimal places. Enter your answers as a percentage.

a.	Solvency ratio	%
b.	Liquidity ratio	%
c.	Savings ratio	%
d.	Debt Service ratio	%

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

Critically evaluate the Beckers' approach to financial planning. Point out any fallacies in Terry'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.