Courtney Bennett recently graduated from college and accepted a position in Manhattan, Kansas, as an assistant librarian in the public library. Courtney has no debts, and her budget is shown in the first column (no debt) of Table 6-2 on page 173. She now faces the question of whether to trade in her old car for a new one requiring a monthly payment of $330. Taking the role of a good friend of Courtney, suggest how Courtney might cut back on her expenses so that she can afford the vehicle.

a. What areas might be cut back?

b. How much in each area might be cut back?

c. After finishing your analysis, what advice (and possibly alternatives) would you offer Courtney about buying the new car?

Financial Planning Case 7: Debt Consolidation as a Debt Reduction Strategy

Justin Granovsky, an assistant manager at a small retail shop in Lubbock, Texas, had an unusual amount of debt. He owed $5400 to one bank, $1800 to a clothing store, $2700 to his credit union, and several hundred dollars to other stores and individuals. Justin was paying more than $460 per month on the three major obligations to pay them off when due in two years. He realized that his take-home pay of slightly more than $2100 per month did not leave him with much excess cash. Justin discussed a different way of handling his major payments with his banks loan officer. The officer suggested that he pool all of his debts and take out an $11,000 debt-consolidation loan for seven years at 21 percent. As a result, he would pay only $250 per month for all his debts. Justin seemed ecstatic over the idea.

a. Is Justins enthusiasm over the idea of a debt consolidation loan justified? Why or why not?

b. Why can the bank offer such a good deal to Justin?

c. What compromise would Justin make to remit payments of only $250 as compared with $460?

d. How much total interest would Justin pay over the seven years, and what would be a justification for this added cost?