FIN2338 Group Assignment 1- Net Worth and Cash Flow

David and Amanda

David, age 27, and his fiance Amanda, age 23, have just purchased a new home together in Barrhaven. The purchase price of the house was $270,000. David and Amanda put $20,000 towards a down payment, and have a 25-year mortgage for $250,000. They have a fixed rate of 3.59% for the next 4 years, at which point they will renew. Currently, their monthly mortgage payment, including the CMHC premium, is $1,320. Property tax is $2820 annually, and water tax $420 annually. They average about $240 per month for electricity bills.

David is a software programmer and works as an independent consultant. His current contract is with the federal government where he makes $4,500 per month gross. As he is self employed, David is not a member of any group benefits or pension plan. He has an RRSP to which he contributes $250 per month, and the current balance is $13,200. He also has $3,500 in his TFSA to which he contributes $100 per month. David pays $110 per month for his individual disability insurance plan.

Amanda, a recent graduate of the finance major at Algonquin College, works as an account manager at Scotiabank and has a salary of $45,000 gross. She is a member of her company's group benefits plan where she has life, disability, medical and dental insurance. David has spousal coverage under the medical and dental portion of her plan. Amanda's monthly insurance premiums are $130. She is also a member of the Scotiabank non-contributory pension plan (that is, she makes no contributions), which has a current value $11,300. Amanda currently has $5,600 in her TFSA, to which she contributes $250 per month.

Both Amanda and David are quite active, they both have gym memberships - Amanda pays $55 per month, David $360 per year. Between the two of them, they spend about $150 per week on groceries and another $100 on eating out at restaurants. Amanda typically spends $100 monthly on her hair and cosmetics. David is a casual smoker and spends an equivalent amount on cigarettes. David's cell phone costs him about $80 per month while Amanda pays $110 monthly. They've just recently purchased a new HDTV and upgraded their cable tv package which is now $115 per month. David spends an average of $900 per year on clothing, while Amanda spends twice as much. They spend $1,000 each on Christmas gifts each year.

David drives a Honda Civic, which he paid off just last year. He spends about $40 per week on gas, and insurance costs are $120 per month. Amanda recently purchased a new Toyota Yaris but had to seek financing for the purchase. She has a 60-month loan at 4.99% and her monthly payments are $242. She also spends about $40 per week on gas, but her car insurance costs are only half of David's. Currently, Amada's car is worth $14,000 and David's is worth about $7,500.

David and Amanda both have student loans. David has a balance of $5,800 and is paying $220 per month, whereas Amanda still owes $9,450 and her monthly payment is $245. They have taken out a joint line of credit with a limit of $15,000 and the current balance is $0. Both David and Amanda use credit cards for the majority of their purchases. David has a limit of $2,500 and a current balance of $1,350. Amanda's credit card limit is $3,000 and her current balance is $0.

David has a savings account with a balance of $1,340 while Amanda's savings account balance is $775. They have a joint chequing account with a balance of $1,100.

Your Assignment

1. Determine both David and Amanda's income tax situation. You can assume they are both residents of Ontario, and you can use this resource: http://www.ey.com/CA/en/Services/Tax/Tax-Calculators-2019-Personal-Tax

a)How much income tax does David pay (annually)?

b)What is David's after-tax annual income?

c)What is David's MARGINAL tax rate?

d)What is David's AVERAGE tax rate?

e)How much income tax does Amanda pay (annually)?

f)What is Amanda's after-tax annual income?

g)What is Amanda's MARGINAL tax rate?

h)What is Amanda's AVERAGE tax rate?

1. Suggest a Net Worth Statement for David and Amanda indicating both individual and combined household figures. USE THE TEMPLATE PROVIDED.

IMPORTANT - For the net worth exercise, assume joint assets and liabilities are shared equally unless explicitly stated as an individual asset or liability. For example, the house value of $370,000 would be recorded so that both David and Amanda have an asset of $185,000 each.

1. Suggest a MONTHLY Cash Flow Statement for David and Amanda indicating both individual and combined household figures. USE THE TEMPLATE PROVIDED.

IMPORTANT - For the cash flow exercise, assume joint expenses are shared equally unless explicitly stated as an individual expense. For example, the monthly mortgage payment of $1,320 would be recorded so that both David and Amanda have a monthly mortgage payment of $660 each. However David's gym membership cost of $30 would show up under his name only.

1. David would like to accumulate $1,000,000 in his RRSP at age 65. Assuming a 7% average annual return (compounded annually), how much should he contribute per month to his RRSP? Is this realistic given his current level of income and expenses?

1. At her current savings rate, and assuming an 8% average annual return (compounded annually), how much would Amanda have accumulated in her TFSA at age 65?