Personal Finance

ASSIGNMENT Managing Personal Finances The Smith Family

Jack and Jill Smith live in the Midwestern suburb of Pleasantville. They have two children, ages 5 and 7. Jill is 39 years old and Jack is 40. Jack works as a marketing manager for a toy manufacturing company. Jack has been with this company for 10 years and his career is progressing well. He makes $72,000 per year (before taxes). Jill worked part-time at a department store for many years but quit her job after their second child was born.

Assume that their total income taxes (including Federal, State and FICA / Medicare) are $12,000 per year. Jacks company offers a 401(K) plan (they do not however match any of his contributions). Jack contributes $12,000 per year to the 401(K) and he plans to continue contributing this amount every year until he retires. He has built up a balance of $40,000 in the 401k account so far. After excluding his 401(k) contribution Jacks take home pay is $4000 per month.

They have a mortgage of $200,000 (monthly payment is $1000) on their home. Their home is worth $220,000. They own two cars an SUV (worth about $12000) and a sedan (worth about $5000). They have a $10,000 car loan on the SUV, on which the monthly payment is $500. Their Property taxes on the home are $400 per month. Home insurance costs $400 per year and Auto Insurance is $1200 per year. The health insurance provided by Jacks employer costs $100 per month. They spend $1100 per month on food and household items, $400 on Gas (plus maintenance for the cars), $200 per month on personal care (e.g. haircuts), clothing (and other personal needs) and $200 on entertainment (e.g. movies, eating out). They also spend $500 per month on utilities (including gas heating, electric/AC, phone, water etc).

Two years ago, Jack got interested in investing, opened an internet brokerage account, and bought $10,000 of a mutual fund. Jack carries a Term Life insurance policy with a Death benefit of $100,000 that is provided by his employer. Jill does not carry Life Insurance. Jack and Jill have often talked about preparing a will but have not gotten around to doing so. They have a Savings and Checking account at the bank with a balance of $6,000.

In answering the questions, assume that the description above covers their ENTIRE financial situation. If something that you think should be included is missing, it is because the Smiths have not set it up or considered it. You should include this in your recommendations.

Question 3 Childrens education

Assume that their children will go to a public school, but likely in another state. At such (out of state) public schools today, tuition, fees and living expenses add up to about $20,000 per year. Tuition is expected to grow at 6% a year. Given these facts, what will be the total 4 year tuition expense (= Tuition upon entering college x 4) for each child?. Show your calculations (please use the Time value of Money tables in the text) and summarize in the table below:

Show your calculations clearly

	Todays tuition and room / board Assume that tuition is fixed in year 1 i.e. it will be the same for all 4 yrs of college	Total Tuition for 4 years at the time of college entry
Child 1 (age 7) Will enter college 11 years from today	$20,000 x 4 (yrs) = $80,000	$ ___
Child 2 (age 5) Will enter college 13 years from today	$20,000 x 4 (yrs) = $80,000	$ ___

Question 4 Retirement (15 pts)

(Please use the tables in the Time value of Money Appendix from the textbook for your calculations. Show your calculations clearly. Do not use Excel or websites such as Moneychimp.com. If you are not sure about the approach to use, make a posting to the Course topics board or send me an email and I can steer you in the right direction.)

1. Assume that the rate of inflation in the future will be 4%. Jack would like to retire at age 65 (in 25 years). For this calculation, assume that their total monthly expenses in todays dollars are $5000 (ignore the detailed expenses listed at the beginning of the case), how much will their expenses grow to in 25 years? Show your calculations clearly
2. Jacks total retirement savings today are $40,000 (assume he is saving only in his 401k for retirement). Based on the $12,000 he plans to add to his 401k each year, how much will it grow to in 25 years? Assume that he will obtain a rate of return of 7% per year. Show your calculations clearly
3. A Financial Planner advised Jack that he would need $2 Million in his 401k to be assured of a comfortable retirement. How much would Jack need to invest (in total, including the $12,000 per year that he plans upon putting in) in his 401k each year, for the next 25 years, to grow the account from its current value of $40,000 to $2 M at age 65? Assume that he will obtain a rate of return of 7% per year. Show your calculations clearly