The Financial Statements of Harry and Belinda Johnson Suggest Budgeting Problems

Harry graduated with a bachelor's degree in interior design last spring from a large Midwestern university near his hometown. Belinda has a degree in information technology from a university on the West Coast and is employed in a medium-size public relations firm. Harry and Belinda both worked on their schools' student newspapers and met at a conference during their junior year in college. They were married last June and live in an apartment in Kansas City. They will face many financial challenges over the next 20 years, as they buy their first home, decide on life insurance needs, begin a family, change jobs, and invest for retirement.

Harry works at a medium-size interior design firm and, during the last half of last year, earned a gross salary of $3,100 per month. He also receives $3,000 in interest income per year from a trust fund set up by his deceased father's estate; the trust fund will continue to pay that amount until 2028. He anticipates a raise of $150 a month in his salary by next January. Belinda works as a salesperson for a regional stock brokerage firm.

She earned a salary of $4,750 per month last year. Belinda has many job-related benefits, including life insurance, health insurance, a retirement plan, and a credit union. Since she is a new employee Belinda does not expect a raise at the end of the year. The Johnsons live in an apartment located approximately halfway between their places of employment; however, their rent will increase by $100 a month next July. Harry drives about ten minutes to his job, and Belinda travels about 15 minutes via public transportation to reach her downtown job. Harry and Belinda's apartment is very nice, but small, and it is furnished primarily with furniture given to them by their families. Soon after starting their first jobs, Harry and Belinda decided to begin their financial planning. Fortunately each had taken a college course in personal finance. After initial discussion, they worked together for two evenings to develop the two financial statements presented below.

ns: Chapter 3 - Financial Statements, Tools, and Budgets Balance Sheet for Harry and Belinda Johnson January 1, 2015 ASSETS Monetary Assets Cash on hand 1,164 5.43 Savings (First Federal Bank) 890 4.15 Savings (Far West Savings Bank) 560 2.61 Savings (Homestead credit union) 160 0.75 Checking account (First Federal Bank) 752 3.51 Total monetary assets $ 3,526 16.44 Tangible Assets Automobile (3-year-old Toyota) 10,900 50.81 Personal property 2,500 11.65 Furniture 1,600 7.46 Total tangible assets $15,000 69.93 Investment Assets Harry's retirement account 1,425 6.64 Belinda's retirement account 1,500 6.99 Total investment assets $ 2,925 13.64 Total Assets $21,451 100 390 1.82 0.21 45 386 1.80 S 821 3.83 LIABILITIES Short-Term liabilities Visa credit card Target credit card Dental bill Total short-term liabilities Long-Term liabilities Vehicle loan (First Federal Bank) Student loan (Belinda) January 1, 2015 Total long-term liabilities Total Liabilities Net Worth Total Liabilities and Net Worth 3,700 8,400 17.25 39.16 $12,100 $12.921 $ 8,530 $21,451 56.41 60.23 39.77 100.00 Cash-Flow Statement for Harry and Belinda Johnson July 1-December 31, 2014 (First Six Months of Marriage) Cash Flow Dollars Percent INCOME Harry's gross income ($3,100 x 6) 18,600 37.11 Belinda's gross income ($4,750 X 6) 28,500 56.86 Interest on savings account 24 0.05 Harry's trust fund 3,000 5.99 Total Income $50,124 100.00 EXPENDITURES Fixed expenses Rent 6,660 13.29 Renter's insurance 220 0.44 Automobile loan payment 2,980 5.95 Automobile insurance 850 1.70 Health insurance (withheld from salary) 1,250 2.49 Student loan payments 3,570 7.12 Life insurance (withheld from salary) 90 0.18 Cable TV and Internet 720 1.44 Health club 339 0.68 Savings/emergencies 600 1.20 Harry's retirement plan (5% of salary) 1,116 2.23 Belinda's retirement plan (4% of salary) 1,140 2.27 Federal income taxe (withheld from salary) 4,600 9.18 State income taxe (withheld from salary) 1,600 3.19 Social Security (withheld from salary) 3,600 7.18 Automobile registration 300 0.60 Total fixed expenses 29,635 59.12 Variable expenses Food (groceries) 2,400 4.79 Food (out) 2,000 3.99 Utilities 750 1.50 Cell phones 450 0.90 Gasoline and maintenance 700 1.40 Doctor's and dentist's bills 710 1.42 Medicines 350 0.70 Clothing and upkeep 1,200 2.39 Church and charity Gifts Public transportation Personal allowances Entertainment Vacation (holiday) Vacation (summer) Miscellaneous Total variable expenses Total Expenses SURPLUS (DEFICIT) 1,200 1,070 720 4,160 960 600 1,200 480 $18,950 $48,585 1,539 2.39 2.13 1.44 8.30 1.92 1.20 2.39 0.96 37.81 96.93 3.07 a. Briefly describe how Harry and Belinda probably determined the fair market prices for each of their tangible and investment assets. The input in the box below will not be graded, but may be reviewed and considered by your instructor. blank b. Using the data from the cash-flow statement developed by Harry and Belinda, calculate the following financial ratios. Round your answers to two decimal places. 0.43 % % % Basic liquidity ratio Asset-to-debt ratio Debt service-to-income ratio Debt payments-to-disposable income ratio Investment assets-to-total assets ratio % What do these ratios tell you about the Johnsons' financial situation? Should Harry and Belinda incur more debt, such as credit cards or a new car loan? ns: Chapter 3 - Financial Statements, Tools, and Budgets Balance Sheet for Harry and Belinda Johnson January 1, 2015 ASSETS Monetary Assets Cash on hand 1,164 5.43 Savings (First Federal Bank) 890 4.15 Savings (Far West Savings Bank) 560 2.61 Savings (Homestead credit union) 160 0.75 Checking account (First Federal Bank) 752 3.51 Total monetary assets $ 3,526 16.44 Tangible Assets Automobile (3-year-old Toyota) 10,900 50.81 Personal property 2,500 11.65 Furniture 1,600 7.46 Total tangible assets $15,000 69.93 Investment Assets Harry's retirement account 1,425 6.64 Belinda's retirement account 1,500 6.99 Total investment assets $ 2,925 13.64 Total Assets $21,451 100 390 1.82 0.21 45 386 1.80 S 821 3.83 LIABILITIES Short-Term liabilities Visa credit card Target credit card Dental bill Total short-term liabilities Long-Term liabilities Vehicle loan (First Federal Bank) Student loan (Belinda) January 1, 2015 Total long-term liabilities Total Liabilities Net Worth Total Liabilities and Net Worth 3,700 8,400 17.25 39.16 $12,100 $12.921 $ 8,530 $21,451 56.41 60.23 39.77 100.00 Cash-Flow Statement for Harry and Belinda Johnson July 1-December 31, 2014 (First Six Months of Marriage) Cash Flow Dollars Percent INCOME Harry's gross income ($3,100 x 6) 18,600 37.11 Belinda's gross income ($4,750 X 6) 28,500 56.86 Interest on savings account 24 0.05 Harry's trust fund 3,000 5.99 Total Income $50,124 100.00 EXPENDITURES Fixed expenses Rent 6,660 13.29 Renter's insurance 220 0.44 Automobile loan payment 2,980 5.95 Automobile insurance 850 1.70 Health insurance (withheld from salary) 1,250 2.49 Student loan payments 3,570 7.12 Life insurance (withheld from salary) 90 0.18 Cable TV and Internet 720 1.44 Health club 339 0.68 Savings/emergencies 600 1.20 Harry's retirement plan (5% of salary) 1,116 2.23 Belinda's retirement plan (4% of salary) 1,140 2.27 Federal income taxe (withheld from salary) 4,600 9.18 State income taxe (withheld from salary) 1,600 3.19 Social Security (withheld from salary) 3,600 7.18 Automobile registration 300 0.60 Total fixed expenses 29,635 59.12 Variable expenses Food (groceries) 2,400 4.79 Food (out) 2,000 3.99 Utilities 750 1.50 Cell phones 450 0.90 Gasoline and maintenance 700 1.40 Doctor's and dentist's bills 710 1.42 Medicines 350 0.70 Clothing and upkeep 1,200 2.39 Church and charity Gifts Public transportation Personal allowances Entertainment Vacation (holiday) Vacation (summer) Miscellaneous Total variable expenses Total Expenses SURPLUS (DEFICIT) 1,200 1,070 720 4,160 960 600 1,200 480 $18,950 $48,585 1,539 2.39 2.13 1.44 8.30 1.92 1.20 2.39 0.96 37.81 96.93 3.07 a. Briefly describe how Harry and Belinda probably determined the fair market prices for each of their tangible and investment assets. The input in the box below will not be graded, but may be reviewed and considered by your instructor. blank b. Using the data from the cash-flow statement developed by Harry and Belinda, calculate the following financial ratios. Round your answers to two decimal places. 0.43 % % % Basic liquidity ratio Asset-to-debt ratio Debt service-to-income ratio Debt payments-to-disposable income ratio Investment assets-to-total assets ratio % What do these ratios tell you about the Johnsons' financial situation? Should Harry and Belinda incur more debt, such as credit cards or a new car loan