Your friend, Cindy Brady, has come to you for financial advice. She graduated from college three years ago and was hired right out of college by a firm she had interned with the summer before her senior year. Her salary is $50,000/year. She has health and dental insurance through her employer (premiums are deducted from paycheck). They also offer a 401(k) that she is eligible for. During college, she had always planned to begin contributing to a 401(k) with her first paycheck, but she was not eligible with this employer until she worked there for one year. By the time she was eligible, she had purchased a new car, so still didnt begin contributing. Shortly after that, she moved to a nicer (and more expensive) apartment with some friends, so she still doesnt seem to have any of her paycheck left, and still has not started saving for retirement. She knows that the longer she waits to begin saving, the harder it will be, so she has come to you for advice on how she can get her budget under control and start saving.

Cindy had previously written out her budget and expected to have almost $300 left over each month that she would save, but her savings account never seems to grow. Also, about a year ago, Cindy found herself with rising credit card debt and she was beginning to have difficulty making even the minimum monthly payments. She made some spending changes and began making higher than minimum payments and has reduced the balances somewhat, but they are taking longer to pay off than she expected.

Cindy knows that you can help her to get her financial house in order. She has brought you her paycheck stub, her projected budget and other statement information. She tells you that she wants to start saving for retirement and pay off her credit cards, but doesnt really know where to start. She has also heard that you are supposed to have an Emergency Fund, but doesnt know if she really needs one or how much it should be. She asks you what she can do to help build financial security. Read through and assimilate the following information to help Cindy reach her goals:

Assume all bills are paid in the same month they are received (i.e. utility bills are paid as soon as received, so are not a liability at end of month).

Monthly Paycheck:

Gross Salary 4,167

FICA Tax 319

Fed w/h 225

State w/h 80

Health Insurance 200

Dental Insurance 50

Net Paycheck 3,293

Budget:

Paycheck 3,293

Less Expenses:

Rent 1,200

Student Loan payment 300

Auto Payment 300

Auto Insurance & Fuel 250

Utilities 350

Groceries 300

Misc Exp/Entertainment 300 3,000

Surplus 293

Statement Balances:

Auto Loan 17,000

Student Loan 12,000

Credit Card Balance 2,500

Checking Account 1,500

Savings Account 500

Other Assets (Market Value):

Car 15,000

Personal Property 5,000

Cindy has tracked her spending for the last 6 months using her checking account and credit card statement. Below are her ACTUAL average Monthly Expenses:

Rent 1,200

Student Loan payment (Income-Based Repayment plan) 140

Car Payment 400

Auto Insurance & Fuel 250

Renters Insurance 50

Food (groceries) 350

Utilities 350

Entertainment/ Miscellaneous 500

(including eating out)

Clothing 125

ATM withdrawals 160

Credit Card Payment 100

(more than minimum, but doesnt pay in full)

Question: Why is it taking Cindy so long to pay off her credit cards? (provide 2 reasons).