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Personal Finance Project

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by

Katie Hardman

on 30 April 2014

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Transcript of Personal Finance Project

Personal Finance Project
Background Scenario
Married couple: Husband and Wife, Lawrence and Wendy
Both 40 years old
2 children: 10-year old daughter, Rachel and 8-year old son, Harry

Lawrence’s salary: $65,000
Wendy’s salary: $60,000


Background Information
Lawrence Gitman – police officer at Albany Police Dept.
Wendy Gitman – teacher at Albany High School

They live in the outskirts of Albany within Loudonville, NY in a suburban area/housing development

Monthly Budget
Balance Sheet
Forms of Debt
• Student Loan debt = $30,000
• Making monthly payments of $215 to reduce debt ($30,000 debt and 20 years, 6%)

2012 Nissan Sentra with lease payments of $300/month for 36 months

• Mortgage payments of $1,500/month to pay off home

• Wendy has student loan debt of $30,000

• Credit card debt of $1,000  making monthly payments of $100 to pay off debt should be paid off within the year




Assets
They own their home worth $250,000

Own 2008 GMC Sierra worth $20,000

They have a retirement fund worth $75,000

Furniture = $7,000

Wendy inherited jewelry accumulating $20,000

Savings = $20,000

Checking = $5,000

Cash on Hand = $500
Credit Cards
Cards the family may be interested in:

• BankAmericard Cash Rewards™ Credit Card for money back on groceries and gas

• Citi ThankYou® Preferred Card for double the points on dining and entertainment

• Blue Cash Everyday® Card from American Express – earn cash back at many stores including gas stations and grocery stores as well as 1% on all other purchases
Credit Cards
Ways to improve their credit:

• Pay bills on time – have been late twice on their payments
• Reduce balances on credit cards
• Use cards wisely and regularly

Upcoming Purchase
• Wish to go on family vacation to Cape Cod during summer for a week
• Rental home: $2,500
• Groceries: $300
• Gas: $200
• Entertainment: $250 (Lighthouse, Aquarium, Amusement Park)
• Total vacation expense: $3,250

• Going to use cash savings to pay for rental home and entertainment as well as credit cards to pay for gas and groceries
Life Insurance
Yes, they need life insurance because:

o They need financial protection for their dependents (2 children, Rachel and Harry)
o Tax benefits
o Vehicle for savings
o Have debts home mortgage
o Want to ensure that their family will be taken care of in the event of something happening to them



How much life insurance is
right for my family?
• Already have insurance of $125,000

Needs Analysis:
• College tuition and expenses for both children: $250,000 ($125,000 each)
• Funeral Expenses for both spouses: $30,000
• Amount left to pay on mortgage: $200,000
• Amount left for car payment: $3,600 (One year left to pay off car)
• Credit card debt: $500
• Total Life Insurance: $484,100  About $500,000 more
TOTAL POLICY: $625,000
Life Insurance Policy
• Term Life Insurance (Straight term)
• Benefit paid if insured dies during policy period
• Coverage remains the same, however, premiums increase
• Economical way for young families to purchase large amounts of life insurance
• Provides for needs that disappear over time



Retirement
• Currently, Lawrence and Wendy Gitman have saved $75,000 towards retirement

• They are currently 40 and they plan on retiring when they are 67, so they can collect the
full value of their social security

• Both Lawrence and Wendy save
10% of their gross income towards
retirement each year



Retirement
• Lawrence saves via a 401K through work

• Wendy, being a teacher, saves money through a 403B plan

• In the last year Lawrence saved $6,500 and Wendy saved $6,000, making their total amount saved for the year, $12,500

• Both of their retirement plans work through defined contribution, meaning the employer guarantees contribution but not a return
Retirement
• If they continue to save around 10% each year, for the next 27 years, they will be well set to provide for themselves post-retirement

• They also have investments in stocks and bonds to help fund their retirement





Investments
● They should have a diverse retirement portfolio of investments. This can prevent their whole portfolio from losing value all at once. With the stock markets constantly changing, this is the best way for the Gitman's to safely invest. It is important in helping them reach their long-term financial goals with minimal risk.




Investments
● They have $7,500 invested in stocks and $2,000 in bonds

● They’re investing in Sandisk Corp, Barnes & Noble, Toyota, Pepsico, Inc, Wal-Mart Stores, Inc.

➢ Sandisk Corp stock is valued at $75.34
➢ Barnes & Noble’s value is $18.18
➢ Toyota’s value is $106.86
➢ PepsiCo, Inc’s value is $86.96
➢ Wal-Mart Stores, Inc’s value is $76.88

— All companies are domestic stock except Toyota



Investments
● They are semi-aggressive investors since they are not yet at retirement age and have young children to take care of. They want to have enough money to retire comfortably and also plan for their children’s futures. They have around 27 more years to do so if they plan on retiring at 67.

● Their age and time horizon effects on how they should invest because it determines if they can handle loss. They would not want to suffer a big loss since they have to take care of their children.



Tax Scenario
• Married, Filing Jointly
• They have two children, Rachel and Harry.
• Wendy’s gross income is $60,000
• Lawrence’s gross income is $65,000
• Both Wendy and Lawrence contribute 10% of their gross income to their retirement plans.
• They pay a $4,000 pre-tax medical premium
• Wendy paid $215 a month to pay off her student loans with an interest rate of 6%, therefore she paid $154.80 in interest on her student loans this year
• Their Mortgage is $1,500 / month with an interest rate of 8%
• They contribute $1,000 to charity
• They withheld $14,000 this year
Tax Scenario
AGI (Adjusted Gross Income)
• $125,000(combined salary) - $6,500 (his 401K contribution)-$6,000 (her 403B contribution)-$4,000 (medical premium) -$154.80 (Student loan interest)
• Their AGI= $108,345.20

Standard or Itemized Deduction
• The standard deduction is $12,200
• They donate $1,000 to charity /year
• They paid $1,400 in mortgage interest this year.
• They would use the standard deduction.



Tax Scenario
Tax Liability
• Their Taxable income is $80,545.20 (so they lie within the 3rd tax bracket)
• $17,850 X 10% = $1,785
• They pay $1,785 in the 10% tax bracket
• $72,500-$17,851= $54,649 (this is how much will be taxed at 15%
• $54,649 X 15% = $8,197.35
• They pay $8,197.35 in the 15% bracket
Tax Scenario
• $80,545.20(taxable income) - $72,500 = $8,045.2(this is how much will be taxed at 25%
• $8,045.2 X 25% = $2,011.3
• They pay $2,011.3 in the 25% bracket.
• $1,785 + $8,197.35 + $2,011.3= $11,993.65(Tax liability)
• Their Tax Liability = $11,993.65

• They Vastly over paid in taxes this year and will receive a refund of $2,006.35.

If She were eligible for a $2,000 Education Tax Credit, how would this effect their taxes?
• Since tax credits deduct directly from your tax liability there new tax liability with the education credit would be $9,993.65 and they would get an even larger refund
Home and Auto
The Gitman family resides in the outskirts of Albany, NY, around the Loudonville area with their children, Rachel and Harry

They live in a suburban community within a housing development

The Gitmans decided to purchase a home because it is the best option for their family

They were financially able to afford their $250,000 home and knew it was a good investment since most homes appreciate value over time
Home and Auto
They currently own a 2008 GMC Silverado worth $20,000 and decided to lease a 2012 Nissan Sentra for $300 a month for 36 months

They chose to lease a car because the monthly payments for leasing are typically lower than when buying a car

At the end of their open-ended lease, they can choose to purchase the car if they wish and will only have to pay the remaining value
Investments
They have not sold any of their securities because they want to make the most money from them as they can

The Gitmans also have $2,000 in bonds that they are saving until they are matured

Some companies like Wal-Mart never stop increasing in terms of value

They continue to make more money each year and as a result can potentially return larger dividends to their shareholders, like Wendy and Lawrence.


Conclusion
Overall the Gitman family is in a decent financial state right now

They could diversify their portfolio by investing in more foreign stocks or even mutual funds

In the next year, they will also withhold fewer taxes; this way, they are not receiving the extra money as a lump sum that they may consider to be tempting to spend on a large purchase, but instead the extra money from each paycheck can be put into savings

The Gitman family is a good example for using money wisely and preparing for the future, as well as having a safety net of funds, assets, and policies
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