1.The Dumonts are in the early years of the accumulation of wealth stage of the financial life cycle

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• 1. The Dumonts are in the early years of the
  accumulation of wealth stage of the financial
  life cycle. During this longest stage of the life
  cycle, the Dumonts will establish their lifestyle
  and build a foundation for the two later stages.
  This phase is characterized by

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• 1. The Dumonts are in the early years of the
  accumulation of wealth stage of the financial
  life cycle. During this longest stage of the life
  cycle, the Dumonts will establish their lifestyle
  and build a foundation for the two later stages.
  This phase is characterized by
• Family formation.
• Goal setting.
• Home buying.
• Debt planning.
• Savings accumulation (emergency fund, home down
  payment, childrens education fund, and
  retirement).
• Insurance planning (medical, disability,
  liability, property, life).
• Estate planning.

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• 2.
• Cory and Tishas short-term goals (less than one
  year) might include the following
• Cory and Tishas intermediate-term goals (1 to
  10 years) might include the following
• Cory and Tishas long-term goals (greater than
  10 years) might include the following

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• Cory and Tishas short-term goals (less than one
  year) might include the following
• Begin savings to accumulate an emergency fund.
• Continue savings for home down payment.
• Continue payments on debt and credit cards.
• Start saving for retirement.
• Review property, health, disability, life and
  liability insurance needs and purchase as needed.
• Write a will.

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• Cory and Tishas intermediate-term goals (1 to 10
  years) might include the following
• Accumulate emergency fund.
• Save for Chads and Haley's college education.
• Continue saving for home down payment and
  purchase home.
• Pay off debt and credit cards.
• Replace autos.
• Continue saving for retirement.
• Review property, health, disability, life and
  liability insurance as their family situation
  changes.
• Review estate plans as family situation changes.

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• Cory and Tishas long-term goals (greater than 10
  years) might include the following
• Save for and pay for Chads and Haley's college
  education.
• Save for and fund retirement plans to maintain
  current standard of living.
• Review property, health, disability, life and
  liability insurance needs as family situation
  changes.
• Review estate plans as family situation changes.

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• Line D 10,800 (rent) 3,300 (utilities)
  2,100 (furniture)
• Line G 5,880 (auto payments) 1,900
  (transportation expense) 695 (property tax)
• Line J 2,200 (medical) 2,100 (auto) 720
  (life) 150 (renters)
• Line K 1,200 (charity) 9,700 (day care)
  1,330 (miscellaneous) 1,200 (credit cards)
  1,200 (student loan repayment)

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• a. current ratio
• b. month's living expenses covered ratio
• c. debt ratio
• d. long-term debt coverage ratio
• e. savings ratio

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• 5. a. To calculate the current ratio
• Monetary Assets 4,400 3.39
• Current Liabilities 1,300
• b. To calculate the month's living expenses
  covered ratio
• Monetary Assets
  4,400 Annual Living Expenditures/12
  57,025/12
  
• 4,400/4,752.93 months
• c. To calculate the debt ratio
• Total Debt or Liabilities 24,600
  0.31 or 31
• Total Assets 78,300
• d. To calculate the long-term debt coverage
  ratio
• Total Income Available for Living Expenses
  58,000 5.59
• Total Long-Term Debt Payments 10,380
• e. To calculate the savings ratio
• Income Available for Savings Investment
  975 0.017 or 1.7
• Total Income Available for Living Expenses
  58,000

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• 5. a. To calculate the current ratio
• Monetary Assets 4,400 3.39
• Current Liabilities 1,300
• This ratio is greater than two, as recommended.
  In other words, the Dumonts available monetary
  assets are more than three times enough to pay
  off their short-term liabilities (i.e., credit
  card debt). It is important to track the trend of
  this ratio over time it should be increasing,
  not decreasing. If the ratio is declining,
  efforts should be made (1) to increase savings to
  build monetary assets and/or (2) to pay off
  current liabilities more quickly to avoid
  increasing current liabilities.
• Because the Dumonts have not provided details
  about other current bills (e.g., utilities,
  insurance premiums, or other bills to be paid),
  calculation of the current ratio may not be
  realistic. Current liabilities are defined as
  debts that must be paid off within the next year.
  With payments of only 100, it will take Cory and
  Tisha more than a year to repay the credit card
  bill. However, credit cards were designed for
  short-term borrowing with full repayment. For too
  many people, credit cards have become continual
  revolving, installment loans. In reality, the
  Dumonts should view their credit cards as a
  current liability, or debt to be repaid within
  the year.

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• b. To calculate the month's living expenses
  covered ratio
• Monetary Assets
  4,400 4,400 0.93
• Annual Living Expenditures/12
  57,025/12 4,752
• If all other sources of income stopped, the
  Dumonts have enough monetary assets to cover
  their living expenses for less than one month.
  The traditional rule of thumb is that a household
  should have liquid assets to cover 3 to 6 months
  of expenses. This rule ignores the potential
  earnings from alternative investments, or the
  availability of credit capacity. Consequently,
  some flexibility in the amount of emergency
  funds, such as 3 months or less, may be
  appropriate.
• The Dumonts have no funds earmarked for
  emergencies. They do not have access to a home
  equity line and are carrying credit card
  balances. Cory and Tisha would be wise to
  decrease spending and to increase their savings.
  Some dollars should be designated for an
  emergency, whether relatively minor, such as auto
  repair, or major, such as the loss of employment.
  As a measure of their "cash on hand," the month's
  living expenses covered ratio suggests that the
  Dumonts have little reserves to continue their
  lifestyle in the event of a loss of income.

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• c. To calculate the debt ratio
• Total Debt or Liabilities 24,600
  0.31 or 31
• Total Assets 78,300
• Almost a third of the Dumonts assets are
  financed. In other words, they truly own
  approximately 70 percent of their total assets
  the remainder will not be paid for until some
  future date. This ratio will likely increase as
  they use credit to buy a home and other assets to
  support their lifestyle. However, they should
  continue to track the trend of debt to asset
  accumulation, as the ratio should decline as the
  Dumonts age.

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• d. To calculate the long-term debt coverage
  ratio
• Total Income Available for Living Expenses
  58,000 5.59
• Total Long-Term Debt Payments 10,380
• Long-term debt represents any amount that cannot
  easily be repaid in one year. The Dumonts are
  only paying 100 per month on their 1,300 credit
  card balances and Cory's 8,200 student loan
  debt. These debts will not be repaid in one year.
  The car and furniture loans each run for another
  30 months. All the Dumonts' debts can be defined
  as long term. Payments for one year total
  10,380.
• A ratio of less than 2.5 suggests the need for
  caution, but the Dumonts ratio of 5.59 well
  exceeds this level. This ratio will likely
  decline as they use credit to buy a home and
  other assets to support their lifestyle. The
  inverse of this ratio suggests that 17.9 percent
  of the Dumonts income available for living
  expenses is committed to debt repayment.

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• e. To calculate the savings ratio
• Income Available for Savings Investment
  975 0.017 or 1.7
• Total Income Available for Living Expenses
  58,000
• Less than 2 percent of the Dumonts after-tax
  income is currently saved. This percentage is
  very low, particularly for a young family trying
  to save for a house down payment. The trend
  should be tracked over time to insure that it is
  increasing. Certainly, Cory and Tisha are saving
  little of their after-tax incomeeven less than
  Tisha estimated.

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• 6. The ratios suggest that Cory and Tisha are in
  relatively good financial health for a young
  family. They have limited credit use to maintain
  financial flexibility. In other words, a large
  percentage of their budget is not committed to
  pay off debt. Liquidity, as measured through the
  availability of monetary assets to meet current
  liabilities and living expenses is less than
  adequate. To improve their financial health, they
  should review their spending habits and make
  necessary adjustments to accomplish the
  following
• Continue to repay their debt without taking on
  more debt obligations until after they have
  purchased their home.
• Increase their savings for an emergency fund, the
  house down payment, and other financial goals,
  such as educating the children.

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Tisha and Cory have 2,500 in savings, but have
not acknowledged those funds for an emergency.
The traditional rule of thumb is that a household
should have 3 to 6 months of expenses, or for the
Dumonts between 14,526 and 28,512 based on
monthly expenses of 4,752 (57,025/12). This
rule ignores the potential earnings from
alternative investments, as liquid accounts offer
little return. Home equity credit lines or other
available credit lines also can substitute for
some emergency needs, or supplement emergency
funds. This frees more dollars for other, less
liquid investments with higher returns. However,
since the Dumonts do not have access to a home
equity line and they are carrying credit card
balances, they need to increase their savings. An
emergency fund of 3 months or less, in
combination with available credit and adequate
insurance protection should be sufficient. The
stability of employment, the regularity of income
(e.g., regular salary versus irregular
commissions), and the fact that both are employed
also should be considered.
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• How much do they need to save at the end of each
  year to have a) 40,000 in 14 years, b) 100,000
  if they can earn 9 compounded annually?

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• How much do they need to save at the end of each
  year to have a) 40,000 in 14 years, b) 100,000
  if they can earn 9 compounded annually?
• Mode End
• C of compounding periods 1
• Y of years 14
• R Annual Interest Rate 9
• N Total of periods YC 14 1 14
• I Interest rate per period R/C 9/1 9
• FV -40,000, -100,000
• PV 0
• Solve for PMT

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• How much do they need to save to have a) 40,000
  in 14 years, b) 100,000 if they can earn 9
  compounded annually?
• 1,537.33
• 3,843.32

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9. How much do they need to save at the a)
beginning of each year to accumulate 40,000, b)
beginning of each year to save 110,000, c) at
the end of each year to save 110,000 in 16
years at 9?
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• How much do they need to save at the a) beginning
  of each year to accumulate 40,000, b) beginning
  of each year to save 110,000, c) at the end of
  each year to save 110,000 in 16 years at 9?
• Mode Beg, Beg, End
• C of compounding periods 1
• Y of years 16
• R Annual Interest Rate 9
• N Total of periods YC 16 1 16
• I Interest rate per period R/C 9/1 9
• FV -40,000, -110,000, -110,000
• PV 0
• Solve for PMT

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• How much do they need to save at the a) beginning
  of each year to accumulate 40,000, b) beginning
  of each year to save 110,000, c) at the end of
  each year to save 110,000 in 16 years at 9?
• Mode Beg, Beg, End
• C of compounding periods 1
• Y of years 16
• R Annual Interest Rate 9
• N Total of periods YC 16 1 16
• I Interest rate per period R/C 9/1 9
• FV -40,000, -110,000, -110,000
• PV 0
• Solve for PMT
• a) 1,111.92
• b) 3,057.79
• c) 3,332.99

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• At 21, Tisha (33 today) received 100 shares of
  GBBMF worth 1,000. Today, its at 2,300. What
  will it be worth in a) 14 years at 7, b) 16
  years at 7, c) 34 years at 9, d) annualized
  return over last 12 years?

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• At 21, Tisha (33 today) received 100 shares of
  GBBMF worth 1,000. Today, its at 2,300. What
  will it be worth in a) 14 years at 7, b) 16
  years at 7, c) 34 years at 9, d) annualized
  return over last 12 years?
• Mode End
• C of compounding periods 1
• Y of years 14, 16, 34, 12
• R Annual Interest Rate 7, 7, 9, solve for
• N Total of periods YC 14, 16, 34, 12
• I Interest rate per period R/C 9/1 9
• PMT 0
• PV 2300
• Solve for FV, FV, FV, I

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• At 21, Tisha (33 today) received 100 shares of
  GBBMF worth 1,000. Today, its at 2,300. What
  will it be worth in a) 14 years at 7, b) 16
  years at 7, c) 34 years at 9?
• Mode End
• C of compounding periods 1
• Y of years 14, 16, 34
• R Annual Interest Rate 7, 7, 9
• N Total of periods YC 14, 16, 34
• I Interest rate per period R/C 7,7, 9
• PMT 0
• PV 2300
• Solve for FV
• a) -5,930.63
• b) -6,789.97
• c) -43,075.34

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11. Wedding gifts/ contributions were invested
in an index mutual fund. Most current balance
was 13,000. How much will it be worth in 3, 5
and 7 years if they earn a) 6, b 8?
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• Wedding gifts/ contributions were invested in an
  index mutual fund. Most current balance was
  13,000. How much will it be worth in 3, 5 and 7
  years if they earn a) 6, b 8?
• Mode End
• C of compounding periods 1
• Y of years 3, 5, 7
• R Annual Interest Rate 6, 8
• N Total of periods YC 3, 5, 7
• I Interest rate per period R/C 6, 8
• PMT 0
• PV 13,000
• Solve for FV

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• Wedding gifts/ contributions were invested in an
  index mutual fund. Most current balance was
  13,000. How much will it be worth in 3, 5 and 7
  years if they earn a) 6, b 8?
• Mode End
• C of compounding periods 1
• Y of years 3, 5, 7
• R Annual Interest Rate 6, 8
• N Total of periods YC 3, 5, 7
• I Interest rate per period R/C 6, 8
• PMT 0
• PV -13,000
• Solve for FV
• a) 15,483.21, 17,396.93, 19,547.19
• b) 16,376.25, 19,101.26, 22,279.72

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12. Assuming 8 return on mutual fund currently
worth 13,000 and 15 marginal tax bracket, what
will the Dumonts owe in taxes this year?
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• Assuming 8 return on mutual fund currently worth
  13,000 and 15 marginal tax bracket, what will
  the Dumonts owe in taxes this year?
• Federal tax liability 13,000 .08 .15
  156
• After tax growth 13,000 .08 (1-.15) 884

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• Cory (aged 35) has a pension worth 2,500. If it
  grows at 5, what will it be worth by age 67? If
  he took the money and reinvested in a
  tax-deferred account expected to grow at 10,
  what would it be worth at age 67?

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• Cory (aged 35) has a pension worth 2,500. If it
  grows at 5, what will it be worth by age 67? If
  he took the money and reinvested in a
  tax-deferred account expected to grow at 10,
  what would it be worth at age 67?
• 2,500 (1.05)32 11,912.35
• Or PV 2500, N32, PMT 0, I 5...Solve for
  FV
• 2,500 (1.10)32 52,784.44
• Or PV 2500, N32, PMT 0, I 10...Solve for
  FV
• As long as the funds remain in a tax-deferred
  account, no taxes will be due until the time of
  withdrawal.

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14. How much SS and Medicare taxes will be
withheld from Cory and Tishas pay based on their
current income? Cory earns 35,000 and Tisha
earns 38,000
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14. How much Social Security and Medicare taxes
will be withheld from Cory and Tishas pay based
on their current income? Cory earns 35,000 and
Tisha earns 38,000 SS Medicare Taxes FICA
(Federal Insurance Contributions Act) SS 6.2
of Gross Pay (subject to salary caps) Medicare
1.45 of Gross Pay (no caps) Both Cory and Tisha
are well under the caps. Cory will have a total
of 2,677.50 2,170 (0.0620 x 35,000) for Social
Security and 507.50 (0.0145 x 35,000) for
Medicare. Tisha will pay a total of
2,907 2,356 (0.0620 x 38,000) for Social
Security and 551 (0.0145 x 38,000) for
Medicare, the Dumonts will pay a combined total
of 5,584.50 for FICA.
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• Cory paid 312 in student loan interest in 2004.
  How will that interest impact his taxes.

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• Cory paid 312 in student loan interest in 2004.
  How will that interest impact his taxes.
• Assuming they are in the 15 marginal tax
  bracket, taxes will be reduced by
• 312 0.15 46.80
• Note
• The adjustment for student loan interest paid can
  be claimed whether or not the taxpayer itemizes
  deductions, another benefit for taxpayers like
  the Dumonts. Unless the Dumonts have significant
  salary increases above the current 73,000, they
  should be eligible to claim up to the maximum
  2,500 of interest payments for future years,
  including any voluntary payments of interest.
  Couples with a modified AGI between 100,000 and
  130,000 are eligible for only a partial
  deduction in 2004, as this is the phase-out
  income range, which increases over time.

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16. Using the income statement provided, what
was the 2004 taxable income ignoring taxable
earning from savings and investments?
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• Line D 10,800 (rent) 3,300 (utilities)
  2,100 (furniture)
• Line G 5,880 (auto payments) 1,900
  (transportation expense) 695 (property tax)
• Line J 2,200 (medical) 2,100 (auto) 720
  (life) 150 (renters)
• Line K 1,200 (charity) 9,700 (day care)
  1,330 (miscellaneous) 1,200 (credit cards)
  1,200 (student loan repayment)

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16. Using the income statement provided, what
was the 2004 taxable income ignoring taxable
earning from savings and investments? Gross
income 73,000 38,000 32,000 Interest on
student loans 312 (can be claimed whether you
chose to itemize or take standard
deduction) Adjusted Gross Income (AGI)
72,688.00 Standard Deduction for Married Filing
Jointly for 2004 9,700 Possible itemized
deductions Medical Insurance Premiums 2,200
assuming they are not paid pre-tax Non-Reimbursed
Medical Expense Threshold Amounts that exceed
7.5 of AGI 72,688 .075 5,451.60 They
only incurred 750 worth of expenses They dont
pay a mortgage and pay no real estate taxes State
Income Tax Standard Deduction gt Itemized
Deductions 9,700 gt 5,451.60 Personal
Exemptions for 2004 3,100 each 2 children
plus themselves 4 deductions 4 3,100
12,400
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16. Using the income statement provided, what
was the 2004 taxable income ignoring taxable
earning from savings and investments? 73,000.0
0 Gross Income 312.00 Adjustments
to Income for the Student Loan Interest Paid
72,688.00 Adjusted Gross Income (AGI)
9,700.00 Standard Deduction (2004)
12,400.00 Personal Exemptions (4 x 3,100
for 2004) 50,588.00 Taxable Income
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17. What is their 2004 Federal Income Tax
Liability?
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17. What is their 2004 Federal Income Tax
Liability? Based on 2004 tax rates, the Dumonts'
federal tax liability on 50,588 is 6,873. Tax
liability in 10 tax bracket 14,300 x 0.10
1,430.00 Tax liability in 15 tax bracket
36,288 x 0.15 5,443.20
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• Estimate the Child tax credit and the child and
  dependent care credit. What is the Dumonts
  final tax liability?

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• Estimate the Child tax credit and the child and
  dependent care credit. What is the Dumonts
  final tax liability?
• Child Tax Credit and the Child and Dependent Care
  Credit are the two tax credits related to
  children
• Child Tax Credit for 2004 1,000 for children
  under 13 and to disabled dependents or spouse,
  regardless of age
• 2 children 1,000 2,000
• Child and Dependent Care Credit A percentage
  of childcare expenses subject to a maximum
  expense of 3,000 for one child and 6,000 for
  two or more children subject to your AGI.
• AGI lt 15,000 35, gt43,000 20 (as per
  book)
• Day care expenses 9,700 gt 6,000
• 6,000 .20 1,200

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• Estimate the Child tax credit and the child and
  dependent care credit. What is the Dumonts
  final tax liability?
• Child Tax Credit for 2004 2,000
• Child and Dependent Care Credit 1,200
• Total 3,200
• Tax Liability Credits 6,873 - 3,200 3,673

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19. Assuming a marginal state income tax rate of
5.75 based on federal taxable income, calculate
their state tax liability
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19. Assuming a marginal state income tax rate of
5.75 based on federal taxable income, calculate
their state tax liability. State Tax Liability
50,588 .0575 2,908.81
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21. Calculate the difference between their
marginal, average and effective marginal tax
rates.
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• Calculate the difference between their marginal,
  average.
• Marginal tax rate for 2004 was 15 (50,588 for
  Married Filing Jointly)
• Average tax rate was Total tax liability/ Gross
  Income
• 3,673/73,000 5.03