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:

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, children’s education fund, and retirement). Insurance planning (medical, disability, liability, property, life). Estate planning.

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

Cory and Tisha’s 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.

Cory and Tisha’s intermediate-term goals (1 to 10 years) might include the following: Accumulate emergency fund. Save for Chad’s 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.

Cory and Tisha’s long-term goals (greater than 10 years) might include the following: Save for and pay for Chad’s 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.

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)

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

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

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.

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.

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.

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.

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 income—even less than Tisha estimated.

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.

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.

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?

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 = Y*C = 14 * 1 = 14 I = Interest rate per period = R/C = 9%/1 = 9% FV = -$40,000, -$100,000 PV = $0 Solve for PMT

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

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%?

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 = Y*C = 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

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 = Y*C = 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

At 21, Tisha (33 today) received 100 shares of GBBMF worth $1,000 At 21, Tisha (33 today) received 100 shares of GBBMF worth $1,000. Today, it’s 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?

At 21, Tisha (33 today) received 100 shares of GBBMF worth $1,000 At 21, Tisha (33 today) received 100 shares of GBBMF worth $1,000. Today, it’s 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 = Y*C = 14, 16, 34, 12 I = Interest rate per period = R/C = 9%/1 = 9% PMT = $0 PV = $2300 Solve for FV, FV, FV, I

At 21, Tisha (33 today) received 100 shares of GBBMF worth $1,000 At 21, Tisha (33 today) received 100 shares of GBBMF worth $1,000. Today, it’s 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 = Y*C = 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

11. Wedding gifts/ contributions were invested in an index mutual fund 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%?

Wedding gifts/ contributions were invested in an index mutual fund 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 = Y*C = 3, 5, 7 I = Interest rate per period = R/C = 6%, 8% PMT = $0 PV = $13,000 Solve for FV

Wedding gifts/ contributions were invested in an index mutual fund 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 = Y*C = 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

12. Assuming 8% return on mutual fund currently worth $13,000 and 15% marginal tax bracket, what will the Dumont’s owe in taxes this year?

Assuming 8% return on mutual fund currently worth $13,000 and 15% marginal tax bracket, what will the Dumont’s owe in taxes this year? Federal tax liability = $13,000 * .08 * .15 = $156 After tax growth = $13,000 * .08 * (1-.15) = $884

Cory (aged 35) has a pension worth $2,500 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?

Cory (aged 35) has a pension worth $2,500 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, N=32, PMT = 0, I = 5%...Solve for FV $2,500 * (1.10)32 = $52,784.44 Or PV = 2500, N=32, 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.

14. How much SS and Medicare taxes will be withheld from Cory and Tisha’s pay based on their current income? Cory earns $35,000 and Tisha earns $38,000

SS = 6.2% of Gross Pay (subject to salary caps) 14. How much Social Security and Medicare taxes will be withheld from Cory and Tisha’s 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.

Cory paid $312 in student loan interest in 2004 Cory paid $312 in student loan interest in 2004. How will that interest impact his taxes.

Cory paid $312 in student loan interest in 2004 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.

16. Using the income statement provided, what was the 2004 taxable income ignoring taxable earning from savings and investments?

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)

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 don’t pay a mortgage and pay no real estate taxes State Income Tax Standard Deduction > Itemized Deductions $9,700 > $5,451.60 Personal Exemptions for 2004 = $3,100 each 2 children plus themselves = 4 deductions 4 * $3,100 = $12,400

16. Using the income statement provided, what was the 2004 taxable income ignoring taxable earning from savings and investments? $73,000.00 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

17. What is their 2004 Federal Income Tax Liability?

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

Estimate the Child tax credit and the child and dependent care credit Estimate the Child tax credit and the child and dependent care credit. What is the Dumonts’ final tax liability?

Estimate the Child tax credit and the child and dependent care credit 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 < $15,000 = 35%, >$43,000 = 20% (as per book) Day care expenses = $9,700 > $6,000 $6,000 * .20 = $1,200

Estimate the Child tax credit and the child and dependent care credit 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

19. Assuming a marginal state income tax rate of 5 19. Assuming a marginal state income tax rate of 5.75% based on federal taxable income, calculate their state tax liability

19. Assuming a marginal state income tax rate of 5 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

21. Calculate the difference between their marginal, average and effective marginal tax rates.

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%