Question

Life Situation	Financial Data
Single Age 22 Starting a career No dependents	Monthly income	$2,600
	Living expenses	$2,180
	Assets	$8,200
	Liabilities	$3,470
	Emergency fund	$530

Since the major portion of Pam’s income is based on commission, her earnings vary from one month to the next. This situation makes it difficult for her to establish a realistic budget. During lean months, she has had to resort to using her credit card to make ends meet. In fact, her credit card debt, $3,470, is at a fairly high level. In addition, she has not been able to save much for various unexpected expenses and for her long-term financial security.

During the year, Pam has had tax withholding greater than her actual tax liability. As a result, Pam is expecting a fairly large tax refund. In the past, she has always used tax refunds to finance major purchases (a vacation or furniture) or pay off credit card debt. Currently, she is also considering saving some of the money.

Questions

Q1. How might Pam budget for fluctuations in her income caused by commission earnings?

Q2. What are financial actions and revised goals Pam might want to consider at this time?

Q3. Assume Pam's federal tax refund is $1,100. Given her current situation, what should she do with the refund?

Q4. Based on her current and future life situation, what tax planning activities might Pam consider?

Answer 1

answer1

• Pam has variable earnings and not a fixed salary.
• she should first calculate the bare minimum expenses she needs to cover every month (bills, groceries etc)
• then she should calculate her monthly discretionary expenses like (eating out, entertainment etc)
• The total of both these types of expenses is what she would need every month.This amount can be deposited in the begining of the month in her savings account.
• In this way she has a fixed income coming in the begining of every month.This is 'zero sum budget' or living on last month's income.
• anwer2
• Pam can have the following goals
• Pay all credit card debts by starting to make extra payments to minimum amounts
• create an Emergency Fund of 3 to 6 months living expenses by saving a certain amount every month
• Make a retirement Plan for long term security
• an\swer3
• tax refunds should be deposited in savings account. Given her current scenario, she can use the tax refund for paying her credit card bills
• answer 4
• for tax planning , she can make contributions to retirement plans