Question

QUESTION 2 Life Situation Financial Data Single Monthly Income (after taxes) $1,450 Age 21 Personal Property $7,300 No Dependents Savings $2,000 College Student Student Loan $3,000 Credit Card debt $2,400 Rent $400 Utilities $75 Car Insurance $100 Cell Phone $50 Credit Card Payment $40 Gas/ Car Maintenance $100 Cable/ Internet $45 Groceries $300 Clothing $50 Gifts & Donations $50 Since Shelby has fixed income each month, she has been using her credit card to make ends meet. Although she pays the minimum required by the credit card company each month, her credit card debt rising at an alarming state. She knows that she is not clear on where all of her money is going but she is glad to be able to share expenses with her roommate, Melinda. She does have a small amount of savings, but she is not sure it is enough if an emergency were to occur.

Answer the following questions:

1. Since budget is made up fixed expenses and variable expenses, identify which of Shelby’s expenses fall into each category. Then total each category and compare it to her monthly income to determine if she has a surplus or deficit [4 marks]
2. Based on the information above, how much should Shelby have in an emergency fund? [2 marks] What steps should she take to reach this amount? [2 marks]
3. Describe how Shelby might benefit from using the following Personal Financial Planner sheets for assessing her financial condition [4 marks]
   1. Creating personal balance sheet
   2. Creating a personal cash flow statement

iii. Developing a personal budget

Answer 1

(a)

Calculations of Fixed expenses

Rent	$400
Utilities	$75
Car insurance	$100
Fixed expenses	$575

Calculations of variable expenses

Cell phone	$50
Credit card payment	$40
Gas / car maintenance	$100
Groceries	$300
Cable / internet	$45
Clothing	$50
Gifts&donations	$50
Variable expenses	$635

Calculations of surplus

Monthly income ( after taxes )	$1450
Less : fixed expenses	$575
Less : variable expenses	$635
Surplus	$240

(b)

According to financial experts it is advisory to keep aside the amount of 3 to 6 month's living expenses as an emergency fund for unexpected financial difficulty. It depends upon the person's life situatin and employement stability.

In my opinion shelby should set aside an emergency fund of 6 months of her living expenses .

That is (fixed 575 + variable 635 )*6

Total of 1210*6 = $7260

Her budget indicates that she have a surplus of $240 every month . She should set aside a portion of this amount as a emergency fund until she reaches the emergency fund of $7260

(c)

By creating a personal balance sheet, Shelby can determine her net worth or current financialposition. It identifies her total assets and total liabilities.

By creating a personal cash flowstatement Shelby can identify what income she received and what she spent over the past month.By using this form to track her spending, she will be able to identify expenses that can be reduced to help meet her goals.

By developing a personal budget Shelby will be able to determine how well she is managing her money to achieve her financial goals. She will be able to identify variances and differences between her planned activities, planned spending, planned savings, and her actual activities. This will help her to make better money management decisions on a monthly basis.