Question

In: Finance

​​​​​​ Sylvia comes to you for advice in organizing her financial affairs. She is 29 years...

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Sylvia comes to you for advice in organizing her financial affairs. She is 29 years old and makes $50,000 per year, 30% of which goes to payroll deductions and taxes. Sylvia also receives $400 per year in interest from miscellaneous investments and savings accounts.

Sylvia has tracked her expenses for the last six months and provides you with the following estimates for the year:

Mortgage payments, including property taxes and interest

$5,886
($3,094 is interest)

Groceries

$3,600

Holidays

$3,500

Car payments, including interest

$4778
($958 is interest)

Utilities

$3,000

House and car insurance

$1,600

Gas for auto

$2,200

Auto maintenance

$600

Life and disability insurance premiums

$400

House maintenance

$1,500

Household expenses

$600

Medical and dental expenses

$400

Entertainment and lunches

$5,500

Gifts

$1,400

Clothing

$3,400

Miscellaneous expenses

$3,200

Sylvia has the following assets:

House value

$100,000

Cash in the bank

$1,800

Canada Savings Bonds

$8,000

Furnishings and personal assets

$18,000

Auto

$20,000

RRSP

$28,500

Sylvia has the following debt:

Credit card balances owing

$2,800

Line of credit owing

$5,000

Mortgage

$62,000

Car loan

$18,500

Required:

  1. Based on the information provided, prepare a net worth statement and an annual cash flow statement for Sylvia.     

b. Sylvia also has plans for saving and investing, and wants to find a way to “pay herself first.” She is willing to make adjustments to her spending habits and would like to see the effect of putting away 10% of her net pay for investing. Draw up a proposed future cash flow budget that will incorporate her ideas

Solutions

Expert Solution

A)

Based on information provided Sylvia networth statement :

Networth = Assets - Liabilities

Total assets = Hosuing value + cash in bank + Canada Savings Bonds + Furnishings and personal assets + Auto + RRSP

=100,000+1800+8000+18000+20000+28500

=$176,300

Total Liabilities = credit card balance owing + line of credit owing + mortgage + car loan

= 2800+5000+62000+18500

=88,800

Networth = 176,300 - 88,800

= $87,500

Cash Flow Statement of Sylvia

Annual Income = 50000

Payrol and tax deductions = 50000*30% = 15000

Net Income = 50000-15000

=35000

Annual expected Expense = Mortgage payments, including property taxes and interest + Groceries + Holidays + Car payments, including interest + Utilities + House and car insurance + Gas for auto + Auto maintenance + Life and disability insurance premiums + House maintenance + Household expenses + Medical and dental expenses + Entertainment and lunches + Gifts + Clothing + Miscellaneous expenses

= 5886+3600+3500+4778+3000+1600+2200+600+400+1500+600+400+5500+1400+3400+3200

Total Expenses = 41,564

Expenses are higher than income

Cash Flow = Income - Expense

=35000+400-41564

=-$6164

Sylvia has negative cash flow of $6164

B)

As Sylvia has negative cash flow and Sylvia wants to invest 10% of her net pay, that will be approx $3500.

Her net income will be $31,900 (31500+400)

Total Expenses = $41,564

Cash flow Budget = 31900 - 41564

=-$9664

Her cash flow will be negative $9664

She should control her expense as this negative cash flow will lead her to take more debt in future.


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