Question

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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

Answer 1

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.