Question

1. Bill has monthly gross salary of $3,000 and take-home salary of $2,100. His monthly expenses amount to $1,000 and he saves $300 per month and uses the rest to pay his debts. He has cash in checking account of $2,500, emergency fund savings account of $4,200. He also owns a car with estimated value of $12,000. He owns personal possessions valued at $3,500. His credit card debts total $750 and other short-term debts are $800. The only long-term debt he has is balance on his student loan of $4,500.
   1. Prepare balance sheet for Bill.
   2. Does Bill save enough every month
   3. Does Bill have enough for emergency fund?
   4. Calculate Bill’s liquidity ratio and debt ratio and comment whether they are good or need improvement.

Answer 1

		BALANCE SHEET
		Assets:
		Cash	$2,500
		Emergency Fund Savings Account	$4,200
		Car	$12,000
		Personal possessions	$3,500
		Total assets	$22,200
		Liabilities:
		Credit Card Debt	$750
		Other Short Term Debts	$800
		Current Liabilities	$1,550
		Long term debts	$4,500
		Total Debts	$6,050
		Net Worth	$16,150
	b	Monthly Savings	$300
		Take home Salary	$2,100
		Percentage of savings=300/2100	14.29%
		The adequate saving percentage is 20%
		He does not save enough
	c	His emergency fund	$4,200
		This is 4 months of expense
		The amount is not adequate
		It should be at least 6 months of expensd
	d	Liquidity ratio =Current asset/Current Liabilities
		Liquidity ratio =(2500+4200)/1550	4.322581
		He has enough liquidity
		Debt to Income Ratio:
		Payment for Debt=(2100-1000-300)	800
		Debt to Income Ratio=800/2100	38%
		His Debt to income ratio is high
		It should be less than 35%