Question

Time Value of Money

Jim Costa’s financial consulting business had blossomed over the past few years as he had made people aware of their need for financial planning, budgeting, and saving for retirement. Jim strongly believed in and preached the benefits of financial freedom.

Olivia and Brad McCaffrey, who lived in the same town where Jim ran his consulting business, came across his advertising campaign in a local newspaper and it certainly caught their attention. The McCaffreys had tied the knot about three years ago and were enjoying a fairly comfortable lifestyle.

Brad was a middle-level manager at an industrial chemical company, while Olivia worked at her own small business. Both of them had racked up quite a bit of credit card debt and college loans over the years, but were making all the required minimum payments on time. They loved to take annual vacation t rips and host parties so as to keep up with their social circle.

And then the other day, Olivia announced that she was pregnant with their first child. Their thoughts immediately turned to the future and it was only then that it hit them. With very little money saved up and no financial plan, they knew that they had better get some advice.

So they took an appointment to see Jim and at the first meeting they were asked to present information about their ages, current earnings, savings, debts, expenses, and desired goals. The following is a summary of the information that the McCaffreys reported.

When asked about their goals and objectives, Olivia told Jim that they were expecting their first child by the end of the year and were interested in starting a saving plan for their child’s college education. “Excellent idea”, said Jim “It’s never too early to start saving for your child’s education. What about a retirement nest egg? Have either of you put any money aside in some kind of retirement plan?”

Olivia and Brad looked sheepishly at each other “Unfortunately, we have been living it up,” they said. “And thanks to your advertisement, we realized that we had better start planning for the future.”

“Once again, it’s never too late,” said Jim “We’ll come up with some suggestions. Tell me, how long do you guys plan on working?” “Until we turn 62, not a day beyond 62,” they both said without hesitation. “We want to be able to tour the world while we still can!” “My thoughts exactly,” said Jim. “Do you guys own your own home?” “No,” they said. “We are renting a two-bedroom apartment but would like to move into an affordable house as soon as possible. Do you think that’s a good idea?” “Well, it depends,” said Jim. “You will need to come up with a down payment and closing costs. What kind of house did you guys have in mind?” he queried. “A 3 bedroom house that is currently listed at $270,000” they responded. “All right, let’s get to work,” said Jim.

Financial information reported by the McCaffreys:

• Salary:

Brad: $50,000

Olivia: $50,000

• Age:

            Brad: 30

            Olivia: 30

• Credit card balance owed: $12,000 at 15.99% APR and no plan to borrow more from the credit card. They plan to pay this off in 36 months.
• College loans owed (24 months remaining): $12,000 at 5.25% per year
• Car loans owed (24 months remaining): $15,000 at 5.99% per year
• Savings Account balance: $10,000
• Montly rent: $1,500
• Income tax rate (federal and state): 25%

6. Construct an amortization schedule for the 4.8%, 30 year mortgage above, with monthly mortgage payment. Why is it important for the McCaffreys to understand the amortization schedule of the home loan?

Answer 1

The above amortization schedule is important for the couple because it shows how interest gets built up over period of loan.

And that they should be making timely payments in order to ensure that their outgo is minimised