Question

Michael is a 22-year-old recent marketing graduate who received a job in Manhattan, KS with a starting salary of $45,000. He has asked you to help him set some financial goals. He's graduating with $30,000 in student loans at 6.8% interest. As a result, his monthly student loan payment is about $345. Other than this loan, he has no other debt. His only significant asset is an older but reliable car that his parents helped him purchase.

Michael doesn't have a clue where to start. What do you think his first financial goal should be? How much should he try and save towards that goal per month? How long will it take him to reach that goal?

Answer 1

Computing no.of months to pay off the student loan.

Using Financial calculator:

I/Y = [(1.068)^(1/12)]-1 = 0.5497%
PMT = -345
PV = 30000
CPT Press N = 118.59 months. or about 9.88 years.

Normal method:

Formula: The present value of an ordinary annuity (PV)

PV = C× [1-(1+r)^-n]/r

PV = Present value (The cummulative amount available at Present)
C= Periodic cash flow.
r =effective interest rate for the period.
n = number of periods.

30,000= 345× [1-(1+0.005497)^-N]/0.005497

N = 118.59 months. or about 9.88 years.

A. His first priority should be to pay off the student loan. It will take him about 9.88 years to do it.

Then he should plan to save for his retirement and towards buying a house.

He should invest in equity funds for it as both are long term goals.

He should try to save a minimum of 10% of his current salary i.e 4500 per year or 375 per month towards his future.

As and as he grows mature he can start to save more.

Remember that he should never spend more than what he earns. That's the most rule of financial goal.