Financial Plan

FPLN 341 Assignment

Robert Schreiber

External Data Collected

Economic Information

Inflation is expected to increase 2.35% annually.

GDP is to have about a 3.0% change annually (now at $17.42 trillion).
Use caution in the stock market, especially with expected increasing interest rates from
the Federal Reserve.
Expected S&P return over the next 6 months is 3.8%.
30 year fixed mortgage rates around 3.83%.
15 year fixed mortgage rates around 2.98%.
60 month new car loan rate around 3.30%.
CD Rates: 1 Year (1.11%); 2 Year (1.25%); 5 Year (1.81%).
Checking interest rate is about .40%
Credit Card interest rates: Fixed (13.1%); Variable (15.72%).
Savings account interest rates about 0.03%.
Prevailing Bond Rates (Yahoo Finance):

Internal Data Collected

Background
The client is Brooke Schreiber, whom is a 22 year old whom recently graduated from a
medical program in Radiology from GBMC. Right after graduation, Brooke received a full-time
position (about 3 months ago) at ExpressCare where she is a Radiologist. After getting the job,
she became engaged to her boyfriend Keith Smithson. Keith Smithson is a 26 year old full-time
Cecil County Police Officer (of 5 years) who never went to college. The engaged couple have
lived together in a Bel Air, Maryland apartment for about 4 years. They do not have any kids, or
other dependents that financially depend on them. In the near future, they wish to move out of
their apartment and buy a house, and Keith wishes to pursue further education.

Quantitative Information
Net Worth

Savings Account The couple has a combined account balance of about $6,250. They
put in a small amount of about $20 per month. The interest rate on this account is about
.02%.
Checking Account The couple have combined account amounts of about $5,000. The
two dont pay an interest rate monthly on this account.
Mortgage Keith bought a 30 year mortgage at a face value of $124,000 and with a rate
of 12.2%. He still owes about $114,000 on the mortgage, even after paying extra on the
principal portion to reduce interest. The property has devalued, and has a resale price of
about $85,000 today.
Vehicles Keith bought a car worth $34,000 car with a 7 year loan. He pays $500 per
month and has about 4 years left. Brooke bought a car about 4 months ago for $20,000
with a 5 year loan. She pays $220 per month with a little under 5 years left.
Miscellaneous Assets Firearms, furniture, clothes, engagement ring, electronics (BS).

Income

Salary Both earn variable salaries based on overtime. Their combined estimated
amount per month is about $4,800 net taxes, insurance and DCP ($57,600 annual).
Gifts The wedding for the couple occurs during the summer of 2016, where they
expect to receive about $10,000 in gifts from family and friends.

Expenses

Credit card payments The couple has 4 different credit cards (2 Visa and 2 Discover).
They say they use about $500 on each, making a total bill of $2,000 per month. The
following expenses make up the credit card payments:
o Groceries $600 per month.
o Restaurants/Going out - $400 per month
o Gas - $260 per month
o Christmas shopping $80 per month
o Clothes/house supplies - $200 per month
o Miscellaneous - $460 per month
Phone/Internet Bills - Together, they pay about $100 per month.
Utilities - $100 per month
Homeowners Association Payments Pay $200 per month.
Car Payments Together pay about $720 per month.
Mortgage Payments Pay about $900 per month.
Insurance Expenses In more detail below.

Insurance Info

Life Insurance Insured

Face Amount
Cash Value
Monthly Premium
Who pays premium
Beneficiary
Policy Owner

Keith
$100,000
$0
Employer
Brooke
Keith

Health/Dental Insurance Taken out of Keiths salary to cover him. Brooke is still
covered on her parents plan.
Automobile Insurance Brooke and Keith have separate plans for each of their vehicles.
Neither knows specifics of their plans, other than that Brooke pay $55 per month, and
Keith pays $95 per month (total $150).
Homeowners Insurance - $10 per month.
Personal Asset Insurance Insurance on Brookes engagement ring of $120 per month.

Investments

Deferred Compensation Plan- Keiths employer takes out about $100 per month for a
deferred compensation plan that is put into diversified stocks and bonds (Keith does not
know which particular stocks/bonds, but says they are fairly risky). The current balance
in the plan is about $15,000.
Pension Keith receives a pension of 50% of his annual salary when he retires.
Stock Brooke owns 3 shares of Disney stock that is currently worth $120 each (for a
total worth of $360). It pays dividends of about $1.32 (per share) per year. These were
given to Brooke as a gift as a child. These are large cap stocks.
Bonds Neither own any bonds.

Qualitative Information
Short-term Goals:

Within 3 months, the two wish to contribute $1,000 per month into savings for at
least 2 years.
Keith wants to obtain a 401(k) within one year in order to start getting an employer
contribution match.
The two want a successful marriage and to be able to pay off (with help from
parents) their expenses regarding said marriage in 8 months.
They want to be able to rent their current apartment for at least $1,100 per month.
This amount would cover the expenses for the apartment, so more would be profit.
They would like this to be achieved within one year.

Intermediate Goals:

Buy a house for a future family for about $300,000 in about 5 years, and put 20%
down.
Have a baby in 3 years, and be able to pay for its childcare/daycare expenses.
Brooke and Keith both want to go back to school in 5 years, and have minimal
student loans.
Assuming Keiths car is paid off; he will want to buy a new car in about 7 years for
$40,000.

Long-term Goals:

They want to ensure financial security for their family, especially for when they
retire. They want a 100% wage replacement ratio at age 65 (expected to be about
$85,000) after career growth and inflation.
They want to create an adequate fund for their childs college career, which will hold
about $70,000 (will not cover all expenses). This assumes that the tuition per year
will be about $20,000. This will be in about 20 years.
Brooke and Keith want to ensure that they have an emergency fund of $15,000
within 5 years, and to maintain and add to this fund when able.

Investment Attitudes
After talking to Brooke and Keith about their risk tolerance regarding investments, they
both had different opinions in the matter. Keith currently seems to be a more risk tolerant
investor, while Brooke is not. I asked Keith to rate the risk of the investments is his deferred
contribution plan, and he said it would be a 7 out of 10 (10 is very risky). I had the two take a
risk tolerance questionnaire together that I found online to determine their tolerance more
precisely. Keith ended up compromising with Brooke, and he became less risky according to the
results. This test, along with the grading criteria, is presented at the end of the report, following
this financial plan. Together they scored of 24. This means that the two of them have a
combined risk tolerance that is average/moderate, but almost below-average. They do not like
to take many risks, and usually would like to take the safe, more insurable way of making
money.
Client Concerns
Financially, Brooke is extremely concerned about not being able to buy a house in the
near future. Since the value of their apartment has drastically decreased by about 31.45% over
the past few years, she is afraid that they will never get any equity. Selling the house at the
current value with about $114,000 left to pay off will make them lose a lot of money. If they do
not make enough on the sale of the house, she is afraid that they will not be able to put an
adequate down payment of 20% on a house. Also, if they do actually rent the apartment
instead of selling it, she wants to be sure that they will make enough rental revenue per month
to pay of the expenses the apartment accrues ($1,100).

Statement of Financial Position

Brooke Schreiber and Keith Smithson
Balance Sheet as of 11/23/2015
Assets
Current Assets
JT
Checking Account
JT
Savings Account
Total Current Assets

20XX
$ 5,000
6,250
11,250

Investment Assets
K
Deferred Compensation Plan
B
The Walt Disney Co. (3 Shares)
Total Investment Assets

15,000
360
15,360

Personal Use Assets

K
Principal Residence
K
Automobile #1
B
Automobile #2
JT
Clothes/Accessories (includes engagement ring)
JT
Furniture
JT
Firearms
JT
Electronics
Total Personal Use Assets

124,000
Prin
34,000
20,000
13,000
5,000
4,000
1,850
201,850

Total Assets

Liabilities and Net Worth

Current Liabilities
JT
Credit Card Balance - Discover
JT
Credit Card Balance - Visa
K
Automobile #1
B
Automobile #2
K
Personal Residence
Total Current Liabilities

228,460

12,000
$
12,000
6,000
2,640
10,800
43,440

Long-Term Liabilities
K
Automobile #1
B
Automobile #2
K
Personal Residence
Total Long-term Liabilities

18,000
10,560
103,200
131,760

Total Liabilities

175,200

Total Net Worth

53,260

Total Liabilities and Net Worth

JT = Joint

K=Keith

B=Brooke

228,460

Statement of Income and Expenses

Brooke Schreiber and Keith Smithson
Statement of Income and Expenses for Full Year (2015)
Cash Inflows
Totals
Brooke's Salary (net)
$
25,300
Keith's Salary (net)
$
32,300
Total Cash Inflows
$
57,600
Cash Outflows
Savings
Savings Account

240

Total Savings
Debt Payments
Personal Residence (mortgage)
Auto (Brooke)
Auto (Keith)
Credit Cards (includes living exp.)
Total Debt Payments

$
$
$
$

1,200
1,200
2,400

Insurance Payments
Auto Insurance (Brooke)
Auto Insurance (Keith)
Homeowners Insurance
Personal Asset Insurance (Ring)
Total Insurance

660
1,140
120
1,440

Total Cash Outflows

Net Discretionary Cash Flows

240

43,440

4,800

3,360

$
$

51,840
5,760

10,800
2,640
6,000
24,000

Living Expenses
Utilities
$
Phone/Internet
$
Homeowners Associtation Dues
$
Total Living Expenses

$
$
$
$

Balance Sheet Pie Chart

CA
4.92%

Liabilities & Net Worth = 100%

Assets = 100%
IA
6.72%

Current
19.01%

Net Worth
23.31%
Current Assets

Current Liabilities
Investment Assets

Long-Term Liabilities
Net Worth

Personal Use
Assets
PUA
88.35%

Long-Term
57.67%

Income Statement Pie Chart

Income: $57,600
Discretionary Cash Flows: 10%
Insurance
5.83%

Living
8.33%

Savings
0.42%

Living
Savings
Debt Payments
Insurance Payments

Debt
75.42%

Financial Statement Analysis

Current Ratio

Current Ratio = $11,250/$43,440 = .26

o The benchmark for this ratio is 1, so this is weak. This means that Brooke and
Keith cannot pay off their short-term debts as well as they would like. Since
they pay their debts with their incoming income as well (as many do), this is
not such a large issue.

Emergency Fund Ratio

EF Ratio = $11,250/$2,680 = 4.20 months

o The emergency fund ratio determines how many months a client can pay for
all of their monthly non-discretionary cash outflows. The benchmark is 3-6
months, so they are doing very well, as they can pay for over 4 months. It is a
very adequate ratio, but being closer to 6 months would be more beneficial.

Debt Ratios

Housing Ratio 1 = $13,320/$57,600 = 23.13%

o With a benchmark of 28% or less, their ratio is not bad. This means that
23.12% of their pay is devoted to housing, which will decline over time.
Housing Ratio 2 = $45,960/$57,600 = 79.79%
o The benchmark for this is 36% or under, so this result is very weak. This
shows that all monthly debt payments make up almost 80% of their income.
A mean reason for this is that the credit card debt payments are fairly high
for this couple, as most of their living expenses are charged.
Debt to Total Assets = $175,000/$228,460 = 76.69%
o This is an age dependent ratio, which is usually high among young people
such as this. This high ratio shows that a large portion of their assets are
financed by creditors. It will decline in time, building equity.
Net Worth to Total Assets = $53,260/$228,460 = 23.31%
o This complements the debt to total assets ratio and again shows that more
assets are financed by creditors than actually owned by Brooke and Keith.

10

Savings Rate

Savings Rate Ratio = $1,440/ $57,600 = 2.5%

o This is an extremely low rate, being that the benchmark is 10-13%. This
means that they need to save more, especially considering their goal is to
save $12,000 per year (20%).

Investment Assets to Gross Pay

Investment Assets to Gross Pay = ($15,360 + $11,250)/$57,600 = .49:1

o The benchmark for the age of 25 is .2:1, so they are in a strong position. This
means that they have .49 times their pay in investment assets.

Return on Investments

This is hard to determine in their situation since they have not bought stocks or
bonds. Brooke has Disney stocks that give dividends of about $3 per year, but I
cannot determine a capital gain since I do not know the initial price of the shares.

Life and Health Insurance

Brooke does not have theses insurances, and I cannot determine the adequacy of
Keiths life and health insurance because I do not know the premiums paid, since
they are taken out by the employer.

11

Recommendations
Risk Management
Keith seems to be getting decent benefits from his job, including life, health, and dental
insurance. If there is no long-term disability insurance involved with these benefits, I would
recommend getting it. As for Brooke, she should get disability insurance now, and health
insurance when off of her parents plan. The reason I would recommend these actions is that
neither of them would be able to maintain their current expenses safely if one of them lost
their income. Keeping the risk of inability to work covered will allow for a more stable
emergency if one were to arise. Also, with such a small premium on homeowners insurance, it
is unlikely that there is wide coverage. It may be wise to increase the coverage of the plan in
case of a disaster to the apartment.

Budgeting
My recommendation would be to create a strict budget in order to meet the savings
goals that the two wish to accomplish. Within this I would put a restriction on the amount off
miscellaneous spending that they charge to their credit cards in order to bring the Housing
Ratio 2 down from their high 80%. I also recommend not selling their cars as soon as they are
paid off, as Keith wants to do. This will stop more monthly expenses from accruing in the years
to come. Some benchmarks for budgeting includes only spending 25-35% on housing, 5-15% on
vehicles, 15-25% on the miscellaneous expenses (food/personal care), 10-15% on health/life
insurance, 7-15% on loan repayment, 4-7% on utilities, and 1-5% on entertainment. This will be
hard to accomplish in the short run, but through strict spending it can be accomplished. Also if
they want to save for a college fund for their future kid, they should save 4-5% of gross income.

Debt Management
The main recommendation for debt is to pay it all off as quickly as possible, within the
terms of payment. Especially regarding credit card bills, they need to be paid off monthly in
order to prevent interest from accruing. The 30 year mortgage on the house needs to be paid
off as soon as possible, as it is already underwater. Rather than selling it, I would recommend
moving into Keiths parents house (which was confirmed to be an option) in order to rent the
property. Renting it at the cost of $1,300 per month is very reasonable in the area they live, and
will allow them to pay off the house even faster, as the rent will cover the mortgage and other
expenses.

12

Retirement
My biggest recommendation is to establish some kind of retirement plan for Brooke. As
of now she has no way of forcing money into savings for the future, and does not save much on
her own. Keith has a reasonable pension, but could still use more. Both of them should
establish a 401(k), SIMPLE, or profit sharing plan as soon as possible. Having an employer match
will greatly benefit both of them if they are willing to contribute to it.

Investments
As mentioned before, a 401(k) or an IRA of some sorts needs to be placed in a balanced
portfolio. Considering the risk tolerance and their young age that I determined
(moderate/average), I recommend that they invest in about 60% Equities and 40% bonds. The
reason I say this is that equities are more risky than bonds, so this ratio is a nice, fairly even
balance of risk. They should sell some of their personal assets such as the firearms or
electronics that they said they do not use anymore, which could give them about $2,000 more
to invest with. Specifically, convertible bonds could be a good investment, along with annuities,
mutual funds, or even more large-cap stocks. Diversifying the portfolio with different
investment assets will drastically decrease the unsystematic risk.

Estate Plan
Being prepared with estate documents is one of the best ways to benefit their future
family in case of an emergency. This includes having wills, power of attorney for health care,
and advanced medical directives ready. It will allow the assets to go to whoever Brooke and
Keith would like, and would make the process go a lot smoother if there was an unexpected
tragedy. The sooner the better, so try to get these documents established within 2 years.

13

Implementation Effect on Cash Flows

Income
Balance
Statement
Statement
Recurring
Non-Recurring
Impact
Impact
Beginning Cash Flow (Income Statement) $
5,760
Recommendations:
Risk Management:
Disability Insurance for Brooke
Budgeting:
Less Miscellaneous Spending
Debt Management:
Rent Apartment ($1,300/month)
Retirement:
Brooke's 401(k) Plan Roth
Investments:

(3,000)

60% of Gross Pay / 90day waiting pd.

4,800

$400 less
spending/month

2,400

200$ profit/month

(1,720)

6% of salary

Sell Assets

Purchase of investment assets

Estate Plan:

Documents for Brooke and Keith

TOTALS

Comments/
Explanation

$
$

8,240 $

2,000 Sell guns, etc. to invest

60% high-cap stocks/
(15,000) 40% low-risk bonds
Will, Durable Power of
Attorney, Advance
(1,000) Medical Directive
(14,000)

14

The implementation of some of the recommendations causes some changes in key ratios:

Current Ratio: The current ratio is decreased by about 7% from the initial, nonrecurring impact on the Balance Sheet. As the years continue though, this will
increase from the increased revenues from renting and decreased payments of debt.

Emergency Fund Ratio: The decrease is miscellaneous spending and debt payments
on mortgage will increase their monthly income, allowing them to have more cash/
cash equivalents. This will increase the ratio to about 5.22, which is about a month
more of expenses they can handle in case of emergency.

Housing Ratio 1: This will improve to 18.20% since there is an increase of revenue of
$15,600 from rental revenue ($1,300 per month). Over time, it will be even less as
the debt payments go down, and eventually equity may be gained.

Housing Ratio 2: This also improves, to about 62.79% from the increased revenues.
The credit card expenses are paid off monthly, but are still high.

Debt to Total Assets: Not much changes here since the assets that are sold are just
reinvested into new assets, keeping the total assets very similar. Most of their assets
still come from creditors.

Savings Rate Ratio: This is now 5.50% after the increase in revenue and
contributions to Brookes 401(k). The estimation includes a 50% employer match.
This increase is still low compared to the benchmark, but this is because two
incomes are included, and only one person is saving into a plan. In the near future,
Keith should also get a 401(k) plan.

Investment Assets to Gross Pay: With the $15,000 increase in investments, and the
$15,600 change in revenue (rent), the ratio becomes 56.84%. This is an even
stronger position for the young couple, and needs to continue to increase over time.

Return on investment: Depending on the actual stocks and bonds bought by the
couple, this will increase variably. The capital gains and dividends from the stocks,
along with the interest from bonds, will cause this ratio to increase over time.

15

References

Bank of America Interest Rates for Savings, Checking & CDs. (n.d.). Retrieved
November 20, 2015, from https://www.bankofamerica.com/deposits/bankaccount-interest-rates.go
Composite Bond Rates. (n.d.). Retrieved November 20, 2015, from
http://finance.yahoo.com/bonds/composite_bond_rates
Current U.S. Savings Bond Interest Rates. (n.d.). Retrieved November 19, 2015,
from http://www.savingsbonds.com/rates.cfm
Dalton, M., Dalton, J., Gillice, J., & Langdon, T. (2015). Fundamentals of financial
planning (Fourth ed.). Money Education.
Investment Risk and Return Characteristics. (n.d.). Retrieved November 18, 2015,
from http://njaes.rutgers.edu/money/investmentrisk.asp
Welcome to Bankrate. (n.d.). Retrieved November 20, 2015, from
http://www.bankrate.com/