Donna and Sherman Terrel are preparing a budget for 2003. Donna is a systems analyst with an airplane manufacturer, and Sherman is working on a master's degree in educational psychology. The Terrels do not have any children or other dependents. Donna estimates her salary will be about $39,996 in 2003; Sherman expects to work only during the summer months, doing painting and remodeling work for a building contractor. He anticipates an income from those activities of $3000 a month in June, July, and August. Sherman does have a scholarship that pays his tuition and also provides $3,600 a year of which $2400 is payable in February and $1200 is payable in October. The Terrels don't expect to have any other income in 2003.
Donna and Sherman have listed their expected total expenses in 2003 as follows:
Housing (rent) $6,600
Transportation 5100
Food (includes dining out) 8100
Utilities 3000
Payroll taxes:
Donna
12,000
Sherman
1500
Insurance:
Life - payable in May
720
Auto - payable in January
1,500
Leisure and entertainment:
Vacation in May
1,200
All others
1,800
Clothing 1,500
Others $3,900
Total Expenses $46,920
The Terrels will begin 2003 with about $1,000 in liquid assets, and they prefer not to draw this balance below $600 at any time during the year.
Prepare a monthly income and expense plan for the Terrels in 2003.
On the basis of the plan you have just prepared, discuss the Terrels expected financial situation in 2003. Explain if you foresee any difficulties.
During the quarter break in April, Sherman's employer landed a major remodeling project and asked for Sherman's help. Sherman agreed, and he expects to earn $1,500 from the job before taxes but probably won't receive a check until early June. Discuss how this unexpected event might affect the Terrels' activities and their budget for the balance of 2003. It is not necessary to prepare a revised monthly income and expense plan but do refer to specific accounts and amounts (make appropriate assumptions) in your discussion
To prepare a monthly income and expense plan for the Terrels in 2003, we need to consider their expected income and expenses on a monthly basis.
Monthly income:
Donna's salary: $39,996 / 12 = $3,333
Sherman's income from painting and remodeling work in June, July, and August: 3,000 * 3 = $9,000
Total monthly income: $3,333 + $9,000 = $12,333
Monthly expenses:
Housing (rent): $6,600 / 12 = $550
Transportation: $5,100 / 12 = $425
Food: $8,100 / 12 = $675
Utilities: $3,000 / 12 = $250
Donna's payroll taxes: $12,000 / 12 = $1,000
Sherman's payroll taxes: $1,500 / 12 = $125
Life insurance: $720 / 12 = $60
Auto insurance: $1,500 / 12 = $125
Leisure and entertainment (excluding vacation in May): $1,800 / 12 = $150
Clothing: $1,500 / 12 = $125
Others: $3,900 / 12 = $325
Total monthly expenses: $3,605
To calculate the monthly surplus or deficit, we subtract total monthly expenses from total monthly income:
$12,333 - $3,605 = $8,728
Based on this plan, the Terrels can expect a monthly surplus of $8,728. However, they should keep in mind that unexpected events or additional expenses may affect their financial situation.
Regarding the unexpected remodeling project in April, assuming the $1,500 income is received in early June, this will add to their income for that month. They should adjust their budget for June accordingly. It would be ideal to allocate a portion of the additional income to any specific expenses or savings goals they have.
Since the Terrels have a monthly surplus of $8,728, they can use a portion of that surplus to cover any temporary shortfall during the months of May and early June when Sherman will not have his regular income yet. They can also consider using a portion of their liquid assets to bridge the gap if needed, but they should aim to maintain a balance of at least $600 as they prefer.
In summary, the Terrels' expected financial situation in 2003 appears stable with a monthly surplus. The unexpected remodeling project adding $1,500 to their income in June will help offset any temporary shortfall and ensure they can continue to meet their expenses. As long as they carefully manage their monthly budgets and allocate the additional income appropriately, they should be able to maintain their financial stability throughout the year.