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. Let's break it down:
Monthly income:
- Donna's salary: $39,996 / 12 = $3,333
- Sherman's income from painting and remodeling work: $3,000/month for June, July, and August
Monthly expenses:
- Housing (rent): $6,600 / 12 = $550
- Transportation: $5,100 / 12 = $425
- Food: $8,100 / 12 = $675
- Utilities: $3,000 / 12 = $250
- Payroll taxes (Donna): $12,000 / 12 = $1,000
- Payroll taxes (Sherman): $1,500 / 12 = $125
- Life insurance (payable in May): $720 / 12 = $60
- Auto insurance (payable in January): $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: $3,160 + $3,000 (June, July, August) + $60 (May life insurance payment) = $6,220
Expected monthly savings (income minus expenses): $3,333 + $3,000 - $6,220 = $113
Based on this monthly income and expense plan, the Terrels are expected to have a positive monthly savings of $113, which means they will be saving a small amount each month. They will also have a starting balance of $1,000 in their liquid assets, which they prefer not to draw below $600.
However, there are a few potential difficulties that can arise:
1. The monthly savings of $113 may not be sufficient for unexpected expenses or emergencies.
2. The Terrels do not have any other sources of income apart from Donna's salary and Sherman's summer work, which might make it difficult for them to handle any significant financial changes or setbacks.
3. The Terrels have relatively high total expenses compared to their income, which means they need to be cautious about managing their spending to stay within their budget.
The unexpected event of Sherman earning an additional $1,500 before taxes during the quarter break in April can have both positive and negative impacts on the Terrels' activities and budget for the rest of 2003.
Positive impact:
- The additional income will provide the Terrels with some extra financial cushion.
- It can be used to cover any unexpected expenses or emergencies that may arise.
- They may even consider using part of it to increase their liquid assets beyond the preferred $600 minimum balance.
Negative impact:
- As they won't receive the payment until early June, they might need to adjust their planned expenses for May and possibly June.
- If they were relying on using the additional income to cover specific expenses, they'll need to reassess their priorities and adjust their budget accordingly.
- They might need to consider rearranging their savings or making temporary adjustments to their monthly savings target until the additional income is received.
Overall, the unexpected event can provide some flexibility to the Terrels' budget, but they need to be mindful of managing their expenses and potential changes in their financial situation until they receive the additional income in June.