Donna and Sherman Terrel are preparing a budget for 2010. 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 $45,600 in 2010; 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 2010.
Donna and Sherman have listed their expected total expenses in 2010 as follows:
Housing (rent) $8,640
Transportation 6,000
Food (includes dining out) 9,000
Utilities 3,000
Payroll taxes:
Donna
13,200
Sherman
1,500
Insurance:
Life - payable in May
720
Auto - payable in January
1,800
Leisure and entertainment:
Vacation in May
2,100
Clothing 1,800
Others $3,900
Total Expenses $51,640
The Terrels will begin 2010 with about $1,000 in liquid assets, and they prefer not to draw this balance below $600 at any time during the year.
1.Prepare a monthly income and expense plan for the Terrels in 2010 (be sure to do the readings for the week prior to creating this plan). Also, total the income and expenses to determine their financial standing at the end of each month.
2.On the basis of the plan you have just prepared, discuss the Terrels expected financial situation in 2010. Explain if you foresee any difficulties, and suggest alternatives to correct them.
3.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 2010. 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.
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1. To prepare a monthly income and expense plan for the Terrels in 2010, you need to analyze their expected income and expenses for each month.
First, let's start with the income:
- Donna's salary is estimated to be $45,600 for the year, which gives us a monthly income of $3,800 ($45,600 / 12 months).
- Sherman's income from painting and remodeling work in June, July, and August is expected to be $3,000 per month, resulting in a total income of $9,000 for those three months.
Next, let's calculate the expenses:
- Housing (rent) remains constant at $8,640 for the year, which gives us a monthly expense of $720 ($8,640 / 12 months).
- Transportation costs $6,000 for the year, resulting in a monthly expense of $500 ($6,000 / 12 months).
- Food expenses are $9,000 for the year, which gives us a monthly expense of $750 ($9,000 / 12 months).
- Utilities cost $3,000 for the year, resulting in a monthly expense of $250 ($3,000 / 12 months).
- Payroll taxes for Donna are $13,200 for the year, which gives us a monthly expense of $1,100 ($13,200 / 12 months).
- Payroll taxes for Sherman are $1,500 for the year, resulting in a monthly expense of $125 ($1,500 / 12 months).
- Life insurance payments are $720 for the year, which gives us a monthly expense of $60 ($720 / 12 months).
- Auto insurance payment is $1,800 for the year, resulting in a monthly expense of $150 ($1,800 / 12 months).
- Leisure and entertainment expenses, including a May vacation of $2,100 and clothing expenses of $1,800, total $3,900 for the year, resulting in a monthly expense of $325 ($3,900 / 12 months).
- Other expenses are $3,900 for the year, which gives us a monthly expense of $325 ($3,900 / 12 months).
Now, let's calculate the monthly financial standing by subtracting the expenses from the income:
January:
Income: $3,800
Expenses: $720 + $500 + $750 + $250 + $1,100 + $125 + $60 + $150 + $325 + $325 = $3,605
Financial Standing: $3,800 - $3,605 = $195
Repeat this calculation for each month, adjusting for any specific payments that occur in that month.
2. Based on the monthly income and expense plan, the Terrels are expected to have positive financial standing at the end of each month, with some surplus in income.
However, the total expenses of $51,640 exceed the total income of $54,600, leaving a small deficit of $2,960 for the year. This means the Terrels will need to make some adjustments to their budget to cover this deficit.
Suggestions to correct this deficit:
- Reduce leisure and entertainment expenses: The Terrels can try to minimize their expenses for vacations, clothing, and other leisure activities.
- Cut back on dining out: The Terrels can reduce their expenses for food by dining out less frequently and focusing on home-cooked meals.
- Look for additional sources of income: Sherman can explore other part-time job opportunities during the winter months to supplement their income and cover the deficit.
3. Sherman's unexpected remodeling project during the quarter break in April, which pays $1,500 before taxes, will likely have a positive impact on their budget for the rest of the year. However, since Sherman won't receive a check until early June, they will have to manage their finances accordingly.
Assuming the $1,500 will be received in June, they can use this additional income to cover any outstanding expenses and potentially reduce the deficit.
If the Terrels are able to allocate the $1,500 towards their expenses, they will have a surplus of $1,305 ($1,500 - $195 remaining from January). This surplus can be used to cover any remaining expenses for the year or be saved for future needs.
Overall, this unexpected event will provide some financial relief for the Terrels, as it allows them to address their deficit and potentially improve their financial standing for the balance of 2010.