personal finance

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:
Life - payable in May
Auto - payable in January
Leisure and entertainment:
Vacation in May
All others
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.

We don't do homework problems. We wouldn't dream of depriving you of the learning experience in figuring out the Terrel's budget for yourself. Good luck!

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  1. Donna’s total yearly income= $ 39996
    Sherman has no yearly total income like Donna, because Sherman expects to work only in the summer months & has a scholarship to cover some expenses.
    His total summer income is= $(3000*3)= $9000.
    Scholarship earnings = $3600 of which $2400 is payable in February & $ 1200 is payable in October.
    So, Sherman’s total income= $( 9000+3600)= $ 12600 yearly.

    Total income( TERREL)= $ 52596 Total expense= $ 46920
    Avg. income (monthly)= $4383 Avg. expense(monthly)= $ 3910
    Surplus money(bank deposit)(monthly)= $473
    Monthly income & expense plan: (summary)
    income Expense
    Total income= 4383 Total expense= 3910
    Bank deposit= 473

    income Expense
    Donna’s monthly income= $3333 Housing(rent) = 550
    Sherman’s monthly income= $ 1050 Transportation= 425
    Food (includes dining out) = 675
    Utilities= 250
    Payroll taxes:
    Donna= 1000
    Life - payable in May= 60
    Auto - payable in January= 125
    Leisure and entertainment:
    Vacation in May= 1000
    All others=150
    Clothing= 125
    Others= 325
    Bank deposit= 473

    The problem is they both don’t expect to receive their income yearly, so their income & expenses will not be as simple as it shows here. Again, the insurance payables are not yearly,but for some specific months; so those have to be shown for specific months onl. The next thing to consider is that, the vacation expense of May has to be calkculated on the month of May,not for the other months.
    They have to kep in mind that their liquid asset balance is $1000 & it must not be drawn below $600 in any state.

    So,total yearly expense will be = 46920-720-1500-1200= $ 43500
    Avg. expense for the month is= $3625
    Because Sherman doesn’t expect his income to be collected annually,his income is not going to be calculated in the average monthly income where he does’t expect to,with that consideration, Donna’s avg. monthly income = $ 3333.

    For the month January,
    Income Expense
    Donna= 3333 Avg. expense= 3625
    Sale of liquid asset= 400 Auto-payable=1500
    Debt= 1392
    The remaining balance of the liquid asset is now = $600.we assume that the bank debt is going to be paid at the end of the year with 10% interest rate. But again, because we are not going to count the interest rate on the deposited amount of the TERREL’s,we will not count the interest payment here.

    Income Expense
    Dona= 3333 Avg. expense= 3625
    Sherman= 2400 Bank deposit= 2108

    For the months March,April, September & November; the monthly income & expense plan will be,
    Income Expense
    Donna= 3333 Avg.Expense= 3625
    Debt= 292


    Donna= 3333 Avg.Expense= 3625
    Debt=1492 Vacation payable= 1200

    For the months June,July& August

    Donna= 3333 Avg.Expense= 3625
    Sherman= 3000 Bank deposit= 2708


    Donna= 3333 Avg.Expense= 3625
    Sherman= 1200 Bank deposit= 908


    Donna= 3333 Avg.Expense= 3625
    Debt= 292

    Now,if the TERREL family wants to see what will be the condition in the beginning of 2004,they will see the following picture:
    Total income of Donna= $ 39996 total income of Sherman= $ 12600
    Total expense= $ 43500 (deducting the payables)
    Payables= $ 3420 Bank loan= $ 4052
    Interest payment (due with 10% rate) = $ 265.66

    (II) the financial condition of the Terrel’s is as below:
    with the normal calculation basis,it is -
    Total income( TERREL)= $ 52596 Total expense= $ 46920
    Avg. income (monthly)= $4383 Avg. expense(monthly)= $ 3910
    Surplus money(bank deposit)(monthly)= $473
    Monthly income & expense plan: (summary)
    income Expense
    Total income= 4383 Total expense= 3910
    surplus= 473

    income Expense
    Total income= 52596 Total expense= 46920
    surplus= 5696

    But because the payables are not throughout the whole 12 months,the income of Sherman is not yearly , that’s why the calculation will be complex one. With the complex situation of the fact, we have derived the summary of the 2003 of their expected budget as follows:

    Total income of Donna= $ 39996 total income of Sherman= $ 12600
    Total expense= $ 43500 (deducting the payables)
    Payables= $ 3420 Bank loan= $ 4052
    Interest payment (due with 10% rate) = $ 265.66
    Total income(adding income of Donna & Sherman)= $ 52596
    Total expense (including expense,payables,bank loan & interest payment)=$ 51238
    Surplus= $ 1358.
    So,their financial condition is good because they have surplus amount of money from their earnings. They are meeting up all the expenses for that particular year from their income, so it gives them the savings option or buying marketable securities or liquid asset option. Again,they have the opportunity to spend more money in the upcoming year because of the surplus money.

    But the difficulty is the detoriation in the income& expenses. If the income is going downward 7 th expense is going upword, then that will hamper the predction. So it will cause negeative impact ovee their expectation. Again, detoriation or changes in tax law shall have an impact over their earnings. Here, they have not included the accidental cost,which may give trouble in their calculation if that occurs., again,in the main figures,there is no hint of the bankloan & interest payment. There is no hint for the savings rate also. That may cause impact over their calulatiuoions.

    (III) Sherman is going to earn some money from a project which is going to be received I June. So,the June earnings of the Tereel’s will increase & that will cause the yearly statement to change.
    The earnings is= $ 1500 before tax tax rate = (12000/39996)= 30%
    So,after tax income = $ 1050

    Monthly statement of June (revised)

    Donna=3333 Avg. exp= 3625
    Sherman= 4050 Bank deposit=425

    Yearly, (general)

    Total income=54046 Expense= 46920
    surplus= 7126

    Considering the payables,bank loans & interest payment,the scenario is,

    Total= 54046 Expense=51238
    surplus= 2808

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  2. prepare a monthly income and expense plan for terrels in 2003.

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