The Gordons’ Version of Financial Planning

The Gordons’ Version of Financial Planning

Burt

and

Emily

Gordon are a married couple in their mid-20s.

Burt

has a good start as a bank manager and Emily works as a sales representative. Since their marriage 4 years ago, Burt and Emily have been living comfortably. Their income has exceeded their expenses, and they have accumulated an enviable net worth. This includes the $10,000 that they have built up in savings and investments. Because their income has always been more than enough for them to have the lifestyle they desire, the Gordons have done no financial planning.

Emily has just learned that she’s 2 months pregnant. She’s concerned about how they’ll make ends meet if she quits work after their child is born. Each time she and Burt discuss the matter, he tells her not to worry because “we’ve always managed to pay our bills on time.” Emily can’t understand his attitude, because her income will be completely eliminated. To convince Emily there’s no need for concern, Burt points out that their expenses last year, but for the common stock purchase, were about equal to his take-home pay. With an anticipated promotion to a managerial position and an expected 10% pay raise, his income next year should exceed this amount. Burt also points out that they can reduce luxuries (trips, recreation, and entertainment) and can always draw down their savings or sell some of their stock if they get in a bind. When Emily asks about the long-run implications for their finances, Burt says there will be “no problems” because his boss has assured him that he has a bright future with the bank. Burt also emphasizes that Emily can go back to work in a few years if necessary.

Despite Burt’s arguments, Emily feels that they should carefully examine their financial condition in order to do some serious planning. She has gathered the following financial information for the year ending December 31, 2012.

Burt

Emily

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  7,500

 

 

Salaries

Take-home Pay

Gross Salary

$44,200

$6

4,000

25,048

36,000

Item

 

Amount

Food

$ 5,902

Clothing

2,300

Mortgage payments, including property taxes of $1,400

11,028

Travel and entertainment card balances

2,000

Gas, electric, water expenses

1,990

Household furnishings

4,

500

Telephone

640

Auto loan balance

4,650

Common stock investments

7,500

Bank credit card balances

675

Federal income taxes

19,044

State income tax

4,058

Social security contributions

7,650

Credit card loan payments

2,210

Cash on hand

85

2007 Nissan Sentra

1

5,000

Medical expenses (unreimbursed)

600

Homeowner’s insurance premiums paid

1,300

Checking account balance

485

Auto insurance premiums paid

1,600

Transportation

2,800

Cable television

680

Estimated value of home

185,000

Trip to Europe

5,000

Recreation and entertainment

4,000

Auto loan payments

2,150

Money market account balance

2,500

Purchase of common stock

Addition to money market account

500

Mortgage on home

148,000

Critical Thinking Questions

1.   Using this information and Worksheets 2.1 and 2.2, construct the Gordons’ balance sheet and income and expense statement for the year ending December 31, 2010.

2.   Comment on the Gordons’ financial condition regarding (a) solvency, (b) liquidity, (c) savings, and (d) ability to pay debts promptly. If the Gordons continue to manage their finances as described, what do you expect the long-run consequences to be? Discuss.

3.   Critically evaluate the Gordon’s approach to financial planning. Point out any fallacies in Burt’s arguments, and be sure to mention (a) implications for the long term as well as (b) the potential impact of inflation in general and specifically on their net worth. What procedures should they use to get their financial house in order? Be sure to discuss the role that long- and short-term financial plans and budgets might play.

   

 and i need anlayses .

     

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