Kevin Anderson just graduated with a B.S. in engineering and landed a new job with a starting annual salary of $58,500. There are a number of things that he would like to do with his newfound “wealth”. For starters, he needs to begin repaying his student loans (totaling $26,900) and he’d like to reduce some outstanding balances on credit cards (totaling $7250). Kevin also need to purchase a car to get to work and would like to put money aside to purchase a condo in the future. Last, but not least, he wants to put some money aside for his eventual retirement.
Kevin needs to do some financial planning, for which he has selected a 10-year time frame. At the end of 10 years, he’d like to have paid off his current student loan and credit card debt, as well as have accumulated $50,000 for a down payment on a condo. Kevin would like to put aside 10% of his take-home (after tax) salary for retirement. He has gathered the following information to assist him in his planning:
Student loans are typically repaid in equal monthly installments over a period of 10 years. The interest rate on Kevin’s loan is 7.5% compounded monthly
Credit cards vary greatly in the interest rate charged. Typical APR rates are close to 20% and monthly minimum payments are usually computed using a 10-year repayment period. The interest rate on Kevin’s credit card is 18.25% compounded monthly
Car loans are usually repaid three, four or five years. The APR on a car loan can be as l ow as 2.9% or as high as 12%. As a first time car buyer, Kevin can secure a $17,250 car loan at 7.5% compounded monthly to be repaid over 60 months. Even though the car will be completely repaid after 5 years, Kevin knows he will eventually need to replace the car. To accumulate funds for the replacement of the car, he wants to continue to set aside this amount each month for the second five years and invest it in a “safe” investment plan
Insurance for the car will cost $950 per year, and Kevin has budgeted $140 per month to cover for gas and maintenance
A nice 2-bdr apartment near Kevin’s place of work has a monthly rent of $950. The rental office provided him with a monthly utility cost estimate of $150.
Other living expenses trouble Kevin; he knows that his day-to-day spending will have the most variability and that it will tempting to overspend. Nonetheless, he has committed himself to limit his monthly living expenses to $580
A 30-year, fixed rate mortgage is currently going for 5.75%-6.0% per year. If Kevin can save enough to make a 20% down payment on the purchase of his condo, he can avoid private mortgage insurance that can cost as much as $65 per month.
Investment opportunities can provide variable returns. “Safe” investments can guarantee 6% per year, while “risky” investments could return 30% or more per year. As a starter, Kevin will opt for a relatively “safe” investment (CDs and bonds) that earn 7.8% compounded monthly on his savings.
Kevin’s parents and older siblings have reminded him that his monthly take home pay will be reduced by income taxes and benefit deductions. He should not count on being able to spend more than 80% of his gross salary
ANALYSIS
Based on the preceding information, perform a financial analysis regarding Kevin’s plans. Summarize in a table Kevin’s monthly financial plan for the next 10 years. Is it a reasonable plan, considering all Kevin’s financial goals and expenses?
How much will Kevin have accumulated for retirement at the end of the 10-year period?
Property taxes and insurance can be as much as 30% of the monthly principal and interest payment (i.e. for a principal and interest payment of $1000, taxes and insurance would be an additional $300). What is the maximum purchase price Kevin can afford if he’d like to keep his housing costs at $1100 per month?
Update: tax on Salary is given in this statement:
Kevin’s parents and older siblings have reminded him that his monthly take home pay will be reduced by income taxes and benefit deductions. He should not count on being able to spend more than 80% of his gross salary