Question - Sireli Williamson and Arti Devi is a married couple in their mid 20s. Sireli is a financial analyst and Arti works as a sales representative. Since their marriage four years ago, Sireli and Arti have been living comfortably. Their income has exceeded their expenses and they have accumulated a net worth of nearly $45,000. This includes the $10,000 that they have built up in savings and investments. Because their income has always been more than adequate to allow them to live in the fashion they desire, Williamsons have done no financial planning.
Arti has just learnt that she is two months' pregnant and is concerned about how they will make ends meet if she quits work after her child is born. Each time she and Sireli discuss the matter, Sireli tells her not to worry because 'we have always managed to pay our bills on time'. Arti cannot understand his attitude, because her income will be completely eliminated. To convince Arti that there is no need for concern, Sireli points out that their expenses for necessities last year were $24 885, which just about equaled his take-home pay of $26 480.
With an anticipated promotion to a managerial position and an expected 10% pay raise, his income next year should exceed this amount. Sireli also points out that they can reduce luxuries (trips, recreation, and entertainment) and can always draw down their savings or sell some of their shares if they get in a bind. Arti asks about the long-run implications for their finances; Sireli replies that there will be 'no problem' because his boss has assured him that he has a bright future with the company. Sireli also emphasizes that Arti can go back to work in a few years if necessary. In spite of Sireli's somewhat convincing arguments, Arti feels that they should carefully examine their financial condition in order to do some serious planning. She has gathered the following financial information for the year ending 31 December 2009:
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Salaries
Sileri
Arti
|
Take-home pay ($)
26480
18090
|
Gross Salary ($)
38350
26000
|
|
Item
Food
Clothing
Mortgage payments
Travel and entertainment card balances
Gas, electric, water expenses
Household furnishings
Telephone
Car loan balance
Share investments
Bank credit card balances
Income taxes
Credit card loan payments
Cash on hand
2001 Nissan car
Medical expenses (not reimbursed)
Homeowner's insurance premiums paid
Cheque account balance
Car insurance premiums paid
Transportation
Cable television
Estimated value of home
Trip to Europe
Recreation and entertainment
Car loan payments
Money market account balance
Purchase of common stock
Addition to money market account
Mortgage on home
|
|
amount
4,200
2,300
9,400
2,000
1,990
4,500
640
2,650
7,500
675
16,940
2,210
85
7,000
600
400
485
800
2,800
480
98,000
5,000
4,000
2,150
2,500
7,500
500
70,000
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Requirements -
1. Using this information and Worksheets 2.2 and 2.3, construct the Williamsons' 31 December 2009 balance sheet and income expenses statement for the year ending 31 December 2009.
2. Comment on the Williamsons' financial condition with respect to (a) solvency, (b) liquidity, (c) savings, and (d) ability to pay debts promptly. If the Williamsons continue to manage their finances as described, what do you expect the long-run consequences to be? Discuss.
3. Critically evaluate the Williamsons' approach to financial planning. Point out any fallacies in Sireli's arguments, and be sure to mention (a) implications for the long term, (b) the potential impact of inflation, and (c) the impact 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.