Jason Rawinski

Continuing
Case:
Corey and
Tisha
Dumont
Jason Rawinski
Summary;

Cory and Tisha Dumont are a young couple who are in the early stages of

building their wealth. The recently read an article that discussed common financial

problems that families face thought their life. The Dumonts thought about taking a

personal finance course to help them. Cory is 31 and Tisha is 30, they have two

children. Haley who is 2 and Chad who is 4. They also have a beloved family cat.

Cory make $45,000 a year as a store manager. While Tishas salary is $53,000, she

works as an accountant. They currently live in a three-bedroom apartment, their

rent is $2,000 a month. The Dumonts plan on purchasing a new home within the

next 3-5 years. They have a mutual fund where they have their savings for their

future home worth $13,000.

The Dumonts also have an array of financial concerns. Regarding taxes Cory

and Tisha have been shocked when they saw how much was withheld from them for

federal, state, social security, and medicare taxes. They have concern about the

accuracy of their calculations. The Dumonts are also worried about how much

insurance theyll need, they have always chosen the cheapest plan. They have been

over paying for Tishas life insurance policy, her policy is worth 1,800 while the

Dumonts have make serveal annual payments of $720. Both Cory and Tisha are

curious about the new credit card offers, promising lower interest rates. They arent

sure if they should accept one of these offers. Even thought Cory and Tisha keep

making payments of $100 each month but their account balance tends to stay

around $1,300. Cory and Tisha have a savings account that earns 3% interest

annually, the balance in the account is $2,500. They also have concerns about the

future costs of Chad and Haleys college expense, Cory is still paying off his student

loans it is easy to see the cause for concern. The Dumonts currently lack an IRA but
Corys former employer recently sent him a statement informing him of $2,500 in

retirement funds he left with the former company. The Dumont have different view

to taking on risk. Cory does not like financial surprises and therefore would like to

minimize his risk, while Tisha on the other hand has mentions she is willing to take

financial risk when she believes the return is worth the risk. Cory and Tisha lack will

as well as other estate planning documents. The Dumonts enjoy being outdoors and

being active with their children. They have considered joining a golf club cost $250

a month to be a member.

1. Identify the stage of the life cycle that best describes Corey and Tisha

today. What important financial planning issues characterize this stage?

Corey and Tisha are in the beginning stage of accumulating their wealth. This

stage can continue into a persons mid-fifties. The primary issues the Dumonts

should be concerned with are setting financial goals, acquiring insurance, building

emergency savings, buying a home, and forming a family.

2. Based on the issues in Question 1 and your Knowledge of the Dumont

household, help Corey and Tisha complete Worksheet 1 to identify their

short term, intermediate-term, and long-term financial goals.

3. Complete Worksheet 5 for the Dumonts.

The Duponts have a combined income of $98,000, before pretax employer

deductions for Tishas medical insurance plan ($3,200), Corys 401k contribution

($2,250), and Tishas 401k contribution worth ($2,650) leaving the Dupont with a

total income of $89,900. Minus there income taxes of $22,000 their after-tax income

available for living expenditures is $67,900. The Duponts rent is $2,000 a month

costing them $24,000 a year. Cory and Tisha spend $6,900 on food, this total

includes groceries and the cost of going out to dinner. They spend a total of $3,300
on personal care items. Their transportation expense, includes the cost of

maintaining their vehicles, property taxes on both Cory and Tishas cars as well as

their auto payments, total $7,955 for the year. The Dumonts spend $2,400 annually

on entertainment. Their medical expenditures cost Cory and Tisha $850 for their

health and dental plan. Insurance costs the Dumonts $3,520, this includes

insurance for their automobiles ($2,200), Tishas life insurance ($720), and renters

insurance ($600). The Dumonts other annual miscellaneous expenses include their

annual cell phone expense ($1,800), charity donation ($2,400), day care ($10,000),

miscellaneous ($2,400), utilities ($3,900), credit card debt ($1,200), debt on

furniture ($2,352), and student loans ($2,520). The Dumonts total annual living

expenditure is $75,497 while their after-tax income is only $67,900. Cory and Tisha

need to reduce their annuals living expense so they can continue their saving and

investing.

4. Develop a balance sheet for the Dumonts using Worksheet 4. Do they

have a positive or negative net worth?

The Duponts total assets have a value of $78,300. This includes monetary

assets worth $4,400, Investments worth $17,100, retirement plans worth $2,500,

automobiles worth $31,700. While their total debts are worth $28,050. There debts

include $325 in unpaid utility bills, $1,300 in credit card debt, automobile loans

valued at $12,925, student loans worth $8,200, and other debts worth $5,300. The

Dumonts have a positive net worth of $50,250.

5. Using the information from the income and expense statements and the

balance sheet, calculate the following ratios

a. current ratio
 Corey and Tishas monetary assets add up to $4,400 while their current

liabilities total $325. When we divide 4,400 by 325 we get a current ratio of 13.538,

meaning Corey and Tisha will be able to pay their current liabilities 13.538 times

over if they liquidated all of their monetary assets. The current ratio is a way to tell

how liquid your assets are compared to your debts. To calculate this ratio, divide the

value of monetary assets by the value of current liabilities.

b. Months living expenses covered ratio

The months living expenses covered ratio is calculated by dividing monetary

assets by monthly living expenses. As stated above Corey and Tisha have monetary

assets of $4,400 their annual living expenditure is $75,497, to get their monthly

expenditure divide their annual living expenditure ($75,497) by 12 and you come up

with 6,291.42. After dividing monetary assets by the monthly living expenditure,

you come up with a months living coverage expense ratio of 0.699. What this

means is that if Corey and Tisha were unable to work and they liquidated their

monetary assets they would only be able to cover 0.699-month worth of living

expenditures. It is recommended that your liquid assets should be able to pay

around 3-6 months worth of expenses.

c. Debt ratio

The debt ratio tells us how much of their assets has been paid for by loans or

borrowing. In order to calculate the debt ratio, you divide total debt by total assets,

in Corey and Tishas case they have $28,000 in liabilities and $ 78,300 in total

assets. Corey and Tisha have a debt ratio of 0.358. A debt ratio of 0.358 indicates

that 35.8% of their assets was paid for with borrowed money.

D. Long-term debt coverage ratio

 This ratio tells us how many times over Corey and Tisha could pay there their

long-term debt, to calculate this ratio divide the total available income by total long-

term debt payments. Long-term debt is any debt that will take over one year to pay

off. The Duponts long-term debts include credit card debts that have a total

outstanding balance worth $1,300, at a payment rate of $100 per month it will take

the Dumonts 13 months to pay off this debt. Corys student loan debt of $8,200 has

48 monthly payment instilments left at $196 a month. They are paying $405 a

month to pay off their car loan, that still has $12,925 left on it and would take the

three years to pay off. Cory and Tisha also have a debt of $5,300 payable to the

furniture company at a rate of $210 a month they can expect to pay off their

furniture debt in 30 months. The Dumonts available income for living expenditures

is $67,900. Their total long-term debt payments are $10,932. 67,900/10,932= 6.21.

A long-term debt coverage ratio under 2.5 should be a warning, but the Dumonts

LTD coverage ratio of 6.21 is well above the recommended level.

E. Savings Ratio

The savings ratio is calculated by dividing income available for savings and

investment by income available for living expenditures. The Dumonts currently have

-$7,579 available for savings and investment and $67,900 available for living

expenses, there savings ratio is -0.11.

6. Use the information provided by the ratio analysis to assess the Dumonts

financial health. what recommendations would you make?

Cory and Tishas current ratio is currently 2.79, a current ratio greater

than one is the desired range. There current ratio isnt the problem though

their months living expenses covered ratio is only at .699, this should be

concerning to them. If either Tisha or Cory become sick or unable to work

 for an extended period of time they would unable to pay for monthly living

expenses like food, rent, or day care. There savings ratio is also

troublesome at -0.11, if they plan to purchase a house soon then the

Dumonts should look to reduce unnecessary expenses and focus on

paying off their debts.

Some recommendations I would make to Cory and Tisha are to begin

building an emergency fund, as well as increase savings for a down

payment, begin college funds for children. Continue to pay off debts, pay

more than the monthly minimum.

7. Do the Dumonts have an emergency fund? Should they? How much

would you recommend that they have in an emergency fund?

The should have an emergency savings fund but for whatever reason they

lack one. As a rule of thumb your emergency fund should be made up of

assets that can liquidated quickly in the event of an emergency, this fund

should have enough to cover 3-6 months of living expenses. The

Dumonts annual living expense is $75,497 so there monthly living

expense is $6291.41, based on the rule of thumb well will need

$18,874.25-$37,748.50 to cover 3-6 months of living.

8. According to the Money article that Cory and Tisha read, they can expect

to pay about $100,000 in tuition and college related expenses when Chad

enters college and even more for Haley. The Dumonts hope that Chad will

receive academic scholarships that will reduce total college costs to about

$40,000. Assuming that the Dumonts start a college savings program

today and manages to earn 9 percent a year ignoring taxes, until Chad is

18, how much will they need to save at the end of the year?

The Dumonts son Chad recently just turned 4, happy belated birthday to

Chad, in 14 years he will turn 18. Assuming he is able to receive $60,000 in

scholarships and his college savings program is able to earn 9% annually his

parents would have to save $1,537.33 every year.

FV 40000
PV
R 0.09
Y 14
PMT ($1,537.33)
How much will the Dumonts need to save each year if

Chad does not receive any scholarships?

If the estimated cost of Chads college expenses will be $100,000 in 14 years,

assuming he will receive no scholarships, and also assuming his college savings
FV 100000
program would earn 9% his PV parents would have to save
R 0.09
$3,843.32 every year. Y 14
PMT ($3,843.32)

9. How much will the Dumonts need to save at the beginning of each year to

accumulate $40,000 for Haley to attend college if they can earn 9% on

their savings?

Haley is 2-year-old and will enter college in 16 years. Assuming her college

savings programs earns 9%, her parents must accumulate $40,000. Her parent
PV
must put aside $1,212 every FV 40000 year.
R 0.09
Y 16

PMT ($1,212.00)
Assuming the Dumonts need to accumulate $100,000 to fund all of Haleys college

expenses, how much do they need to save at the end of each year?

If the Dumonts must accumulate $110,000 in 16 years to pay for Haleys

college expenses and her college savings account is growing 9% annually then Cory

and Tisha must save $3,332.99 annually.

PV
FV 110000
R 0.09
Y $16.00

PMT ($3,332.99)

10.How much will Tishas Great Basin Balanced Mutual fund shares be worth

when Chad enters college, assuming the funds returns 7 percent after

taxes on annualized basis?

In 14 years Chad, will enter college. Tishas mutual fund shares are currently

worth $2,300, assuming the mutual fund will earn 7% annually then Tishas mutual

fund shares will be worth $5,930.63.

PV 2300
PMT
R 0.07
Y 14

FV ($5,930.63)

How much will the shares be worth when Haley turns 18?

In 16 years when Haley turns 18 her mothers mutual shares will have gained

7% PV 2300 compounded annually, the share would be worth

PMT
R 0.07 $6,789.98.
Y 16

FV ($6,789.98)
 What will the value of the shares be when Tisha retires at age 67, assuming a

9 percent after-tax return and no deductions from her account?

Currently Tisha is 30 years old and will be able to retire in 37 years. She

anticipates that mutual fund shares, currently valued at $2,300, will gain 9% every
PV 2300
year. In 37 years Tishas PMT mutual fund shares will be
R 0.09
worth $55,783.82. Y 37

FV ($55,783.82)

11.How will the Dumonts market index fund be valued at $13,000 be worth

in 3,5, and 7 years if they can earn a current return of 6 percent?

At a rate of 6% the Dumonts Market index fund will be worth $15,483.21

in three years, $17,396.93 in five years, and $19.547.19 in seven years.

PV -13000 -13000 -13000

R 0.06 0.06 0.06
Y 3 5 7

FV $15,483.21 $17,396.93 $19,547.19

How will the Dumonts market index fund be valued at $13,000 be worth in

3,5, and 7 years if they can earn a current return of 8 percent?

Growing at a rate of 8% the Dumonts $13,000 investment will grow to

$16,376.26 in three years, $19,101.26 in five years, and $22,279.72 in seven years.
 PV -13000 -13000 -13000
R 0.08 0.08 0.08
Y 3 5 7

FV $16,376.26 $19,101.26 $22,279.72

12.Assuming an 8% return for the current year from their market index fund

valued at $13,000 and a 15 percent federal marginal tax rate, how much

will the Dumonts pay in taxes on their investment this year? By how much

after taxes will their account grow this year?

A market index fund valued at $13,000 growing 8% over one year will grow to

$14,040. An increase of $1,040 for the year. The Dumonts would not have to pay

taxes on their capital gain if they decided to hold on to the share. However, if they

did choose to sell their shares and were taxed at 15% they would pay $156 on their

capital gain.

PV -13,000
R 0.08
Y 1

FV $14,040.00

13.Assuming that Cory does nothing with his 401k retirement account from

his former employer and that the account grows at a rate of 5% annually,

how much will Cory have when he retires at 67? If instead, Cory takes

control of the money and invests it in a tax -deferred IRA earning 10%

annually, how much will he have at age 67.

Cory is currently 31 years and will be able to retire in 36 years. If he decides

to leave his retirement of his former employer at rate of 5% his retirement will grow

to $14,479.54. If Cory decides to manage his own money and assuming he can
make an annual return of 10% over 36 years his retirement account will grow to

$77,281.70.

PV 2500 PV 2500
R 0.05 R 0.1
Y 36 Y 36

FV ($14,479.54) FV ($77,281.70)

14.Using the Income and expense estimates provided by Tisha, calculate the

Dumonts taxable income using the 2014 tax information provided in the

text.

The Dumonts have a combine income of $98,000. The only allowable

adjustment was on Corys student loans, worth 652. $98,000- $652=$97,348. The

$97,348 is the adjusted income minus the standard deduction of $12,400, the

Dumonts also get 4 personal exemptions because of the four individuals supported

in the household. Each exemption is worth $3,950, for four people the Dumonts

personal exemption is worth $15,800. Subtracting both the standard deduction and

the personal exemptions leaves us with a taxable income of $69,148.

a. Do the Dumonts have enough to tax-deducible expense to itemize

deductions?

The Dumonts do not have enough tax-deductibles expense, so they should

choose the standard deduction.

b. Explain the tax ramifications of Corys student loan interest, estimated to

be $652 for 2014.

Cory should be eligible to for an adjustment of 15%, reducing his $652 in interest by

$97.80.
 c. How much Social Security and Medicare taxes are withheld from Corys

and Tishas income?

The Social Security tax is 6.2% of income and the Medicare tax withholds

1.45% of income. Corys income is $45,000, Social Security will withhold $2,790 of

his income, and Medicare will withhold $652.50 The total amount being withheld

from Corys income is $3,442. Tishas income is $53,000, $3286 of her income will

be withheld due to Social Security taxed. Medicare will withhold $768.50 from her

annual income. Tisha will have a total $4,054.50 withheld from her.

d. What is the Dumonts total federal income tax liability?

Based on the taxable income, found in question 14, $69,148 the Dumonts fall

in the 15% tax bracket. So are liable for 10% of 18,150, which is $1815. They are

also liable for 15% of $50,998, which is $7,649.70. Their total federal liability is

$9,464.70.

e. Do the Dumonts qualify for the child tax credit? If so how will it affect their

federal income tax liability? How will payment or refund be determined?

To qualify for the child tax credit a household must support at least once child

under 17. Both Haley and Chas are under 17. The Dumonts do qualify for the child

credit tax, each credit is worth $1,000 per child under 17. Each Child tax credit

subtracts $1,000 from the Dumonts taxable income.

15. Based on the Social Security tax, Medicare tax, and federal income tax

liability calculated above, how close did Tisha come? How does the

difference in estimated and actual tax liabilities changes their financial

situation? What recommendations would you make?

 The projected total tax for Social Security, Medicare tax, and Federal tax total

$14,961. Compared to Tishas estimate of $22,000, she over estimated by $7,039.

This benefits the Dumonts because they can put that money to some much-needed

savings. I would recommend that the Dumonts put some or all of that money in

either a savings account or some other investment vehicle. This newly freed up

funds could be used pay off existing debts.

16.Compare and interpret for Cory and Tisha the differences in their

marginal, average, and effective marginal tax rates. How might these

rates change with the life events such as salary increase or purchase of a

new home?

The marginal tax rate is the percentage of the last dollar you earn that goes

to taxes. The Dumonts marginal tax rate is 15%.

There effective marginal tax rate is 22.65%. the effective marginal tax rate is

calculated by adding that tax rates of the Federal marginal tax, state marginal tax,

city marginal tax, and social security tax rate. The Dumont were not liable for any

state marginal or city marginal taxes but they were taxed the federal marginal tax

and the social security tax, their rates are 15% and 7.65%.

Life events such as salary increase may result in a bracket creep, or an

increase in marginal tax. The purchasing of a home may allow the Dumonts to

qualify for deductions.

Recommendations

Short-term

Begin emergency savings

Reduce unnecessary debts
 Pay off current debts- utilities
Increase deposits into checking and savings accounts
Estate Planning
Begin college savings
Contribute to retirement
Reduce credit card use
Estate planning
Do not join the golf club

Intermediate-term

Keep making contributions to college savings

Purchase a home
Pay off furniture debt
Pay off student loans
Keep making contributions to retirement

Long-term

Continue to contribute to college funds

Continue to contribute to retirement
Thinks about purchasing a second home