The Lee Case Study

Megan and Kevin Lee--The Newlyweds

Megan and Kevin were married just a few months ago, and they are happily adjusting to their
new lives together. Megan, who grew up in San Diego, and Kevin, who grew up in a small town
30 miles from Memphis, met at State University and dated for most of their college careers. Both
had enrolled in a large Physics course, and they happened to sit next to each other the first day
of class. By the end of the week, they each decided the only way to survive the class was to
organize a study group...and by the end of the semester they were “an item.” While neither of
them decided to become a physics major, Megan did receive her Bachelors degree in psychology
and started graduate school two years ago. Kevin received his Bachelors degree in Business
last summer and began his first job with a large consulting firm soon thereafter. He received a
$5,000 signing bonus that he used to open a money market mutual fund and to buy stock in
AT&T.

The first few months of marriage have been accompanied by many changes in both Megan and
Kevin’s lives. These include the normal challenges of merging two individual lives into one (e.g.,
selecting an apartment, taking a spouse’s needs and wants into account when deciding on
employment, etc.). But, as with many couples, financial management issues have been
particularly challenging. While dating they were each somewhat aware of the other’s spending
patterns and college funding, but financial practices were considered individual choices and not
really discussed. Now as a married couple they want to merge their finances, so both past and
future financial management practices are topics of debate.

The good news is that Megan and Kevin communicate well with each other. They have always
been able to express their opinions, even conflicting opinions, without letting the conflicts
become personal in nature. In addition, a two-day financial planning seminar given by an
experienced Certified Financial Planner (CFP) practitioner was one of the perks offered by
Kevin’s employer for all new employees and their spouses. This combination of instruction and
personal communication skills has provided Megan and Kevin with the tools to start tackling their
financial planning issues.

The bad new is that there are some difficult issues to tackle. They have significant debt, some
education loans as well as credit card balances. While Kevin’s father supported him financially
for at least half of his college costs, Megan provided for most of her own college expenses. In
addition, after years of college Megan and Kevin are experiencing pent up demand--the urge to
buy new clothes, furniture, cars, etc.--now that Kevin finally has a real job with a good income.
Then there are decisions to make about employer benefit plans, insurance, savings, etc. And
finally, Kevin is concerned about his father’s (Lyle Lee’s) financial future. His mother died when
Kevin was in high school, and his father (now age 50) has worked hard to see that all three
children were able to finish college. However, Kevin is concerned that his father has not been
able to provide for his own retirement.

Motivated by the financial planning seminar they attended, Megan and Kevin have worked the
past couple months to gather as much financial information as they could. Since they had little
idea about how much they were spending on things like eating out, entertainment, etc., they have
been keeping track of all their expenditures for the last two months. They have now filled out the
following forms they received at the seminar as completely as possible. Read the information
Megan and Kevin have provided so that you can “get acquainted” with them. As you first read
the case, you probably will not understand all the vocabulary or why certain information is even
included. Feel free to read ahead in your text or ask about terms that are not clear to you. By
the time you reach the end of this course, Megan and Kevin, as well as their financial lives, will
be old friends, and you will feel very comfortable with what all of this means!
 PERSONAL FINANCIAL INFORMATION

Client Information Spouse Information

Name: Kevin Lyle Lee Name: Megan Lynne Lee

Birth Date: October 7, 1978 Birth Date: July 28, 1976

Soc. Sec. No.: 459-23-8887 Soc. Sec. No.: 323-54-3990

Business Phone: 512/555-5379 Business Phone: 512/555-5697

Residence Address: 1626 Volunteer Dr. #425

Smithvale, USA 78131

Home Phone: 512/555-9836

Wedding Date: July 18, 2001

CHILDREN
Name Birth Date Social Security Number Grade
None

EDUCATION School Degree Year Received

Kevin State University B.A. Business August, 2001

Megan State University B.A. Psychology May, 1999

State University Ph.D. Social Work May, 2004 (projected)

OCCUPATION Employer Position Years

From To

Kevin DeVitt Consulting Computer Information Specialist 2001-present

Megan State University Teaching/Research Assistant 1999-present

FINANCIAL PLANNING CONSULTANTS

Name Address Phone

Financial Planner Eric Anderson, CFP Anderson Financial Consultants 555-1256

Attorney None

Securities Broker None

Bank Officer None State University Credit Union 555-6662

Smithvale, USA 60131

Insurance Agent Alice Rodriguez The Axtell Agency 555-6722

1563 Trail Brush
Smithvale, USA 60131

FINANCIAL PLANNING DOCUMENTS

Location

Personal Property Inventory None

Wills/Trusts: None

Insurance: Life Group policy through DeVitt Consulting

Information booklet in desk drawer at home

Health Group coverage through DeVitt Consulting

Information booklet in desk drawer at home

Dental Group coverage through DeVitt Consulting

Information booklet in desk drawer at home

Disability None
income

Auto Policy in desk drawer at home

Homeowners/ None
Renters

Deeds: Auto In desk drawer at home

Birth/Marriage/Other Birth Megan’s is in desk drawer, but cannot find Kevin’s

Certificates: In desk drawer at home
Marriage
 ASSETS - January 1, 2002
RATE OF
BALANCE INTEREST MATURITY
LOCATION
CHECKING State Univ. Credit Union1,2 $ 4,809 N/A N/A
State Univ. Credit Union1,3 $ 780 N/A N/A
(minimum balance acct.)
MONEY MARKET State Univ. Credit Union1,4 $ 2,603 2.5% N/A
ACCOUNTS/FUNDS (opened 2001)
Fidelity Cash Reserves2 $ 3,610 4.9% N/A
(opened 2001)
SAVINGS ACCT. First National Bank1,3 $ 518 2.0% N/A
(opened 1983)
CASH ON HAND Desk drawer at home $ 340 N/A N/A

VESTED PENSION See Security Investments $ 558

401(k)-DeVitt Consulting

SECURITY INVESTMENTS
Cost Current Value

Date Acquired Per Share Total Per Share Total

Security # Shares

AT&T2 T 43 8/15/01 $23.50 $ 1,011 $15.25 $ 656

Fidelity Magellan Mutual3 517.384 9/18/91 $12.23 $ 6,328 $50.01 $25,874

Fund (inherited) FMAGX
Average
401(k)--DeVitt Consulting:2 Monthly
Vanguard 500 Index 6.042 purchases $48.50 $ 293 $43.20 $ 261
Mutual Fund VFINX from 9/01 to
Vanguard International Value 22.284 1/02 $17.75 $ 396 $18.19 $ 405
Mutual Fund VTRIX
Reinvested
Vanguard 500 Index MF 0.068 dividends & $47.25 $ 3 $43.20 $ 3
Vanguard International Value 1.647 capital gains $17.80 $ 29 $18.19 $ 30
MF distributions

1
Federally insured
2
Kevin’s separate account
3
Megan’s separate account
4
Kevin and Megan’s joint account with right of survivorship
PERSONAL PROPERTY
Year Make Model Cost Current Value
Automobile: 1999 Ford Explorer $20,500 $15,500

Market Value Replacement

Value
Clothing $ 3,000 $10,500
Furniture & appliances $ 6,000 $13,000
Stereo, TVs, cameras, etc. $ 3,200 $ 6,800
Computer, printer, & software $ 2,000 $ 3,000
Golf clubs $ 800 $ 2,000
Jewelry $ 4,000 $ 7,500
Miscellaneous household items $ 1,500 $ 3,000

REAL PROPERTY

None

LIABILITIES - January 1, 2002

LOANS
To Whom Owed Original Property or Interest Current Payment How often Total Date of First
Amount of Service Rate Balance Amount Paid Number of Payment
Account Purchased Payments

State University $9,800 Education 9.0% $ 9,800 $203 monthly 60 1/10/02

Credit Union (Kevin)

State University $36,780 Education 8.0% $36,780 N/A N/A N/A N/A
Credit Union (Megan)

State University $ 3,000 Computer and 10.0% $ 2,409 $ 97 monthly 36 6/1/01

Credit Union printer
(Megan)

Ford Credit Corp. $17,500 Automobile 7.5% $11,542 $423 monthly 48 8/3/00
(Kevin)
 CREDIT CARDS

Annual Interest Maximum Outstanding Minimum Grace Calculation

Number Fee Rate Line of Balance Monthly Period Method
Credit Payment

CitiBank 5419 2556 0000 1627 $35 14.0% $4,000 $3,805 2% of balance yes1 Av. Daily
MasterCard or $20, Bal.2
(Kevin) whichever is
greater

State Univ. 4610 4600 2100 3539 $0 12.0% $5,000 $2,808 3% of balance yes Av. Daily
Credit Union or $75, Bal.3
Visa (Kevin) whichever is
greater

Dillards 5929 0317 2552 3645 $0 18.0% $3,000 $1,800 2% of balance Yes1 Av. Daily
Dept. Store or $50, Bal.2
(Megan) whichever is
greater

American 2739 192039 97105 $55 --- --- $ 0 Total balance --- ---
Express
(Kevin)

Sears 0 52566 90182 0 $0 21.0% $5,000 $1,667 2% of balance Yes1 Av. Daily
(Joint) or $10, Bal.2
whichever is
greater

Discover 321 01463 1495 $0 21.5% $3,000 $2,967

2% of balance no Two-cycle
(Joint) or $25, av. daily
whichever is bal.1
greater
**Kevin and Megan have decided they will pay all new charges in full starting January 2002.

LINE OF CREDIT

Number Annual Interest Maximum Outstanding Minimum Grace Calculation

Fee Rate Line of Balance Monthly Period Method
Credit Payment
State Univ. 186-621-841 $0 11.0% $10,000 $0 2% of balance no Av. Daily
Credit Union or $50, Bal.2
(Joint) whichever is
greater

1
Grace period only if total outstanding balance is paid in full monthly.
2
Including new purchases and cash advances.
3
Excluding new purchases, but including cash advances.
 INCOME—January 1 to December 31, 2001

Salary (Kevin) $ 42,000

Bonuses $ 0

Salary (Megan) $ 19,000

Bonuses $ 0

Consulting income (Megan) $ 5,000

Interest1 $ 75

Dividends2 $ 975

Capital gains distributions3 $ 3,197

Monthly salary after tax deductions:

Kevin Megan

Gross salary $ 3,500 $ 1,583

Federal income tax withholding 525 111
State income tax withholding (3%) 105 47
Social security tax withholding (7.65%) 268 121
Net salary $ 2,602 $ 1,304

1
Money market account ($65 for the year, paid monthly) and savings account ($10 for the
year, paid monthly). Interest will be left in accounts to accumulate.
2
Fidelity Cash Reserves ($177 for the year) and Fidelity Magellan ($798 for the year), both
paid semiannually in June and December. Dividends will be reinvested.
3
Fidelity Magellan ($3,197 for the year), paid semiannually in June and December.
Dividends will be reinvested.
EXPENSES--January 1 to December 31, 2001
Cash Flow Cash Flow
Monthly Annually

Rent $850 $10,200

Utilities (electricity and gas) 180 2,160

Telephone ($35) and cable TV ($45) 80 960

Groceries 300 3,600

Food away from home 170 2,040

Auto loan payments 423 5,076

Auto maintenance (gas, repairs, licenses, etc.) 165 1,980

Medical/dental expenses (not covered by insurance) 80 960

Clothing 225 2,700

Insurance premiums paid through withholding 6 72

Contributions to 401(k) pension 175 2,100

Auto insurance (paid semi-annually in March and September) 586

Federal income tax withholding 636 7,632

Social security tax withholding 389 4,668

State income tax withholding 152 1,824

Appliance, furniture, and equipment purchases 1,500

Personal care 50 600

Entertainment 200 2,400

Vacations 1,000

Education expenses (books and supplies) 150 1,800

Charitable contributions 25 300

Gifts ($35/mo. Jan. through Oct., $400/mo. Nov. and Dec.) 1,150

Reinvested interest, dividends, and capital gains distributions 4,247

Computer loan payments 97 1,164

Minimum payments on credit cards 303 3,636

Miscellaneous 100 1,200

EMPLOYEE BENEFIT INFORMATION--DEVITT CONSULTING

DeVitt Consulting offers a cafeteria benefit plan with the following choices. DeVitt Consulting
pays $300 per month towards the premiums of the selected insurance coverages. If the
employee wants more of the insurance coverages than the $300 premium DeVitt Consulting
pays, the difference is deducted from the employee's monthly paycheck. No reimbursement is
made if the employee selects less coverage than the $300 premium covers. Kevin currently is
covered by the group term life policy and both Kevin and Megan are insured under the major
medical policy. Kevin is not covered by the other insurance and is not participating in the
company's flexible spending account.

LIFE INSURANCE

Type of life insurance Group Term Accidental Death and Dismemberment

Face amount 2, 3, or 4 times gross salary Sold in multiples of $10,000 not to

exceed 10 times gross salary

Monthly premium $0.07 per $1,000 of coverage $0.023 per $1,000 of coverage

Kevin's current $84,000 (2 times gross salary) None

coverage

Beneficiary Megan (primary beneficiary) N/A

Lyle Lee (secondary beneficiary)

Owner Kevin N/A

Monthly premium for $5.88 N/A

coverage selected

DISABILITY INSURANCE

Policy conditions Employer group policy

Definition of disability Own job for 2 years, then any job educationally suited for

Monthly benefit 70% of gross monthly salary

Waiting Sickness 90 days

period
Accident 90 days

Benefit Sickness to age 65

period
Accident to age 65

Monthly premiums $0.4 per $100 of gross monthly salary

Kevin's current coverage None

Monthly premium for N/A

coverage selected
MEDICAL INSURANCE

*Type of Policy Major Medical Option HMO Option

Company PMA Medical Grant HMO

Policy number Group #153-271 Group # 143591 HMO

*Hospitalization
85% of semi-private 100% of semi-private rate
Room Rate rate

Number of days unlimited unlimited

*Major Medical
$500,000/person/year unlimited
Maximum

Deductible/copayment $500/person/year $50 copayment/emergency room visit

$15 copayment/doctor's visit
$ 0 copayment/hospital stay
$15 copayment/brand-name prescription
$ 5 copayment/generic prescription

Participation percentage 85/15 --

Cap on participation $2000/person/year --

Mental health 85% for up to 20 visits $20 copayment per visit for up to 30
annually visits annually

Dental not covered not covered

Monthly premiums $150 per person $125 per person

Monthly premium for Kevin $300 N/A

and Megan’s current coverage

*COMMENTS

Major medical: Prescription drugs are covered with a $10 copayment for generic
prescriptions and a $20 copayment for brand-name prescriptions. Drug
copayments cannot be included as part of the deductible or the participation
cap.

HMO: Must use HMO facilities and selected pharmacies and hospitals.
DENTAL INSURANCE

Policy Number Group #078 61

Annual deductible $25 (waived for 2 diagnostic and 2

preventative treatments a year)

Maximum annual benefit $2,000

Diagnostic (oral exams and x-rays) 100%

Preventive (cleanings, fluoride, and sealants) 100%

Restorative--minor (fillings and stainless steel crowns) 75%

Restorative--major (porcelain, resin, and gold crowns) 50%

Endodontics (pulp caps and root canals) 75%

Periodontics (periodontal scaling, root planing, and treatment 75%

of gum disease)

Prosthodontics (bridges and dentures) 50%

Oral surgery (extractions) 75%

Orthodontics (retainers and braces) 50% ($2,000 lifetime maximum)

Monthly premiums $35/per person

Current coverage None

Monthly premium for coverage selected N/A

OTHER BENEFITS

Sick leave: Employee earns 1 day per month. Sick days can be accumulated up
to 90 days of leave. Kevin currently has 4 days accumulated.

Personal days: 3 days of personal leave with pay are given each year after 1 year of
employment. These days cannot be accumulated from year to year.

Vacation: Two weeks of vacation are given annually after 1 year of

employment. Three weeks of vacation are given annually after 5
years of employment. Vacation days can be split, but they cannot be
accumulated from year to year.

Tuition reimbursement: Up to $2,000 per year tuition and fee reimbursement for courses
taken by employee that improve job skills.

Flexible spending accounts: Up to $400 per month can be contributed to each a health care
flexible spending account and a dependent care flexible spending
account. Employees can contribute to one or both of these
accounts, as needed.
 PRIVATE INSURANCE

AUTO INSURANCE

*DESCRIPTION (1) 1999 Ford Explorer (2)

Company Safe-Drive Casualty, Inc.

Policy Number 1356-8356-EXP

Liability $40,000 or (20/40/15)

Medical Payments $3,000/person

Uninsured Motorist $40,000 or (20/40/15)

Collision (Actual Cash Value)

Deductible $200

Comprehensive (Actual Cash Value)

Deductible $ 50

Annual Premium $586

Comments Paid semi-annually in March

and September

RETIREMENT INFORMATION--DEVITT CONSULTING

Type of pension plan 401(k) salary reduction plan

Employee contribution Voluntary contribution. Maximum contribution is 15% of gross salary

(excluding bonuses) up to $10,500 annually.

Employer contribution Matches $0.50 for every $1.00 of employee contribution for the first 8% of
gross salary contributed by employee.

Vesting Employee contributions immediate; employer contributions--40% after 2

years, 60% after 3 years, 80% after 4 years, and 100% after 5 years

Investment choices Employee can put money in a 5-year Guaranteed Investment Contract (GIC)
and/or any of the Vanguard family of mutual funds. The 5-year GIC offered
is paying a 5% rate of return.

Kevin's current 5% of gross salary

contribution

Current value of $837

pension

Current vested value $558

Beneficiary Megan
 FINANCIAL GOALS

Assume these goals are listed in order of priority (from highest to lowest).

Short range (1 year):

• Evaluate their financial situation and make necessary changes in spending and financial
alternatives
• Get control of their finances
• Pay all new credit card charges in full upon billing

Intermediate range (2-5 years):

• Pay off all credit card balances
• Accumulate an adequate emergency fund
• Buy a second car
• Purchase a house
• Save for a new car to replace the Explorer

Long term (over 5 years):

• Save for retirement
• Provide funds for Kevin’s father in case he needs financial support
• Have 2 children
• Save for children’s college educations (once children are born)

OTHER INFORMATION

1. Are you able to save regularly? Only for retirement through 401(k) and through
reinvestment of interest, dividend, and capital gains distribution income.

2. How much are able to save annually? $2,100 in the 401(k) and about $4,250 of
reinvested interest, dividend, and capital gains distribution income.

3. Do you invest regularly? Only through the 401(k).

4. Do feel that you are financially organized? No, but we are working on it.

5. Do you budget your money? No, but we are willing to start budgeting.

6. If you were to die, could your dependents handle their finances? Yes

7. How do you feel about saving for retirement? It's important, but we have other goals that
are also very important right now.

8. If you had an extra $5,000 what would you do with it? Pay off credit card debt

9. How do feel about taking investment risks? We are comfortable with a moderate amount
of risk.

10. How is your health? Very good except for an occasional cold or injury.

11. What is your single most important financial objective at this time? Pay off our new credit
charges each month and reduce the current outstanding credit card balances.