Financial Budjeting

Part One

 We now return to our friends Sam and Judy. They are still living with Sam’s parents in Chelmsford, but are reaching the point where they think that it is time to strike out on their own.  They are feeling confident in their jobs and both have gotten promotions and several pay increases.  Sam is now earning $45,000 and Judy is earning $48,000.  Their monthly take home $5037.50.

They still drive to work together, leaving the car near Judy’s job in Cambridge with Sam taking the subway into Boston where he works.  They got a good deal leasing a second car and they pay $198 per month.  They now have one credit each with an interest rate of 12.5%. .  They have spent a total of $4500 buying some of their wish list and they now have a monthly payment of $139.75.

Their budget now looks like this:

Rent                                                    $400

Utilities                                               $200

Student loan                                      $250

Second car                                         $198

Car loan:                                             $125

Car insurance                                                $425

Gas                                                      $350

Subway                                               $   60

Food at home                                                $300

Food and Entertainment                  $300

Dry Cleaning                                      $  40

Credit cards                                       $139

Miscellaneous                                    $400


Total                                                   $3187

Sam and Judy both want to own their own home. They had been planning to move into an apartment for a while when they left Chelmsford, but with their higher salaries they are now thinking of buying something right away.  They had discussed this issue with both of their parents and have discovered that both families are able to help them out.  Between Sam’s family and Judy’s they will have $45,000 available to buy a house.  They know that they want to have a family relatively soon and that Judy intends to keep on working.

The need to decide a couple of things:  First, should they change their plans and buy a home or should they rent an apartment?  Second, where do they want to live?  Third, what kind of dwelling unit should they buy?

You can find prices on renting and buying on the internet as we saw in class.  If you have trouble finding a website let me know and I will find one for you.

Your assignment is to: 

1.)   Discuss whether you think they should rent or buy.  What are the factors they should consider?  They think that they probably can find an apartment that would rent for $1500 a month.

2.)   Discuss of where you think they should live?  What are the factors they should consider?  Can they find an apartment in their price range in the areas where you think they should live?

3.)   Discuss the costs of renting vs. buying.

Make up a new budget that reflects the changes in their expenses.


Part Two

 After thinking about things for a while Sam and Judy have decided to rent and try to come up with an even bigger down payment.  Their parents have made the $45,000 available to them right away and they want to invest in both stocks and bonds.  Actually, they will probably buy mutual funds but the fund will return the same gains that individual securities will.  They have done some research and have discovered that over time bond funds return about 5% per year and stock funds return about 9% per year.

Your assignment should include the following:

1.)   Your guess at what kind of risk tolerance Sam and Judy have.  You can make your guess based on the material and recommendations in our earlier presentations.  Make sure your presentation includes your rational.

2.)   Your suggestions for an asset allocation for their investments, meaning what percentage of their money they should invest in bonds and what percentage should they invest in stocks.

3.)   Based on their asset allocation how much do you think that they will have for a down payment in five years?  Use the Future Value method to determine how much they will have.  Make sure that you show all of your work in calculating what they will have.


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