The Financial Statements of harry and Belinda Johnson Suggest Budgeting Problems

Harry has worked at a medium-size interior design firm for five years and earns a salary of $4,080 per month. He also receives $3,000 in interest income once a year from a trust fund set up by his deceased father’s estate. Belinda earns a salary of $6,400 per month, and she has many job-related benefits including flexible benefits program, life insurance, health insurance, a 401(k) retirement program, workplace financial education, and a credit union. The Johnsons live in an old apartment located approximately halfway between their places of employment. However, their rent will increase by $100 a month in July. Harry drives about ten minutes to his job, and Belinda travels about 15 min- utes via public transportation to reach her downtown job. Harry and Belinda’s apartment is very nice, but small, and it is furnished primarily with furniture given to them by some of his friends. Soon after getting married, Harry and Belinda decided to begin their financial planning. Fortu- nately each had taken a college course in personal finance. After initial discussion, they worked together for three evenings to develop the financial statements presented be- low. Note that the cash flow statement covered the first six months of their marriage.

(c) The Johnsons enjoy a high income because both work at well-paying jobs. They have spent parts of three evenings over the past several days discussing their financial values and goals together. As shown
in the upper portion of Figure 3-5, they have estab- lished three long-term goals: $6,000 for a European vacation to be taken in 2020, $5,000 needed in October 2021 for a down payment on a new au- tomobile, and $30,000 for a down payment on a home to be purchased in December 2023. As shown in the lower portion of the figure, the Johnsons did some calculations to determine how much they had to save for each goal—over the near term—to stay on schedule to reach their long-term goals as well as pay for two vacations and an anniversary party. After developing their balance sheet and cash-flow state- ment (shown below), the Johnsons made a budget for the year (shown in Table 3-6 on page 97). They then reconciled various conflicting needs and wants until they found that total annual income was close to the total of planned expenses. Next, they created a revolving savings fund (Table 3-8 on page 99) in which they were careful to include enough money each month to meet all of their short-term goals. When developing their cash-flow calendar for the year (Table 3-7 on page 98), they noticed a prob- lem: substantial cash deficits in November and December. Make specific recommendations to the Johnsons on how they could make reductions in their budget estimates. Do not offer suggestions that would alter their new lifestyle drastically, as the couple would reject such ideas.

Transcribed Image Text:Preview File Edit View Go Tools Window Help 61% Sun Mar 14 3:49 PM a Personal finance. by E Thomas Garman (z-lib.org).pdf (page 130 of 644) – Edited Q Search v Personal finance.. 128 129 130 131 Table 3-7 Cash-Flow Calendar for Harry and Belinda Johnson 3. Surplus/ Deficit (1-2) 2 Estimated Estimated Cumulative Surplus/Deficit $ 233 Month Income Expenses January $ 10,510 $ 10,277 $233 February 10,510 $ 10,277 233 $ 466 60L $ $ 947 March 10,510 10,267 243 10,272 238 μαν May 10,510 10,510 10,277 233 $1,180 June 10,510 10,507 $1,183 July 10,510 10,457 53 $1,236 August 13,510 13,477 33 $1,269 September 10,510 10,457 53 $1,322 October 10,510 10,437 73 $1,395 nd November 10,510 10,895 - 385 $1,010 DEFICIT ses ble Exp December 10,510 11,095 -585 $ 425 ation Total $129,120 $128,695 $425 by trip wances ortation tharity upkee renewal fees, property taxes, back-to-school supplies, vet grooming and checkups, den- tal cleanings, magazine subscriptions, special haircuts, one-time tickets for whatever, birthdays, and Christmas (travel, decorations, gifts). Table 3-8 shows the Johnsons' re- volving savings fund. When preparing their budget, the Johnsons realized that they were going to have significant deficits. dentis ntenar Fina Table 3-8 Revolving Savings Fund for Harry and Belinda Johnson Large Expenses Deposit Into Withdrawal Fund Fund Balance Amount Month Needed From Fund January $ 250 $ 250 $ February 250 $ 500 March 210 $ 710 April 250 096 $ May $1,150 06 June $1,150 July Summer 1,200 240 $1,390 vacation August $1,390 September $1,590 October $1,780 061 November Gifts/Other 385 $1,320 December Dinner 585 220 $1,100 Party/Other Total $2,170 $1,780 089$ 06E$-
Transcribed Image Text:Preview File Edit View Go Tools Window Help 61% Sun Mar 14 3:49 PM a Personal finance. by E Thomas Garman (z-lib.org).pdf (page 129 of 644) – Edited Q Search v Personal finance.. 128 129 이 130 131 CHAPTER 3 Financial Statements, Tools, and Budgets 97 Table 3-6 2018 Unfinished Annual Budget Estimates for Harry and Belinda Johnson Yearly Monthly Jan. Feb. Mar. Apr. June July Aug. Sept. Oct. Nov. Dec. Total Averages INCOME Harry's salary 4,080 4,080 4,080 4,080 4,080 4,080 4,080 4,080 4,080 4,080 4,080 4,080 48,960 4,080.00 Belinda's salary 6,400 6,400 6,400 6,400 6,400 6,400 6,400 6,400 6,400 76,800 6,400.00 Interest 30.00 250.00 000' 10,760.00 Income from trust 000'E TOTAL INCOME 10,510 10,510 10,510 10,510 10,510 10,510 10,510 13,510 10,510 10,510 10,510 10,510 129,120 EXPENSES Fixed Expenses 19,800 1,650.00 009' 008 00L'L 350 00' 350 00L' 350 1,700 009'L 350 Rent 1,700 009'l 00' 009'L 009'L 009'L 350 006' 240 Health insurance 350 325.00 00 00 Life insurance nd Home purchase fund 00S 220 2,500 208.33 Renter's insurance 220 18.33 DEFICIT ses Automobile insurance 1,200 100.00 009 009 ble Exp Auto loan payments 5,880 490.00 060 060 060 060 060 060 ation Student loan payments 009' 1,200 300.00 008 00 000 00 000 00 by trip 100.00 u Savings/emergencies 00 L 195 wances ortation Harry's retirement plan 195 195 195 195 195 195 195 195 195 195 195 2,340 195.00 000 4,800 1,920 oydn Belinda's retirement plan 400.00 tharity 000 160.00 09 1,700 09L 20,400 uspuap Cable TV and Internet 091 09 09 09L 091 09 0 ntenan Federal income taxes 09 1,700 1,700 1,700 1,700.00 002'L 00L' 00L' 500.00 State income taxes 000 000'9 000 800.00 Social security taxes Automobile registration Total fixed expenses Variable Expenses Fina 008 008 008 008 008 008 008 008 008 009'6 008 008 008 00 6,991.67 006'E8 6,565 6,565 6,565 6,565 6,565 7,165 6,715 7,435 7,215 7,215 7,515 7,815 3,400 283.33 Savings money market Revolving savings fund Food (home) 000'E 1,780 148.33 0 550 210 06 550 250 250 250 240 550 550 550 550 550 550 550 550 550 550.00 009'9 008 220 008 220 008 220 00E 220 008 220 009' 2,640 008 00'00 (1no) poo 220.00 Utilities 220 220 220 220 220 220 220 110 110 1,320 110.00 Cell phones Auto gas repairs Doctor/dentist/ out-of-pocket Medicines 110 110 110 110 110 110 110 110 110 220 220 220 220 220 220 220 220 220 220 220 220 2,640 220.00 1,200 00 0 00 0 00 0 00 0 720 09 170 09 09 09 00'09 09 09 09 09 09 09 09 09 2,040 170.00 Clothing and upkeep Church and charity 1,160 96.67 00 0 110 00 0 140 00 0 120 09 00L 00 0 00 L 00 0 1,475 Gifts 75 122.92 09 09 08 08 Public transportation 1,920 160.00 09 091 091 09 09 0 09 09 09 L 000'9 1,800 500.00 00S 150 Personal allowances Entertainment 150 150 150 150 150 150 150 150 150 150 150 150.00 300.00 009' 1,200 European vacation 007 100.00 000 42 000 42 007 42 007 42 Summer vacation Anniversary dinner party 42 42 42 42 42 42 41.67 Miscellaneous 1,200 100.00 00 0 44,795 Total variable 3,712 3,712 3,702 3,707 3,712 3,342 3,742 6,042 3,242 3,222 3,380 3,280 3,732.92 expenses TOTAL EXPENSES 10,277 10,277 10,267 10,272 10,277 10,507 10,457 13,477 10,457 10,437 10,895 11,095 128,695 10,724.58 33 53 -385 -585 425 Difference (available for spending, saving, investing, and donating 233 233 243 238 233 53 EL 385 585 Revolving savings withdrawals

Question

The Financial Statements of harry and Belinda Johnson Suggest Budgeting Problems

Harry has worked at a medium-size interior design firm for five years and earns a salary of $4,080 per month. He also receives $3,000 in interest income once a year from a trust fund set up by his deceased father’s estate. Belinda earns a salary of $6,400 per month, and she has many job-related benefits including flexible benefits program, life insurance, health insurance, a 401(k) retirement program, workplace financial education, and a credit union. The Johnsons live in an old apartment located approximately halfway between their places of employment. However, their rent will increase by $100 a month in July. Harry drives about ten minutes to his job, and Belinda travels about 15 min- utes via public transportation to reach her downtown job. Harry and Belinda’s apartment is very nice, but small, and it is furnished primarily with furniture given to them by some of his friends. Soon after getting married, Harry and Belinda decided to begin their financial planning. Fortu- nately each had taken a college course in personal finance. After initial discussion, they worked together for three evenings to develop the financial statements presented be- low. Note that the cash flow statement covered the first six months of their marriage.

(c) The Johnsons enjoy a high income because both work at well-paying jobs. They have spent parts of three evenings over the past several days discussing their financial values and goals together. As shown
in the upper portion of Figure 3-5, they have estab- lished three long-term goals: $6,000 for a European vacation to be taken in 2020, $5,000 needed in October 2021 for a down payment on a new au- tomobile, and $30,000 for a down payment on a home to be purchased in December 2023. As shown in the lower portion of the figure, the Johnsons did some calculations to determine how much they had to save for each goal—over the near term—to stay on schedule to reach their long-term goals as well as pay for two vacations and an anniversary party. After developing their balance sheet and cash-flow state- ment (shown below), the Johnsons made a budget for the year (shown in Table 3-6 on page 97). They then reconciled various conflicting needs and wants until they found that total annual income was close to the total of planned expenses. Next, they created a revolving savings fund (Table 3-8 on page 99) in which they were careful to include enough money each month to meet all of their short-term goals. When developing their cash-flow calendar for the year (Table 3-7 on page 98), they noticed a prob- lem: substantial cash deficits in November and December. Make specific recommendations to the Johnsons on how they could make reductions in their budget estimates. Do not offer suggestions that would alter their new lifestyle drastically, as the couple would reject such ideas.

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Table 3-7
Cash-Flow Calendar for Harry
and Belinda Johnson
3.
Surplus/
Deficit (1-2)
2
Estimated
Estimated
Cumulative
Surplus/Deficit
$ 233
Month
Income
Expenses
January
$ 10,510
$ 10,277
$233
February
10,510
$ 10,277
233
$ 466
60L $
$ 947
March
10,510
10,267
243
10,272
238
μαν
May
10,510
10,510
10,277
233
$1,180
June
10,510
10,507
$1,183
July
10,510
10,457
53
$1,236
August
13,510
13,477
33
$1,269
September
10,510
10,457
53
$1,322
October
10,510
10,437
73
$1,395
nd
November
10,510
10,895
- 385
$1,010
DEFICIT
ses
ble Exp
December
10,510
11,095
-585
$ 425
ation
Total
$129,120
$128,695
$425
by trip
wances
ortation
tharity
upkee
renewal fees, property taxes, back-to-school supplies, vet grooming and checkups, den-
tal cleanings, magazine subscriptions, special haircuts, one-time tickets for whatever,
birthdays, and Christmas (travel, decorations, gifts). Table 3-8 shows the Johnsons' re-
volving savings fund. When preparing their budget, the Johnsons realized that they
were going to have significant deficits.
dentis
ntenar
Fina
Table 3-8
Revolving Savings Fund for Harry
and Belinda Johnson
Large
Expenses
Deposit Into Withdrawal
Fund
Fund
Balance
Amount
Month
Needed
From Fund
January
$ 250
$ 250
$
February
250
$ 500
March
210
$ 710
April
250
096 $
May
$1,150
06
June
$1,150
July
Summer
1,200
240
$1,390
vacation
August
$1,390
September
$1,590
October
$1,780
061
November
Gifts/Other
385
$1,320
December
Dinner
585
220
$1,100
Party/Other
Total
$2,170
$1,780
089$
06E$-

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CHAPTER 3 Financial Statements, Tools, and Budgets 97
Table 3-6
2018 Unfinished Annual Budget Estimates for Harry and Belinda Johnson
Yearly Monthly
Jan.
Feb.
Mar.
Apr.
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
Total
Averages
INCOME
Harry's salary
4,080 4,080
4,080
4,080
4,080
4,080
4,080
4,080
4,080
4,080
4,080
4,080
48,960
4,080.00
Belinda's salary
6,400
6,400
6,400
6,400
6,400
6,400
6,400
6,400
6,400
76,800
6,400.00
Interest
30.00
250.00
000'
10,760.00
Income from trust
000'E
TOTAL INCOME
10,510 10,510 10,510 10,510
10,510 10,510 10,510
13,510 10,510 10,510 10,510
10,510
129,120
EXPENSES
Fixed Expenses
19,800
1,650.00
009'
008
00L'L
350
00'
350
00L'
350
1,700
009'L
350
Rent
1,700
009'l
00'
009'L
009'L
009'L
350
006'
240
Health insurance
350
325.00
00
00
Life insurance
nd
Home purchase fund
00S
220
2,500
208.33
Renter's insurance
220
18.33
DEFICIT
ses
Automobile insurance
1,200
100.00
009
009
ble Exp
Auto loan payments
5,880
490.00
060
060
060
060
060
060
ation
Student loan payments
009'
1,200
300.00
008
00
000
00
000
00
by trip
100.00
u Savings/emergencies
00 L
195
wances
ortation
Harry's retirement plan
195
195
195
195
195
195
195
195
195
195
195
2,340
195.00
000
4,800
1,920
oydn Belinda's retirement plan
400.00
tharity
000
160.00
09
1,700
09L
20,400
uspuap Cable TV and Internet
091
09
09
09L
091
09 0
ntenan
Federal income taxes
09
1,700
1,700
1,700
1,700.00
002'L
00L'
00L'
500.00
State income taxes
000
000'9
000
800.00
Social security taxes
Automobile registration
Total fixed expenses
Variable Expenses
Fina
008
008
008
008
008
008
008
008
008
009'6
008
008
008
00
6,991.67
006'E8
6,565
6,565
6,565
6,565
6,565
7,165
6,715
7,435
7,215
7,215
7,515
7,815
3,400
283.33
Savings money market
Revolving savings fund
Food (home)
000'E
1,780
148.33
0
550
210
06
550
250
250
250
240
550
550
550
550
550
550
550
550
550
550.00
009'9
008
220
008
220
008
220
00E
220
008
220
009'
2,640
008
00'00
(1no) poo
220.00
Utilities
220
220
220
220
220
220
220
110
110
1,320
110.00
Cell phones
Auto gas repairs
Doctor/dentist/
out-of-pocket
Medicines
110
110
110
110
110
110
110
110
110
220
220
220
220
220
220
220
220
220
220
220
220
2,640
220.00
1,200
00 0
00 0
00 0
00 0
720
09
170
09
09
09
00'09
09
09
09
09
09
09
09
09
2,040
170.00
Clothing and upkeep
Church and charity
1,160
96.67
00 0
110
00 0
140
00 0
120
09
00L
00 0
00 L
00 0
1,475
Gifts
75
122.92
09
09
08
08
Public transportation
1,920
160.00
09
091
091
09
09 0
09
09
09 L
000'9
1,800
500.00
00S
150
Personal allowances
Entertainment
150
150
150
150
150
150
150
150
150
150
150
150.00
300.00
009'
1,200
European vacation
007
100.00
000
42
000
42
007
42
007
42
Summer vacation
Anniversary dinner party
42
42
42
42
42
42
41.67
Miscellaneous
1,200
100.00
00 0
44,795
Total variable
3,712 3,712
3,702
3,707
3,712
3,342
3,742
6,042
3,242
3,222
3,380
3,280
3,732.92
expenses
TOTAL EXPENSES
10,277 10,277 10,267
10,272 10,277 10,507 10,457
13,477
10,457
10,437 10,895
11,095
128,695
10,724.58
33
53
-385
-585
425
Difference (available
for spending,
saving, investing,
and donating
233
233
243
238
233
53
EL
385
585
Revolving savings
withdrawals

Accepted Answer

Budget is defined as the financial plan for the stated period or year and it involves the planned…