FIN 420 Week 5 Comprehensive Personal Financial Assessment Example

One Year Later: A Full Financial Checkup for the Whitfields, From Net Worth and Ratios to a House Budget, Wills and a Guardian for Maya

[Student Name]

University of Phoenix

FIN/420: Personal Financial Planning

Week 5 Assignment

[Instructor Name]

[Date]

The Whitfields and all figures are composites written for a model paper; planning ratios, legal documents and research findings come from the sources listed and are stated generally.

A year after they first tracked their spending, the Whitfields, the composite Phoenix couple, sat down to review everything at once. Jasmine had received a raise to $57,000, Andre a raise to $66,000, and Maya had started kindergarten, ending $1,100 a month of child care costs. The plan had worked in pieces; the final step was to see whether the pieces added up to a household that was safer, freer and closer to its goals. This paper assesses their position and sets the next three years.

The Updated Balance Sheet

Their liquid savings rose from $3,200 to $12,400: $8,600 in the emergency fund, $2,200 in the irregular-expense account and $1,600 in checking. The house fund holds $4,800. Retirement accounts grew from $46,000 to $61,500 with new contributions and market gains, and Maya's 529 plan holds $1,300. The cars are worth about $26,000. On the debt side, the credit card balance transfer has $2,100 remaining, the car loans total $20,800 and the student loan $19,100. Total assets are about $106,000 and total debts about $42,000, for a net worth of about $64,000, up from about $21,900. Higher retirement balances and lower card debt explain most of the gain.

The Ratios

The liquidity ratio, liquid assets divided by monthly essential expenses, is about $12,400 divided by $5,200, or 2.4 months, up from about half a month a year ago but still below the three months set as the goal (Kapoor et al., 2020). The debt payment ratio, monthly debt payments other than rent divided by take-home pay, is about $1,725 divided by $8,300, or 21 percent, which will fall to about 13 percent when the balance transfer is cleared. The savings rate, including retirement contributions and employer match, is about 15 percent of gross income, up from about 7 percent. Each ratio moved in the right direction.

The Cash Flow After Child Care

The end of child care frees $1,100 a month. Following the Week 1 plan, half goes to the house fund and half to retirement, raising Andre's 457(b) contribution. With the card payment of $675 ending in three months, that money goes to the emergency fund until it reaches $15,000, then to the house fund.

How Much House?

Lenders commonly look for housing costs, including principal, interest, taxes and insurance, below about 28 percent of gross monthly income, and total debt payments below about 36 percent. On gross income of $123,000, or $10,250 a month, 28 percent allows about $2,870 a month for housing. But the couple's budget, which must still fund retirement, Maya's account and car costs, can carry about $2,400, only a little above their current $1,850 rent plus what they now save toward the house. At a 6.5 percent mortgage rate with taxes and insurance of about $450 a month, $2,400 supports a loan of about $310,000. With a down payment of $24,000 to $30,000, they can look at homes around $335,000 to $340,000, and the plan should allow for closing costs and mortgage insurance if the down payment is under 20 percent.

Retirement Progress

A common benchmark suggests having about one times salary saved by age 30 and three times by 40. At $61,500 against combined pay of $123,000, they are at half a year's salary, behind the benchmark but with Andre's pension adding value the benchmark does not count. Raising contributions with the child care savings will close much of the gap within five years.

Education Progress

Maya's 529 plan holds $1,300 and will receive $100 a month plus gifts. The family accepts that it will cover only part of college costs and plans to raise contributions after the house purchase.

Insurance Review

The policies added in Week 3 are in force. Their liability coverage will need updating when they buy a home, replacing renters insurance with homeowners insurance.

Estate Planning

The couple has no wills. If both died without one, Arizona law would decide who receives their property and a court would choose Maya's guardian. They will each sign a will naming Jasmine's sister as guardian and setting up a trust to manage any money left to Maya until she is older. They will name each other as primary beneficiaries on retirement accounts and life insurance, with the trust for Maya as contingent beneficiary, and sign durable financial powers of attorney and health care directives. An attorney will draft the documents for an estimated $1,500.

Taxes in the Plan

The couple's tax picture changed with the plan. Higher traditional 401(k) and 457(b) contributions lowered their taxable income, and the health savings account added a deduction. They also qualify for the federal child tax credit for Maya. Arizona's flat rate keeps state tax simple, and contributions to Maya's Arizona 529 plan reduce state taxable income. They adjusted their paycheck withholding so that they no longer receive a large refund each spring, which had been an interest-free loan to the government, and directed the extra monthly pay to the house fund.

Beyond Net Worth

Financial well-being, in the federal consumer bureau's definition, means having control over day-to-day finances, capacity to absorb a shock, being on track to meet goals and having the freedom to make choices that let one enjoy life (Consumer Financial Protection Bureau, 2015). Brüggen et al. (2017) similarly described well-being as the perception of being able to sustain a desired standard of living. By those measures, the Whitfields improved most in shock absorption and control, which they described as sleeping better.

The Three-Year Action List

Within three months: finish the balance transfer and sign wills and powers of attorney. Within one year: reach the $15,000 emergency fund and refinance the 11.5 percent car loan. Within two years: grow the house fund to $28,000 and get mortgage preapproval. Within three years: buy a home and replace renters with homeowners insurance. Every January: review the plan, ratios, beneficiaries and insurance.

Conclusion

In one year the Whitfields nearly quadrupled their liquid savings, nearly tripled their net worth, cut card debt by about four fifths and doubled their savings rate. A house budget set by their own plan, estate documents for Maya and a three-year action list with an annual review join the course's separate topics into one plan.

References

Brüggen, E. C., Hogreve, J., Holmlund, M., Kabadayi, S., & Löfgren, M. (2017). Financial well-being: A conceptualization and research agenda. Journal of Business Research, 79, 228-237. https://doi.org/10.1016/j.jbusres.2017.03.013

Consumer Financial Protection Bureau. (2015). Financial well-being: The goal of financial education. https://www.consumerfinance.gov/data-research/research-reports/financial-well-being/

Kapoor, J. R., Dlabay, L. R., Hughes, R. J., & Hart, M. M. (2020). Personal finance (13th ed.). McGraw Hill Education.