Question

The Sampsons realize that the first step toward achieving their financial goals is to create a budget capturing their monthly cash inflows and outflows. Dave and Sharon’s combined disposable (after-tax) income is now about $5,000 per month.

Reviewing their bank statement from last month, Dave and Sharon identify the following monthly household payments:

• $1,100 for home expenses (including the mortgage payment, home insurance, and property taxes)

• $100 for Internet

• $200 for electricity and water

• $200 for cellular expenses

• $800 for groceries

• $200 for a health care expenses

The Sampsons also review several credit card bills to estimate their other typical monthly expenses:

• About $300 for clothing

• About $400 for car expenses (insurance, maintenance, and gas)

• About $200 for school expenses

• About $900 for recreation and programs for the children

To determine their net worth, the Sampsons also assess their assets and liabilities, which include the following:

• $2,000 in their checking account

• Home valued at $150,000

• Furniture worth about $3,000

• Sharon’s car, which needs to be replaced soon, is worth about $1,000; Dave’s car is worth approximately $8,000

• They owe $130,000 on their home mortgage

1. Using the information in the case, prepare a personal cash flow statement for the Sampsons.

   Personal Cash Flow Statement
   Cash Inflows	This Month
   Disposable income
   Total Cash Inflows
   Cash Outflows
   Mortgage, home insurance and property taxes
   Internet
   Electricity and water
   Cellular
   Groceries
   Health care insurance and expenses
   Clothing
   Car expenses (insurance, maintenance, and gas)
   School expenses
   Recreation
   Credit card minimum payments
   Other
   Total Cash Outflows
   Net Cash Flows

2. The Sampsons hope to have net cash flows of $1,000 per month so that they can add $1,000 per month to their savings. Based on their personal cash flow statement for last month, were the Sampsons able to meet their goal of saving $1,000? If not, how do you recommend that they revise their personal cash flow statement to achieve their savings goals? Is there any particular cash outflow which seems unusually large that could possibly be reduced?
   

   
   
   

3. Prepare a personal balance sheet for the Sampsons.

   Personal Balance Sheet
   Liquid Assets
   Cash
   Checking account
   Savings account
   Total liquid assets
   Household Assets
   Home
   Car
   Furniture
   Total household assets
   Investment Assets
   Stocks
   Bonds
   Mutual funds
   Total investment assets
   Total Assets
   Liabilities and Net Worth
   Current Liabilities
   Loans
   Credit card balance
   Total current liabilities
   Long-Term Liabilities
   Mortgage
   Car loan
   Total long-term liabilities
   Total Liabilities
   Net Worth

4. What is the Sampsons’ net worth? Based on the personal cash flow statement that you prepared in question 1, do you expect that their net worth will increase or decrease in the future? Why?
   

   
   

Answer 1

Personal Cash Flow Statement
Cash Inflows	This Month
Disposable income	5000
Total Cash Inflows	5000
Cash Outflows
Mortgage, home insurance and property taxes	1100
Internet	100
Electricity and water	200
Cellular	200
Groceries	800
Health care insurance and expenses	200
Clothing	300
Car expenses (insurance, maintenance, and gas)	400
School expenses	200
Recreation	900
Credit card minimum payments	0
Other	0
Total Cash Outflows	4400
Net Cash Flows	600

1. The Sampsons hope to have net cash flows of $1,000 per month so that they can add $1,000 per month to their savings. Based on their personal cash flow statement for last month, were the Sampsons able to meet their goal of saving $1,000? If not, how do you recommend that they revise their personal cash flow statement to achieve their savings goals? Is there any particular cash outflow which seems unusually large that could possibly be reduced?

The net cash flow for the Sampsons after considering all expenses is $600. They are not able to achieve this goal currently. To be able to save $1000 per month, they need to reduce the amount spent on recreation to $500 per month from the current $900. This $400 saving will help take their net cash flow to $1000 per month.

2. Prepare a personal balance sheet for the Sampsons.

Personal Balance Sheet
Liquid Assets
Cash	600
Checking account	2000
Savings account	0
Total liquid assets	2600
Household Assets
Home	150000
Car	9000
Furniture	3000
Total household assets	162000
Investment Assets
Stocks	0
Bonds	0
Mutual funds	0
Total investment assets	0
Total Assets	164600
Liabilities and Net Worth
Current Liabilities
Loans	0
Credit card balance	1800
Total current liabilities	0
Long-Term Liabilities
Mortgage	130000
Car loan	0
Total long-term liabilities	130000
Total Liabilities	131800
Net Worth	32800

3. What is the Sampsons’ net worth? Based on the personal cash flow statement that you prepared in question 1, do you expect that their net worth will increase or decrease in the future? Why?

Net worth of the Sampsons’ is $32800 (Total assets – total liabilities).

Total assets = 164600          

Total liabilities = 131800

Is they reduce the recreation expenses by $500, the net worth can increase by that amount.