Question

20 Family friend, David Robertson, has asked you to help him gain control of his personal finances. Single and 27 years old, David was recently employed as a salesperson for a technology company. His annual salary is $63 000. He has payroll deductions for Eland CPP contributions, and income taxes of $1400 per month. David also recently moved from his comfortable two-bedroom apartment with rentof$1250 per month to a two-bedroom condo with rent of $1600 per month, utilities are included. The condo is in in an executive community with access to two golf courses, a lake, and an activity centre. David currently owns a car valued at $11 000 with an outstanding loan balance of $10 000. After having reviewed his other monthly expenses since the move, you have uncovered the following: ITEM $ AMOUNT/ MTH Tenant's insurance $ Car payment 550 Smartphone, Internet and Netflix 210 Smartphone 75 Food (consumed at home) 200 Car Expenses (gas, insurance, maintenance) 310 Credit Card payment 740 David is surprised by how much money he spends monthly on clothes ($150) and entertainment ($350). He uses his credit card for these purchases (the balance is $8000 and climbing) and has little trouble making the required minimum monthly payment. He would, however, like to gain control over his finances and see the balance go down to eventually payhis credit cardoffcompletely. David's other goal is to save $4800 a year so that he can retire 28 years from now at 55. He would like to start savinginfive years, so he can pay off his credit card and car first. He does not think the delay will affect the final amount of retirement savings he will accumulate. David currently has about $3500 in his chequing account and $200 in his savings account. He has furniture valued at $1500 andowns 1000 shares of an internet stock, currently valued at $1200, which he believes has the potential to make him rich.

Prepare a personal cash flow statement for David.

Answer 1

Based on the information provided by David, it looks like he would end up negative at the end of the year. Which means he may have to borrow to defray some expenses.

1. He should first pay off his credit card dues asap.

2. He should clear his car loan once the credit card is paid off.

3 David should prioritize his expenditure and try to be more frugal to achieve financial independencce.

These two liabilities would free up David so he can start his savings early. The quantum of savings each year would be lesser if he starts saving earlier in life to achieve his desired corpus when he is 55yrs.

Below is the Cash flow sttaement based on the information provided.

Annual Cash flow statement of David
Particulars		$	$
Inflows
Gross salary		63000
Less Deduction		16800
Net Disposable Salary			46200
Total Inflow			46200
Outflows
Recurring Expenses
Rent		19200
Tenants insurance		240
Car payments		6600
Smartphone.Internet and netflix		2520
Smartphone		900
Food		2400
Car Expenses		3720
Credit Card Payment		8880
Clothes		1800
Entertainment		4200
Total Outflow			50460
Net Inflow/(outflow)			(4260)
Available Cash Balance			3700
(Chequing and savings)
Net Deficit			(560)