Question

The starting salary of $60,000 per year is more than she ever imagined. However, after receiving her first paycheck and seeing that about 20% was taken out for taxes and 7.65% for social security and Medicare, and $100 a month for medical and other benefits,  she was only going to bring home $42,000 a year.  That was a big shock.   

Dream vacations: Can she travel and do the fun things that young professionals do? Throughout college, Kate worked every summer to finance her education. She was never able to take that special European vacation that she had always hoped for. One of her goals is to save up enough money to be able to take trips to Europe each year. She estimates that, it will cost $6,000, once a year, each year. She knows she would need to set aside $500 a month to pay for her yearly trips to Europe.

New wheels: And, how about buying a new car? Living on campus as an undergraduate student, there was no need for a car. So, in order to save money, Kate never owned a car in college. In the summers she was able to borrow the family car to go to and from her various summer jobs. But now, she would love to have a brand-new shiny compact car to call her own. Her parents have already agreed to co-sign for an automobile loan and help her out by gifting her

$3,000 for the down payment. The car that she has in mind will cost $27,000. After the gift from her parents, she would still owe $24,000. Spreading the loan over a five-year period would result in:

a monthly car payment of $400.

Also, there will be automobile insurance ($150 a month)

And, gas and maintenance costs ($200 a month) .

College loans: She wonders, will there be enough money to pay off the college loans? Without loans, Kate would never have been able to attend college and realize her goal of earning a degree. Her loans are structured such that she must begin making payments immediately after graduation. With a grand total of $36,000 in loans due within the ten years from graduation, her monthly payment will amount to $300 per month.

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After hours:. She has always wished she could afford to go out on weekends to socialize with her friends.  However, she is well aware that a night on the town costs about $200.

If possible, she would still like to do this one night each weekend (4 times a month). Kate realizes that this is $800 a month and may be one of the things that she may have to cut back on or even eliminate completely. But, she certainly would not be happy about having to do so.

The basics: Along with renting an apartment, come basic necessities. For example, there will be utilities, cable television, cell phone expenses, food, clothing and other day-to-day expenses to consider.  Below are expenses Kate anticipates.  This does not include student debt and vacation and dining out expenses or any savings.

Table 1. Partial Estimated Monthly Outflows

Item	Estimate per Month
Rent and renters insurance	$1,500
Utilities	200
Cell phone	150
Cable service-premium	200
Food	250
Clothing	150
Personal items-not included above	200
​	$2,650
​	​
​	​
​	​

No credit card debt: Although Kate had two credit cards which she used occasionally during her undergraduate years, one thing that her parents always told her was to pay the accounts off as they became due and never carry a balance. She listened to them and now is grateful for that advice. Unlike some of her college friends, Kate has no credit card balances at all.

Other information: Here is some additional very important information. Her benefits package includes very good medical and dental coverage, as well as a generous match on her 401k plan of one dollar for every dollar that she puts in, up to 6% of her salary.   

At this point she has a two bedroom apartment but no roommate to share expenses and does not really want one.  However, she is concerned as to whether or not she will be able to live in the city on her own, cover her expenses and still have enough to fund the fun stuff such as a brand new car, nights out on the town and vacations.

At this point, she is overwhelmed! She wonders, can she live within her means and still have it all?

CASE QUESTIONS

Compare Kate’s income with her expenses to determine if she can afford her lifestyle.

1. Does she have money left over each month or does she have a shortfall?
2. What is the amount per month of the excess or shortfall?
3. If there is a shortfall, what steps would you advise her to take? Kate does not contribute to her 401k plan.
4. Should she do so and why?
5. How much do you recommend she contributes as a percent of her salary and why?
6. Name some actions she could take to find the money for this contribution?

Answer 1

Vacations Car Car insurance Gas & maintenance Loan repayment After hours Basics Total Planned Revised 500 250 400 300 150 150 200 200 300 300 800 400 2650 1900 5000 3500 As can be seen from the above, the original planned scenario, the expenses are more than the net income of 42000/12 = 3500 So the shortfall per month is 1500. She will have to cut down expenses. Examples being - Plan euro trip every two years, go after hours partying every alternate week And also get a room mate and opt for lower priced car She should definitely contribute to her 401(K) as that would ensure her financial security later on Ideally she should max out her contribution till 6% and the money for this can come from savings in tour expenses, partying and opting for a lesser expensive car She can also look at a new job to increase her income