Mark and Jane Personal Finance Case Scenario
Scenario 1
current financial situation
Mark and Jane both work and live together in an apartment. They both own used
cars. They do not have any child expenses, but Mark does have student loans. He
stopped paying his student loans recently to allocate for the wedding, but the
remaining debt is small. They each only own one credit card and have decent
credited scores with no credit card debt. Neither individual has investments or
sufficient savings for enormous expenses.
Financial Goals
Mark and Jane both want to start their lives together with additional expenses and
establish a financial plan that hits major financial milestones up to retirement.
They want to buy a starter home to begin their family as well as a well-operating
car they both can utilize. The couple also wants to increase their assets through
investment. Since they will become a married couple, they want to understand
how to file their taxes jointly and obtain joint credit cards. Once they learn about
their finances and establish their new lives, Mark and Jane want to create a will
for their family. They want to complete all of this within five years.
Action Plan
Mark and Jane's primary goal is to understand where they stand financially and to
create a realistic time frame for each goal they have. Since the couple has a
lengthy financial goal, each goal would have to be broken down and met at a
certain time that is applicable. The first goal I would recommend after analyzing
their income is to eliminate debt. They will have to begin repaying their student
loans. They can plan how they will repay their debts once they have identified
them. The next step is to establish a savings account and invest some of their
savings in investments that they can maintain. That way, they can reach their goal
as soon as possible. They should also establish a budget that matches their income
and expenses. Since they do not have any debt, their principal goal is to
investigate what is the most important expense in their lives and where they can
minimize expenses to increase their budget timeframe. As a result, they will be
able to achieve their objectives more
efficiently and effectively.
Review
Once the couple implemented the action plan into their lives, they realized they
would have to cut down on expenses and research ways they could maximize
their investments. Some of their goals won't be met as soon as they want them to,
and they would have to be more realistic in each aspect of their goals. So far, they
have found a way to repay their debt within their budget, but it took up a large
portion of their remaining expenses. On the other hand, they were able to find a
way to invest their money and set up a savings account that would allow them to
stick to their budget. They were also able to file their taxes jointly. They are each
still learning how to alleviate some of their expenses so they can have more
wiggle room with their income.
Revision
Both individuals have maintained their payments on their debt, and it has
decreased by a fraction. With the increase in income and assets, after managing
their debt, their next focus is to decide which credit card would best fit their
finances and lifestyle as a married couple. Once they figure out which credit card
matches their lifestyle, they would then be able to examine their credit, savings,
and income to decide on which car they would like to purchase that meets their
lifestyle. Mark and Jane will continue their goals, but they will ensure that one
doesn't affect the other. They also decided to put a hold on some of their goals,
especially major purchases, to focus on their debt and continue to increase their
income and credit score. Their timeframe has increased by three more years,
making them long-term and more realistic.
Scenario 2
The rent, tax income, student loan payments, and medical and car insurance are all fixed. Food,
clothing, personal care, transportation, and recreational expenses are variables. The primary
source of income comes from their jobs, but the rent takes up most of that income.
Current Ratio
$87,000/$71,200=1.2219
Mark and Jane have approximately 1.2 times more current assets than current
liabilities. That means that they have enough assets to pay their liabilities, with
only a small amount of money left over.
Living Expenses Ratio
$61,200/$87,000=70.34%
Approximately 70% of their income is going toward their expenses. They make
enough to cover their expenses and have money left over to save and pay off any
debt they have.
Debt Ratio
$10,000/$87,000=11.49%
Mark and Jane's debt ratio is low, and if they manage their money properly, they
can remove their debt entirely.
Long-Term Debt Ration
$10,000/$87,000=11.49%
Their long-term debt is the same as their debt ratio since the only debt they do
have are student loans, which are long-term debt.
Savings Ratio
$4,800/$60,000=8%
They are only saving 8% of their income; once they remove their debt, their
savings can increase significantly.
Mark and Jane should eliminate unnecessary expenses that they can live without. They could cut
down on food, clothing, and self-care spending. They could also use the money they do not
spend to invest it for a bigger return. Since both own a vehicle, they can decide if they only need
one. Since getting a car is one of their financial goals, if it doesn’t interfere with their schedule,
they can sell one of the cars they do own. The return can go towards debt, lowering their debt
ratio, which would ultimately increase their current ratio.
Scenario 3
Since Mark and Jane are a couple, they will file as a married couple once they are married.
Within that, they can decide whether to file separately or jointly. The best way for Mark and Jane
to file their taxes would be to file them jointly. That way, they can get lower tax rates and have
more tax benefits. Since they are filing jointly, are both under 25, covered the entire 12-month
period, do not have a disability or loss, can support themselves and each other, and their income
is $68,000 (more than the $25,900 standard deduction this year), only a portion of their taxes will
be deducted. The simplest tax form Mark and Jane qualify for are the 1040EZ, because not only
is it simpler for them, but they also qualify. Their taxable income is below $100,000; they are
married and filing jointly; their interest income is below $1,500.
Scenario 4
For Mark and Jane, I would recommend a money market account for a savings account. It is a
good middle ground between a regular savings account and a certificate of deposit account. They
can meet the minimum deposit of $500, but it restricts the number of withdrawals they can make,
and it earns a higher interest rate compared to a regular savings account. This will impose great
discipline due to the limited number of withdrawals. They can then decide whether to withdraw
funds from the account. I would also recommend that they place at least half of their remaining
income into long-term savings to maximize their financial goals, and the other half can be for
emergencies.
Scenario 5
For big purchases like a house and a car, I recommend that Mark and Jane follow this guideline:
research, select, buy, and maintain. For an automobile purchase, they should research the type of
care that matches their lifestyle and budget. The size, cost, conditions, and maintenance. The
down payment on the car should not come from their emergency fund, and it should be less than
their monthly net income. Once they establish their price range, they should also consider the
type of car: hybrid, electric, and gas. A hybrid is advisable if the cost is less than both a gas car
and an electric car. If they want a car with all the bells and whistles, buying a used one is
recommended. They will require a car that can accommodate their size and body type because
they are starting a family. I would recommend that they buy a car instead of leasing one unless
they can maintain it and stay within the mileage. After making their selection, it is best to test
drive the car to ensure it meets all their requirements. The sticker price is the best retail price,
and they must understand the dealer's cost to optimize their purchase. If the car is under $20,000,
the markup should be 3-4%; if the car is over $20,000, the markup should be 6-7%. Deciding on
a house depends on their finances. Buying would be ideal if they used their savings account and
cut expenses.
Also, since they want to have a more stable home to start their family, getting a starter home is a
nice way to start based on their finances, and it will be their first home. Maintenance and the
housing market must also be taken into consideration when purchasing a home. Another way to
determine whether they want to rent or buy is to use the rent ratio to determine whether they
want to buy a house in an area they like and whether they are ready to buy a home. Buying a
house will allow them to save on taxes if they want to use itemized deductions. It will build
wealth, and it will be more stable for long-term living. The loan-to-value ratio is a great way to
understand the down payment and loan on a home. Unless they want to pay private mortgage
insurance, it is best to put down 20% on an 80% loan. This ensures that the lender is protected if
they default on the loan. Luckily, the PMI will end once they pay the mortgage down to 78% of
the original value. Once they decide on the mortgage loan, they can also decide if they want to
use the mortgage point, paying some of the interest upfronts. This will allow them to have a
lower interest rate and lower monthly payments. The closing cost is the fee they must pay to
finalize and fund their loan.
Scenario 6
Credit cards are great to have because they offer benefits that debit cards do not. They can be
used to avoid paying cash for large outlays, meet a financial emergency, be convenient, and
invest. Credit cards should only be used to make minimum payments and should not be used to
meet basic living expenses, impulse purchases, or non-durable purchases. When thinking about
making purchases with a credit card, ask if the product outlives the payment schedule. Buying
now and paying later may seem beneficial at first, but if not maintained, it can ruin credit. If
Mark and Jane want to have a solid credit line, they should be smart in extending their credit so
they do not overextend to the point that the credit is too big to pay back. They must also adhere
to all credit terms, including the time and amount of payment required. If they ever get into a jam
where they cannot pay on time, notify creditors immediately and be honest, so they can establish
a way to save and maintain their credit.
Scenario 7
Going back to college is a big decision, not only in terms of education and career but also
financially. Since it is a major purchase, there are many ways to pay for it. Student loans,
scholarships, grants, financial aid, work-study, or paying out-of-pocket from savings are all ways
Jane can pay for college. Scholarships are merit-based, financial-based, and character-based.
Merit-based scholarships are for those who are doing exceptionally well in high school and
college. Financial-based scholarships are great for students with lower incomes who cannot
afford college. The type of student filters character-based scholarships, outside of income and
merit. These could include race and ethnicity, gender, majors and minors, hobbies, and unique
characteristics. Financial aid is also based on income, which is determined by examining taxes
and income. This allows for schools and the government to aid in paying for school and reduces
the amount of money Jane has to put in. They can give grants, scholarships, work-study, and
loans. Grants are loans that students do not have to pay back and are funded by the government
or a foundation. Work-study allows Jane to work part-time with the financial need to aid in
paying for school. The government or private lenders give federal and private loans out, such as
banks, credit unions, or state agencies. They must pay these back after they complete their
education. Subsidized and unsubsidized loans are both federal Stafford loans. Subsidized loans
are loans for undergraduate students with financial needs. It does not accrue interest like an
unsubsidized loan. The government covers the interest costs while the student is enrolled or
when the loan is deferred. But, with the loan being deferred, there is a six-month grace period.
The term of the loan is a maximum of 30 years and will not exceed an 8.25% interest rate.
Unsubsidized loans are loans for undergraduate and graduate students, and students do not have
to show financial need. Interest rates start while the student is in school and are added to the loan
amount. The amount of money that can be borrowed is determined by the institution. Graduates
have higher interest rates compared to undergraduates, and the percentage-based fees are
deducted from each loan payment. The range is 10–25 years. Perkins loans are federal loans with
low-interest rates for undergraduate and graduate students with financial needs. PLUS loan
borrowers are instead the parents and cover the remaining gaps not covered by other federal
loans, scholarships, or grants. Direct PLUS loans are usually for graduates eligible for student
loans. Parent PLUS loans are for parents to pay for their children's education. PLUS loans have
higher interest rates than subsidized and unsubsidized loans. Jane may not need the PLUS loan
unless she decides to go to graduate school. I recommend that Jane file a FASFA application to
determine which loan she qualifies for and choose the type of loan she is most able to repay.
Finding grants and scholarships is recommended before taking out a loan, so Jane can reduce her
loan amount, making it easier to pay back and avoiding debt.
Since Mark wants to consolidate his loans, there are several advantages and disadvantages that
he must consider. An advantage of loan consolidation is the combination of all federal loans into
one payment. With that, they can fix interest rates at the average of all the loans combined. It
could also lower his payments by extending the term. There are also multiple repayment plans
out there, and they can be switched at Mark's discretion. By changing the terms and lowering
monthly payments, Mark can avoid default, which affects his credit score hugely. Deferment and
forbearance are restarted for up to three years, so if there is economic hardship, those payments
can be delayed. Loan consolidation covers any amount of debt that Mark has. If Mark can
consistently pay his loans on time, it protects his credit. Through that, he can set up automatic
payments through his bank, and that could come with a loan discount if he keeps up with those
on-time payments. But even with all those advantages, there are disadvantages as well. Mark
may pay more interest over time if he continues to wait to pay off the loans. This will push back
their goals of buying a home, a car or investing opportunities. Interest can be rounded up to the
average of all the loans combined, increasing the interest rate. This doesn't include private loans
through the federal consolidation loan. Even though private lenders can also consolidate loans,
the cost would be much higher. The grace period will decrease significantly, so he will have to
be on top of things. The benefits he had from lenders can be taken away. And this is a one-time
thing, so once committed, there is no do-over.
If neither of them repays their student loans, it would come with great consequences. They
would go into default, and this has consequences for their credit and taxes. Their credit score
would suffer to the point where they would be unable to meet some of their personal financial
goals, such as making large purchases. Mark and Mary won't receive tax refunds to repay the
loan since they are filing jointly and both of their refunds are at risk. The government could also
garnish their wages to repay the loan as well. If they include co-borrowers, they will also be
affected. If loans are taken out through private companies, they can be sued. It is important to
establish a plan for choosing the loan they receive and how they want to repay it. As long as the
loans get repaid promptly, they can avoid these issues.
Scenario 8
Buying a house is a monumental accomplishment for Mark and Jane, but they must understand
how a mortgage works and the types. Mortgages are a type of loan, usually taken out on a home.
Lenders can take ownership of their homes if they do not meet the payments. It is important to
choose the type of mortgage that works best for them so they can repay it successfully and not
affect their credit or get their home taken away. They can choose from fixed-rate mortgages,
adjustable-rate mortgages, conventional mortgages, FHA mortgage insurance, and VA loan
guarantees. Fixed-rate mortgages have a consistent rate and monthly payments throughout the
life of the loan. Terms can range, but 15- and 30-year loans are popular. Luckily, they can make
early payments with no penalty. This is excellent if they are looking for a long-term residence.
There is also no prepayment penalty, making budgeting easier. Adjustable-rate mortgages have
fixed rates, but they can change them for another term. They adjust these rates on an index rate
basis, and they can reach a cap as well as the payments. Overall, their credit will be more secure
with this option.
There are mortgage protections for lenders and buyers. Lenders that assume all can issue
conventional mortgages have the risk of loss, and down payments must be 20% or more of the
property value. FHS mortgage insurance is issued through the Federal Housing Administration.
They typically go for loans that have a high loan-to-value ratio. This is also great if Mark and
Jane have little money for the down payment and closing costs. They issue VA loan guarantees
through the U.S. Veterans Administration to lenders, so veterans and their unmarried surviving
spouses can obtain a loan. If either Mark or Jane decides to enlist and retire before obtaining a
home, this is a great option.
Utilizing a credit union instead of a bank is a great option for Mark and Jane. Credit unions are
not-for-profit financial institutions that Mark and Jane can own with other members. They will
get the best rate they can because it is not-for-profit and their members own them. To get into a
credit union, the members must all share similarities. These could be religion, professionalism,
company, geographic region, or members of other civic organizations. The couple would also be
able to vote on their policies and have a say in how they are operated. Credit unions can have
higher or lower interest rates on deposits or loans. Fees will be extremely low or nonexistent.
Customer services are also usually better because the members are highly involved in the work
and because it is community-based. Credit unions can be insured up to $250,000 by the National
Credit Union Administration, which means better security and that they can open more accounts.
Once Mark and Jane obtain a home of their own, it does come with great freedom, but also more
maintenance. They would have to take care of any issues that arise in the home, and it would
come out of their own pockets. They must also keep up with utilities and decide which
companies are the best for them. Home insurance and disaster protection insurance available in
the area are recommended to optimize the protection of their home. All of these add to the
liabilities and expenses coming out of their pockets, so they must be sure and smart about buying
a house.
Scenario 9
Mark and Jane can put their money in many different forms of investment: stocks, bonds, and
mutual funds. There are even more options available to Mark and Jane in each category. Stocks
are part of a corporation's assets; bonds place the investors in the position of a lender to fund
corporations and governments; and mutual funds are investment vehicles of stocks, bonds, and
other securities. Mark and Jane should invest in stocks, bonds, or both. They are a great,
beginner-friendly way to invest, and they are in control of the buying and selling. They, too, have
their advantages.
Investing in stocks allows them to understand the economy and business cycle. Therefore, as the
economy grows, businesses are doing well. As businesses do well, so do their earnings. Stocks
are easy to buy and sell online, with a financial broker or financial planner. There is no long
process for buying stocks. They also do not need a lot of money to buy stocks due to the variety
of stock prices available. They can earn money by buying stocks low and selling them high.
Stocks usually have higher long-term returns. They can buy stocks on the stock exchange, which
is government-regulated. If Mark and Jane invested in stocks, they would consider them
shareholders. The percentage of shares owned represents the percentage of ownership of a
corporation, depending on how many shares a company has. Whatever occurs to a corporation's
property won't occur to the shareholder's property, because they are viewed as separate entities.
They would not own a portion of the company if they owned a portion of the shares. Instead,
they do grant them rights to vote in shareholder meetings, get dividends, and sell their shares.
More shares equal more voting power in the direction of a company. Common stocks allow
Mark and Jane to vote in shareholder meetings and receive dividends.
Bonds, on the other hand, are fixed-income instruments that represent a loan from an investor to
a borrower. This makes it easier for them to see how much they will get in return. These are
mainly suprarational or governmental. These funds finance projects and operations. When
investing in a bond, there is a maturity date for the principal that would be paid back to the
owner. There are also either fixed or variable interest payments that the borrower makes. Mark
and Jane will become lenders when they invest in a bond to fund the government or a corporate
project. They will also be able to sell or buy bonds after the capital has been raised by the
government or corporation issuing the bond. Bonds are steady and more predictable. They also
carry less risk because they are less susceptible to market volatility. Bondholders are usually
prioritized more during liquidation. Bonds are also insured because credit rating agencies rate
them.
Scenario 10
Establishing insurance is a significant form of protection that will allow them to save money in
case of a risk. Just being healthy and maintaining a healthy lifestyle is not enough because our
health can become unpredictable and possibly lead to bankruptcy. Mark and Jane can choose
between private and government health insurance. Within private health insurance, Mark and
Jane can choose between traditional indemnity insurance and managed care plans. Traditional
indemnity insurance provides an unlimited number of doctors and hospitals to choose from.
Because it is a fee-for-service type of insurance, it pays the deductible and a percentage of the
cost. The couple will receive reimbursements, but it depends on UCR charges. They completely
separated healthcare services from the insurer. Managed care plans have monthly payments to
healthcare organizations. Because of the limited number of options and care, costs are lower.
They will be charged copayments, but they also have access to preventive and routine care. With
managed care plans, there are health maintenance organizations, preferred provider
organizations, and other plans available. HMOs have hospitals and physicians to provide health
care. These also extend to group HMOs. Individual Practice Association hires private doctors.
Preferred provider organizations contract with a network of physicians and hospitals to provide
lower prices. Affiliated providers have reduced exclusive provider organizations' costs. Point-ofservice plans are hybrid HMOs without-of-network services that pay a percentage of the fee.
Government health insurance plans are Medicare, Medicaid, and worker's compensation.
Medicare is for citizens over 65 or who are disabled. There are parts A, B, or D. Part A covers
basic hospital coverage. Part B covers supplementary medical insurance services not included in
Part A. Part D covers prescription drugs. There is also Medicare Advantage, which has private
providers. Medicaid is a state-run public assistance program for eligible individuals, but it
depends on the state. Worker's Compensation Insurance deals with work-related injuries or
illnesses. The employer pays for premiums but doesn't apply to the self-employed. When
deciding on health insurance, it is important to take into consideration their health, what services
they need, and how much they can afford. It's also important to maintain a healthy lifestyle to
reduce costs and services.
When deciding whether to get life insurance and which one, Mark and Jane need to understand
where they stand financially and the effects they may cause when they are no longer around. Life
insurance replaces the loss of income if a premature death occurs, so loved ones can maintain
their lifestyle. They can choose from the terms "life," "whole life," or "universal life." Term life
insurance has a specific amount of coverage and a time limit. Benefits are paid only if that
individual dies during that term. There are two types of term insurance: straight and decreasing.
Straight-term customers maintain the same coverage as their premiums rise with age. Decreasing
the term maintains the premiums while decreasing the coverage instead. Term insurance is
renewable and convertible. Whole life insurance covers the insured's entire life and is permanent.
It has death protection and a savings feature; there is also a right to cash value if canceled before
death. Within whole life insurance, there is a continuous premium, a limited payment, and a
single payment. Premiums remain constant until death or cancellation. Limited payment levels
and premiums for a set number of years. Single premiums have lifetime coverage. Universal life
insurance combines term insurance and a tax-free savings account. It also has death protection.
Savings can increase with the current interest rate and guaranteed minimum rate. Variable life
insurance provides a death benefit as well as savings or cash value. The cash value can be
invested through mutual funds, but the return is not guaranteed. Another great option is group
life insurance, which is offered through employment and has lower premiums. Credit and
mortgage life insurance have decreasing term insurance that pays off the remaining mortgage if
the borrower dies before they paid it off. Lastly, industrial life insurance is whole life insurance
with a small face amount. They typically reserve this for low-income individuals. To make the
best choice, Mark and Jane must analyze the cost of the features they find important and find the
best agent with high ratings.
Property insurance needs to be established, especially since Mark and Jane want to buy a house.
This will not only protect the house itself, but it will also protect what is inside the house. There
is property insurance and liability insurance. Property insurance covers property from disastrous
loss by fire, theft, vandalism, and windstorms. Liability insurance protects the financial aspects
of property loss and personal injuries to others. Homeowner's insurance has five different
options, ranging from HO-1 to HO-8. HO-1 is the most basic, HO-2 is broader, HO-3 is special
and more particular, HO-5 is comprehensive, and HO-8 is the modified version of HO-1. There
is also renter's insurance the couple could look into before purchasing a home, which protects
those who rent and follows a similar provision to homeowner's insurance. All of these features
are important when it comes to owning property because they not only protect the property but
also the couple as well. Natural disasters and crimes are beyond their control, so just like their
bodies, insurance is a great risk management tool for property owners.
Scenario 11
Retirement is an important step in financial planning that not many people are lucky to
experience. If Mark and Jane play their cards right, they can retire successfully. Many things
need to be taken into consideration first: standard of living, location, and income. Once their
goals have been set, they need to determine the amount needed to fund that lifestyle and how
they will invest. The best plan for Mark and Jane is through supplemental plans. It is through
their jobs that they can invest and defer taxes. They have the freedom to decide how much they
are willing to invest. They can choose whether to commit to a company directly or indirectly.
There are profit-sharing plans, thrift and savings plans, 401(k), 403(b), or 457 plans, ROTH
plans, Keogh and SEP plans, and individual retirement accounts. Profit-sharing plans are funded
by the employer, and the amount is based on the company’s profit. This can be done through
stocks or other preferable securities. In 401(k) and savings plans, the employer matches some of
the contributions the employee makes, and a trustee invests the funds for the benefit of
employees through securities. Contributions are tax-deferred and are included in taxable income.
For 401(k), 403(b), or 457 plans, employers make contributions through a salary reduction
agreement. Employees can choose where to invest from a list of employer plans. ROTH plans
utilize after-tax funds. By the age of 59.5, and with funds invested for five years, it does not
subject withdrawals to taxes. Taxes are paid first before the net of tax proceeds is distributed.
The tax amount limits it. Keogh and SEP plans are for small businesses and the self-employed.
With, a maximum of 25% of earned income invested in mutual funds. They must be careful to
not withdraw before they reach the age of 59.5. Out of these supplemental plans, the best one for
Mark and Jane is a ROTH plan, because they can take advantage of the low tax rates and
withdraw tax-free once they retire. They also have more options for investing. If their jobs do not
provide 401(k), it is more accessible to them; they may want to invest more, exceeding the
401(k) limit and enjoying penalty-free access.
It is important to have estate planning when preparing for death because Mark and Jane's items
and property cannot go with them. Therefore, it is important to manage their estate for their
loved ones. Estate planning distributes assets according to the couple's wishes and the needs of
their survivors. If this is not done, their family won't have the opportunity to receive anything,
and instead, it will get sold and face taxes and administrative costs. Various taxes affect the
estate: gift tax, estate tax, and income tax. Estate planning is divided into two parts: people
planning and asset planning. People who plan their departure consider the needs of their loved
ones, both financially and psychologically, by providing income or capital to mitigate the impact
of their departure. Asset planning handles the items—how will they be handled and where are
they going to go? Identifying their financial goals and understanding their family's situation are
the first steps Mark and Jane need to take. Next, do research and collect the necessary
information to ensure nothing is forgotten and everything is handled accordingly. Once their
estate is understood, they need to create beneficiaries for the assets and decide who gets what. To
do so, they must estimate estate transfer costs so that they are covered and do not become a
burden. After making the necessary analysis, they need to implement their plan accordingly and
review it periodically as finances and plans change. Mark and Jane can ensure that their wishes
are granted through their family with no hardship by following this process and staying updated.