Posted: October 13th, 2022

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The Gordons’ Version of Financial Planning

 

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The Gordons’ Version of Financial Planning

 

Burt and Emily Gordon are a married couple in their mid-20s. Burt has a good start as a bank manager and Emily works as a sales representative. Since their marriage 4 years ago, Burt and Emily have been living comfortably. Their income has exceeded their expenses, and they have accumulated an enviable net worth. This includes the $10,000 that they have built up in savings and investments. Because their income has always been more than enough for them to have the lifestyle they desire, the Gordons have done no financial planning.

 

Emily has just learned that she’s 2 months pregnant. She’s concerned about how they’ll make ends meet if she quits work after their child is born. Each time she and Burt discuss the matter, he tells her not to worry because “we’ve always managed to pay our bills on time.” Emily can’t understand his attitude, because her income will be completely eliminated. To convince Emily there’s no need for concern, Burt points out that their expenses last year, but for the common stock purchase, were about equal to his take-home pay. With an anticipated promotion to a managerial position and an expected 10% pay raise, his income next year should exceed this amount. Burt also points out that they can reduce luxuries (trips, recreation, and entertainment) and can always draw down their savings or sell some of their stock if they get in a bind. When Emily asks about the long-run implications for their finances, Burt says there will be “no problems” because his boss has assured him that he has a bright future with the bank. Burt also emphasizes that Emily can go back to work in a few years if necessary.

 

Despite Burt’s arguments, Emily feels that they should carefully examine their financial condition in order to do some serious planning. She has gathered the following financial information for the year ending December 31, 2012.

 

 

Salaries

 

Take-home Pay

 

Gross Salary

 

Burt

 

$44,200

 

$64,000

 

Emily

 

25,048

 

36,000

 

Item

 

 

 

Amount

 

Food

 

 

 

$ 5,902

 

Clothing

 

 

 

2,300

 

Mortgage payments, including property taxes of $1,400

 

 

 

11,028

 

Travel and entertainment card balances

 

 

 

2,000

 

Gas, electric, water expenses

 

 

 

1,990

 

Household furnishings

 

 

 

4,500

 

Telephone

 

 

 

640

 

Auto loan balance

 

 

 

4,650

 

Common stock investments

 

 

 

7,500

 

Bank credit card balances

 

 

 

675

 

Federal income taxes

 

 

 

19,044

 

State income tax

 

 

 

4,058

 

Social security contributions

 

 

 

7,650

 

Credit card loan payments

 

 

 

2,210

 

Cash on hand

 

 

 

85

 

2007 Nissan Sentra

 

 

 

15,000

 

Medical expenses (unreimbursed)

 

 

 

600

 

Homeowner’s insurance premiums paid

 

 

 

1,300

 

Checking account balance

 

 

 

485

 

Auto insurance premiums paid

 

 

 

1,600

 

Transportation

 

 

 

2,800

 

Cable television

 

 

 

680

 

Estimated value of home

 

 

 

185,000

 

Trip to Europe

 

 

 

5,000

 

Recreation and entertainment

 

 

 

4,000

 

Auto loan payments

 

 

 

2,150

 

Money market account balance

 

 

 

2,500

 

Purchase of common stock

 

 

 

7,500

 

Addition to money market account

 

 

 

500

 

Mortgage on home

 

 

 

148,000

 

 

Critical Thinking Questions

 

1.   Using this information and Worksheets 2.1 and 2.2, construct the Gordons’ balance sheet and income and expense statement for the year ending December 31, 2010.

 

2.   Comment on the Gordons’ financial condition regarding (a) solvency, (b) liquidity, (c) savings, and (d) ability to pay debts promptly. If the Gordons continue to manage their finances as described, what do you expect the long-run consequences to be? Discuss.

 

3.   Critically evaluate the Gordon’s approach to financial planning. Point out any fallacies in Burt’s arguments, and be sure to mention (a) implications for the long term as well as (b) the potential impact of inflation in general and specifically on their net worth. What procedures should they use to get their financial house in order? Be sure to discuss the role that long- and short-term financial plans and budgets might play.

 

 

 

 

 

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