BUSI 489 Week 1 Targeted Financial Plan 1 Example

Targeted Financial Plan 1: Goals, Financial Statements and Ratio Analysis for the Whitaker Household

Client Profile and Goals

Daniel Whitaker, 42, is a regional sales manager earning $118,000 a year. Grace Whitaker, 40, works part time as a dental hygienist and earns $38,000. They have two children, ages 10 and 7, own their home and attend a local church. They came to planning because they feel busy and comfortable but unsure whether they are saving enough for college and retirement. Their goals, restated in measurable form, are:

• Build an emergency fund of six months' expenses, about $51,000, within three years.
• Pay off all credit card debt, $7,800, within 12 months.
• Fund half the projected cost of four years at an in-state public university for each child.
• Retire when Daniel turns 62, with income equal to 80 percent of their pre-retirement take-home pay.
• Replace Grace's car with cash in five years.
• Put wills, guardianship and powers of attorney in place this year.

Statement of Financial Position

Net worth is $696,500 minus $328,800, or $367,700.

Monthly Cash Flow

Ratio Analysis

The savings rate counts Daniel's deferral, his employer's 3 percent match, 529 contributions and the monthly surplus.

Analysis

The Whitakers are in better shape than they feel in most respects. Housing and total debt payments sit comfortably below common lender limits, and their savings rate of nearly 13 percent of gross income is solid for a family with young children. Their net worth of $367,700, about $205,000 of it in retirement and investment accounts, gives them a good base.

The weak point is liquidity. With $15,500 in checking and savings and monthly expenses of about $8,542, they could cover fewer than two months without income. Lusardi et al. (2011) found that nearly half of American respondents said they probably or certainly could not come up with $2,000 within a month for an unexpected need, and that financial fragility reached well into middle-income households. A family can be wealthy on paper and fragile in practice when most of its wealth sits in retirement accounts and home equity. The credit card balance, charged at nearly 23 percent, compounds the problem: it signals that recent emergencies were met with borrowing.

The absence of wills and guardianship designations is a serious gap for parents of minor children, and will be addressed in the estate planning section.

Cash Flow Observations

The monthly surplus of $598 is real but small, and it depends on every category holding steady. Three categories deserve attention. Dining, entertainment, clothing and miscellaneous spending total $1,350 a month, the largest discretionary item and the one most likely to be underestimated, since the Whitakers estimated it from memory. Childcare and activities at $900 will fall as the children grow, but college costs will begin rising in eight years. And the car loan payment of $520 ends in about three years, which will free cash flow just as the emergency fund goal requires it. Tracking actual spending for two months, as recommended below, will show whether the surplus is larger or smaller than the estimate.

Composition of Net Worth

More than half of the household's net worth is home equity, $134,000, and most of the rest sits in retirement accounts that cannot be reached without taxes and penalties before age 59 and a half. Only the $35,000 brokerage account and $15,500 in cash are available for near-term needs. That mix is common for families in their early forties, but it explains why the Whitakers feel stretched despite a healthy net worth.

Feasibility of the Goals

Not every goal can be funded at once. The credit card payoff and the emergency fund come first because they reduce risk and cost. The college and retirement goals compete for the same dollars over the next eight to twenty years and will be modeled together in later sections, where the trade-off between them can be shown in numbers rather than guessed at.

Recommendations

• Direct the $598 monthly surplus to the credit cards on top of the minimum payments already budgeted, which clears them in about 10 months, then redirect the full $858 to savings.
• Shift $10,000 of the taxable investments into an insured savings account paying a competitive rate, raising the emergency fund to about three months immediately.
• Track spending for 60 days to confirm the cash flow statement and find $300 a month to add to savings.
• Schedule an estate planning attorney this quarter for wills, guardianship and powers of attorney.

These priorities come first because Lusardi and Mitchell (2014) show that financial outcomes depend on sound basic decisions as much as on sophisticated strategies. The following sections address taxes, insurance, investments, retirement and estate planning in turn, as Grable et al. (2012) recommend, and the process standards in Lytton et al. (2012) guide the format.

A Christian Perspective

Proverbs 24:3-4 pictures a household built by wisdom, made secure by understanding and furnished through knowledge (English Standard Version Bible, 2001/2016). A financial plan begins with knowledge: an honest picture of what a family owns, owes and spends. The Whitakers' generosity, $400 a month, is a strength to preserve as the plan takes shape, and their wish to plan before a crisis forces them to is itself an act of the wisdom the proverb commends.

References

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Grable, J. E., Klock, D. D., & Lytton, R. H. (2012). The case approach to financial planning: Bridging the gap between theory and practice (2nd ed.). The National Underwriter Company.

Lusardi, A., & Mitchell, O. S. (2014). The economic importance of financial literacy: Theory and evidence. Journal of Economic Literature, 52(1), 5-44. https://doi.org/10.1257/jel.52.1.5

Lusardi, A., Schneider, D. J., & Tufano, P. (2011). Financially fragile households: Evidence and implications. Brookings Papers on Economic Activity, 2011(1), 83-134. https://doi.org/10.1353/eca.2011.0002

Lytton, R. H., Grable, J. E., & Klock, D. D. (2012). The process of financial planning: Developing a financial plan (2nd ed.). The National Underwriter Company.