Fin461 Marty and Laura Hall

Executive Summary

Our results of Marty and Laura Hall’s possible future plans are based on the information provided on their finances: saving for their unborn child’s education, saving up to purchase a home, and saving for retirement.

If the Halls made minimum monthly payments, they would have a remaining balance of $2,250.62, not include other living expenses such as food and clothing. For their future child’s education which currently has a cost of about $20,000 per academic year, and with a given increase rate of 4% per year and an 8% yield on investments, they are expected to pay a total of $153,281.95. Marty and Laura must save $319.28 per month for their child’s college fund.

Next, for their house, if they pay a 10% down payment on a $140,000 house, they will owe a mortgage of $126,000 over a 30-year period. Their monthly payment on the mortgage would be $676.40. They want to save for one year, and their full up-front amount needed is $16,250. They’ll need to save $1,326.92 each month for this. However, if the Halls get a FHA loan through Quicken Loans, they would only need to save $224.90 per month for a total down payment of $2,800 and their monthly mortgage payment would be $589.84.

For their retirement account, we assume from the information given that the Halls wish to have a monthly income of $213,088.81. We get this number from their after-tax yearly income of $54,000 and inflation rate of 4%. This means they will need to save $1,044.04 each month.

Our final recommendations for the Halls are to make the minimum payments on their school and auto bills each month. They also should purchase a home using an FHA loan, as they will save thousands on a down payment. After making all payments and deposits to savings accounts, the Halls will have approximately $662.40 left over. We believe that paying at least $100 extra a month on their credit card is their best option and using the rest for food and other living expenses. If they practice their budgeting skills over the next couple of years, they can easily achieve their financial goals.

The first question asks us how much money the Halls will have leftover for all other expenses after making minimum payments on their outstanding debts. Based on the financial information reported by Laura and Marty, we gather the following:

Monthly income= (50,000+25,000) x .28= 21,000….(75,000-21,000)/12 = $4,500

Rent=$1,200

Credit card= (10,000 x .03) = $300

N=24

I=.4992 (5.99/12)

PV= -5,000

PMT=?

FV=0

Solving for PMT we get $221.58 for their car payment.

N= 24

I=.4375 (5.25/12)

PV=-12,000

PMT=?

FV=0

Solving for PMT we get $527.80 for their college loan payment.

The Halls have a total of $2,249.38 in minimum payments and expenses a month. Based on this information we subtract it from their after-tax monthly income and incur that they have $2,250.62 remaining for all other expenses.

The second question in the case asks how much money Marty and Laura would need to deposit each month, beginning when their child is born and ending on their 18th birthday, in order to have enough saved up for their child’s college education. College expenses today are $20,000, and we are given an annual inflation rate of 4%. We assume that their child will be in college for four years. By finding the future value of year each of college, we get the full amount the Halls will need to save for college. We will begin with finding the freshman year’s future value.

N= 18

I= 4%

PV= 20,000

Pmt= 0

FV= ?

Solving for FV we get $40,516.33 for freshman year expenses.

Next, we need to solve for sophomore year.

N=19

I=4%

PV=20,000

Pmt=0

FV=?

Solving for FV we get $42,136.98 for sophomore year expenses.

Next, we need to solve for junior year.

N=20

I=4%

PV=20,000

Pmt= 0

FV=?

Solving for FV we get $43,822.46 for junior year expenses.

Next, we solve for senior year expenses.

N=21

I=4%

PV=20,000

Pmt=0

FV=?

Solving for FV we get $45,575.35 for senior year expenses.

To find the total college expenses for the Halls’ child, we add up each year’s expenses.  The total expenses for college are $172,051.14.

We then need to find how much is needed for the Halls to save each month, given an annual yield of 8%. To do this, we need to find the present value of each year of college separately. Again, we will begin with freshman year.

N=0

I= 8%

PV= ?

Pmt=0

FV=40,516.33

Solving for present value we get $40,516.33 for amount needed to save for freshman year.

Next, we solve for sophomore year.

N=1

I= 8%

PV=?

Pmt=0

FV= $42,136.98

Solving for PV we get $39,015.73 for amount needed to save for sophomore year.

Next, we solve for junior year.

N=2

I=8%

PV=?

Pmt=0

FV=$43,822.46

Solving for PV we get $37,570.70 for amount needed to save for junior year.

Next, we solve for senior year.

N=3

I=8%

PV=?

Pmt=0

FV=$45,575.36

Solving for PV we get $36,179.19 for amount needed to save for senior year.

To find the total amount that the Halls need to save for their child to go to college, we add up the PV’s for each year. This number is $153,281.95. Now, we need to solve for the amount the Halls need to put away each month.

N= 216 (18 years * 12 months per year)

I=8%

PV=0

Pmt=?

FV= $153,281.95

Solving for Pmt we get $319.28 as the amount the Halls need to save each month for their child for college.

The third question asks how much the Halls will need to save each month to have enough saved up for a down payment on a house. They are looking to purchase a $140,000 home after 1 year of saving. We assume that the closing costs will be 2% of the loan, and the down payment is 10% of the price of the home. We calculated the closing costs at 2% of $140,000, and the down payment at 10% of $140,000. This means the Halls will need closing costs of $2,520 and a down payment of $14,000 and will need to save a total of $16,520 in the next 12 months. Given an annual rate of 8%, we need to solve for how much the Halls need to save on a monthly basis in order to buy a house after 12 months.