Cora Hamilton recently graduated from college and moved to Charlotte to take a job as a market research analyst. She was pleased to be financially independent and was sure that, with her $45,000 salary, she could cover her living expenses and have plenty of money left over to furnish her studio apartment and enjoy the wide variety of social and recreational activities available in Charlotte. She opened several department-store charge accounts and obtained a bank credit card.
For a while, Cora managed well on her monthly take-home pay of $2,893, but by the end of 2020, she was having trouble fully paying all his credit card charges each month. Concerned that her spending had gotten out of control and that she was barely making it from paycheck to paycheck, she decided to list her expenses for the past calendar year and develop a budget. She hoped not only to reduce her credit card debt but also to begin a regular savings program.
Cora prepared the following summary of expenses for 2020:
Item Annual Expenditure
Rent $12,000
Auto insurance 1,855
Auto loan payments 3,840
Auto expenses (gas, repairs, and fees) 1,560
Clothing 3,200
Installment loan for stereo 540
Personal care 424
Phone 600
Cable TV 440
Gas and electricity 1,080
Medical care 120
Dentist 70
Groceries 2,500
Dining out 2,600
Furniture purchases 1,200
Recreation and entertainment 2,900
Other expenses 600
After reviewing her 2020 expenses, Cora made the following assumptions about her expenses for 2020:
- All expenses will remain at the same levels, with these exceptions:
Auto insurance, auto expenses, gas and electricity, and groceries will increase 5 percent.
Clothing purchases will decrease to $2,250.
Phone cable TV will increase $5 per month.
Furniture purchases will decrease to $660, most of which is for a new television.
She will take a one-week vacation to Utah in July, at a cost of $2,100.
- All expenses will be budgeted in equal monthly installments except for the vacation and these items:
Auto insurance is paid in two installments due in June and December.
She plans to replace the brakes on her car in February, at a cost of $220.
Visits to the dentist will be made in March and September.
- She will eliminate her bank credit card balance by making extra monthly payments of $75 during each of the first six months.
- Regarding her income, Cora has just received a small raise, so her take-home pay will be $3,200 per month.
Critical Thinking Question
Prepare a preliminary cash budget for Cora for the year ending December 31, 2020, using the format shown in Worksheet 2.3.
Compare Coras estimated expenses with her expected income and make recommendations that will help her balance her budget.
Make any necessary adjustments to Coras estimated monthly expenses and revise her annual cash budget for the year ending December 31, 2021, using Worksheet 2.3.
Analyze the budget and advise Cora on her financial situation. Suggest some long-term, intermediate, and short-term financial goals for Cora, and discuss some steps she can take to reach them.
To assist Cora Hamilton in managing her budget effectively and achieving her financial goals, we will first create a preliminary cash budget for the year ending December 31, 2020, based on the provided data. We will then analyze her estimated expenses compared to her expected income, make necessary adjustments for the year 2021, and offer recommendations for financial goals.
Preliminary Cash Budget for Cora Hamilton (Year Ending December 31, 2020)
Income
- Monthly Take-Home Pay: $3,200
- Annual Income: $3,200 * 12 = $38,400
Estimated Expenses for 2020
| Expense Item |
Monthly Cost |
Annual Cost |
| Rent |
$1,000 |
$12,000 |
| Auto Insurance (2 installments) |
$927.50 (June + Dec) |
$1,855 |
| Auto Loan Payments |
$320 |
$3,840 |
| Auto Expenses (5% increase) |
$130 (from $120) |
$1,560 * 1.05 = $1,638 |
| Clothing (decrease) |
$187.50 |
$2,250 |
| Installment Loan for Stereo |
$45 |
$540 |
| Personal Care |
$35.33 |
$424 |
| Phone and Cable TV |
$54.17 |
($60 + $5)*12 = $780 |
| Gas and Electricity (5% increase) |
$90 |
$1,080 * 1.05 = $1,134 |
| Medical Care |
$10 |
$120 |
| Dentist Visits (2 visits/year) |
$35 |
($70*2) = $140 |
| Groceries (5% increase) |
$208.33 |
$2,500 * 1.05 = $2,625 |
| Dining Out |
$216.67 |
$2,600 |
| Furniture Purchases (decrease) |
$55 |
$660 |
| Recreation and Entertainment |
$241.67 |
$2,900 |
| Other Expenses |
$50 |
$600 |
| Total Estimated Monthly Expenses |
$3,016.67 |
$36,200 |
Summary of Budget
- Total Annual Income: $38,400
- Total Annual Expenses: $36,200
- Estimated Annual Surplus: $38,400 - $36,200 = $2,200
Recommendations
Cora’s budget indicates that she can cover her expenses with a surplus of
$2,200 annually. Here are some recommendations:
- Emergency Fund: Allocate a portion of the surplus to build an emergency fund equivalent to 3-6 months of living expenses.
- Debt Repayment: Focus on paying off credit card debts to avoid interest charges.
- Savings Goals: Begin a regular savings program using part of the surplus.
- Discretionary Spending: Consider reducing discretionary spending on dining out or entertainment to further increase savings.
Revised Budget for Year Ending December 31, 2021
Adjusting Cora’s budget for potential changes in income and expenses:
Changes to Consider
- Increase in monthly rent by 3%: New Rent = $1,030
- Assume a nominal increase in auto expenses and utilities by 5%.
- Adjust clothing purchases based on potential lifestyle changes or needs.
New Estimated Monthly Expenses for 2021
| Expense Item |
Monthly Cost |
Annual Cost |
| Rent |
$1,030 |
$12,360 |
| Auto Insurance |
$927.50 |
$1,855 |
| Auto Loan Payments |
$320 |
$3,840 |
| Auto Expenses |
$136.67 |
($130 * 1.05) = $1,640 |
| Clothing |
$200 |
$2,400 |
| Installment Loan for Stereo |
$45 |
$540 |
| Personal Care |
$35.33 |
$424 |
| Phone and Cable TV |
$54.17 |
$780 |
| Gas and Electricity |
$95 |
($90 * 1.05) = $1,140 |
| Medical Care |
$10 |
$120 |
| Dentist Visits |
$35 |
($70*2) = $140 |
| Groceries |
$218.75 |
($208.33 * 1.05) = $2,625 |
| Dining Out |
$225 |
($216.67 * 1.05) = $2,700 |
| Furniture Purchases |
$55 |
$660 |
| Recreation and Entertainment |
$241.67 |
$2,900 |
| Other Expenses |
$50 |
$600 |
| Total Estimated Monthly Expenses |
$3,093.33 |
$37,120 |
Summary of Revised Budget
- Total Annual Income: Still estimated at $38,400
- Total Revised Annual Expenses: Now estimated at $37,120
- Estimated Annual Surplus:
- Income - Expenses:
- Surplus = $38,400 - $37,120 = $1,280
Financial Goals for Cora
- Short-term Goals (0-1 year):
- Create an emergency savings fund of at least three months' worth of expenses ($9,000).
- Pay off credit card debts and any high-interest loans.
- Intermediate Goals (1-3 years):
- Save for a larger purchase such as a car or additional furniture.
- Begin investing in a retirement account (e.g., IRA).
- Long-term Goals (3+ years):
- Save a down payment for a home.
- Establish long-term investment strategies to secure financial independence.
Steps to Reach Goals
- Set up automated transfers to savings accounts after each paycheck.
- Track spending regularly to identify areas for further reduction.
- Research investment options and consider consulting a financial advisor.
Conclusion
Cora's financial situation shows promise with an estimated annual surplus; however, careful budgeting and planning are essential for her to achieve her financial goals successfully. By following the recommendations outlined above and adjusting her spending habits accordingly, Cora can work towards financial stability and independence while enjoying her new life in Charlotte.