You are preparing to meet with Adam, Kate, and their 3-week-old baby girl Cooper. They have lived life to the fullest but have recently realized that all of this excess is going to seriously jeopardize their long-term finances. They have done a fair job of saving but have also habitually overspent their annual income by financing the difference on credit cards, which has resulted in $ 17,000 in credit card balances. In the last year Kate and Adam have attempted to make significant changes in their spending and have excellent financial records. They have enlisted your help.
You have numerous recommendations for them pertaining to almost every aspect of their financial lives, particularly for insurance and retirement planning, and you have compiled a list of these recommendations along with the associated cost and frequency of payment.
One of your first recommendations is to build a $ 10,000 emergency fund, because you never know what might happen with a newborn.
Currently the only monetary asset is a five-year, $ 15,000 bank CD that Adam inherited from his great-aunt. Luckily it is coming due in a few months, so they will be able to access the money. They also have $ 85,000 in other financial assets and $ 26,170 in nonmortgage liabilities.
When you started your analysis, you realized that Adam and Kate had only $ 2,250 in annual discretionary cash flow, so you knew that you had to recommend that they reallocate some assets and organize some of their debt. Given the low interest rate environment, they had inquired with a local lender and wanted your advice on a mortgage refinance.
You determined that they could take out $ 32,500 of their home equity and still be approved for a 5.75% 20-year mortgage, which would give them enough to pay the $ 6,330 in closing costs and pay off their credit card debt, with the remainder going toward their home equity line of credit (HELOC). The payment on the new mortgage is only $ 40 less than their old mortgage, but they did not want to extend the term beyond 20 years.
Besides, the reduction in the HELOC balance also reduces that monthly payment by $ 125.
Now that they have a child, you think that they should each have life insurance (Adam was actually overinsured, given his company benefits); they should reevaluate their property and casualty insurance coverage and see an attorney to get their affairs in order.
Finally, Kate has informed you that their parents are going to provide generously for Cooper's education, so you are comfortable recommending that they reduce funding there to accomplish some additional goals, namely saving for retirement. You have sketched out your recommendations in the following table.
To prepare for the meeting, you need to:
a. Complete a Recommendation Form and an Impact Form for at least one of the recommendations to explain your planning process to Adam and Kate.
b. Complete a Comprehensive Planning Form to ensure that no planning needs have been overlooked.
c. Complete a Cash Flow and Other Assets Tracker to determine the aggregate impact of your recommendations on their discretionary cash flow and net worth.
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Recommendation Summary
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Annual Value (Cost) /Benefit
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Frequency of (Cost) / Benefit
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Refinance the mortgage (5.75%, $158,300,
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15 yrs.)
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with cash out
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$480
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Annual
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Use the cash out proceeds to pay high-interest credit cards
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closing costs,
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HELOC ,and
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$32,500
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Single
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Closing costs and points for the refinance
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($6,330)
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Single
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Pay off high-rate (16.5%) credit card
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balances
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($17,000)
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Single
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Pay down variable-rate (6.5%) HELOC
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($9,170)
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Single
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Reduce HELOC payment ($125/mo)
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$1,500
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Annual
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Eliminate credit card payments ($510/mo)
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$6,120
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Annual
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Liquidate mutual fund (fund emergency
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fund account)
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$10,000
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Single
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Liquidate CD upon maturity (fund
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emergency fund
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account)
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$4,000
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Single
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Allocate money from CD and mutual account
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fund to emergency
savings
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($14,000)
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Single
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Federal tax refund
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$1,956
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Single
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Reduce education funding , Cooper
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$1,800
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Annual
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Drop $1 million term life insurance,
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Adam
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$600
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Annual
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Purchase $1 million term life insurance,
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Kate
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($770)
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Annual
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Enhance property and casualty insurance (homeowners, auto, umbrella)
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($850)
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Annual
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Increase 401(k) contribution, Adam
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($1,500)
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Annual
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Increase 403(b) contribution, Kate
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($1,500)
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Annual
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Contribute to Roth IRA, Adam
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($3,000)
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Annual
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Contribute to Roth IRA, Kate
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($3,000)
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Annual
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Plan estate (wills, general power instruction, and advance medical
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of attorney, letter
directive)
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of last
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($1,000)
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Single
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Financial planning fee
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($2,500)
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Single
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