Cory and Tisha Dumont

Financial Plan
Brien Thompson

FINANCIAL PLANNING
This document was prepared for Cory and Trisha Dumont.
Within this document exists goals, plans, and strategies that
are unique the Cory and Tisha Dumonts financial future.
This is a confidential document that is not meant to be read
by any unauthorized persons.
Case Summary

Cory and Tisha are seeking urgent financial help. Cory is 31

years old and Tisha is 30 years old. They have a son, Chad who is 4
years old, and a daughter, Haley who is 2 years old. They also have a
very fat tabby cat named Ms. Cat who is a part of the family. Cory is a
store manager and makes $45,000 a year, while Tisha is an accountant
who earns $53,000 each year. The Dumont family is currently renting
a townhome for $2,000 per month but they are hoping to put a down
payment on their dream home within 3 to 5 years. Currently they have
$13,000 saved in a mutual fund with the intention to put it towards
their down payment. Cory and Tisha are surprised about the amount
of taxes they have to pay and are not sure whether or not they have
calculated them correctly. Tisha has a life insurance policy that has
built up a cash value of $1,800. Their credit card debt typically
remains around $1,300 while they make $100 monthly payments.
Together, they have a savings account balance of $2,500 and a
checking account balance of $1,800. Looking into the future, Cory and
Tisha do not want their kids to face the burden of student loans, so
they are looking to find a way to fund their college education. Both
Cory and Tisha have retirement accounts through work, however they
do not know exactly how they are contributing and how it works. Cory
has a 401(k) account with a former employer worth $2,500. Cory is
quick to point out that he does not like financial surprises. Tisha, on
the other hand, indicated that she is willing to take financial risks when
she thinks the returns are worthwhile. Both Cory and Tisha enjoy the
outdoors and maintain their health. They have even considered joining
a golf club that charges a monthly fee of $250. The have two
automobiles. One of which they own and they still owe $12,925 on the
other. Their household furniture, electronics, and other personal
property is worth approximately $12,000. One of their greatest assets
however is Tishas antique jewelry, which she received from her
grandmother. The jewelry is valued at $19,700. Tisha also has a
mutual fund that was given to her by her father. The current value of
the fund is $2,300. Combines, they has a student loan balance of
$8,200 and an installment loan with a balance of $5,300.

Part I: Financial Planning

1. Identify the stage of the life cycle that best describes

Cory and Tisha today. What important financial planning
issues characterize this stage?

Cory and Tisha, you are currently in the first stage of the
financial life cycle. This time is all about wealth accumulation.
This stage lasts from 18 to 55 years old. There are several
important short-term, intermediate, and long-term focuses your
financial plan will have throughout this stage.
Short-Term Goals:
i. Emergency Fund: The first priority needs to be
establishing your emergency savings fund.
Currently, your months living expense ratio is 0.7,
which is really low. This account needs to have six
months worth of living expenses accumulated. With
monthly expenditures of $6,291.42, this account
needs to have $37,748.50 readily available for
necessary withdrawal.
ii. Insurance Planning: We need to make sure that
each of you has proper insurance coverage, along
with your children. Life insurance is extremely
important for both of you. Tisha, you already have a
life insurance policy with a cash value of $1,800.
Continue making the payments insuring the growth
of that account. Cory, you need to begin searching
for a good life insurance policy that fits your needs.
Tisha has a whole-life policy, which means the
insurance company will pay her beneficiary the death
benefit when she passes. There is also the option for
a term-life policy. In this case, the insurance
company will pay the death benefit if you pass before
a certain age. The value of the policies need to be
enough to make sure your family is taken care of
financially when you pass away. This could include
paying off debts, college tuition for the Chad and
Haley, and to cover final expenses. Another
insurance necessity is health insurance. The entire
family is covered by Tishas employee benefits
currently. If there is ever a change in occupation,
just be sure to maintain health care coverage. You
also need to be sure you have property insurance,
disability insurance, and liability insurance. Paying
these costs out of pocket might break the bank.
iii. Credit Cards: Continue paying off credit card
balances each month. Always make sure to make
your payments on time. To help maintain a higher
credit score, try not to use more than 30% of your
credit line and also try to pay off the entire balance
each month.
iv. Estate Planning: You need to meet with an attorney
to get your estate planning in order. This is
 extremely important to do in order to make sure all
of your assets will be in order after you pass away.
v. Home Purchase: I know that a short-term goal for
both of you is to purchase a home. You both have
contributed to a mutual fund worth $13,000 for the
purpose of a down payment on your dream house.
Continue to contribute to this account until you have
approximately 20% of the value of the house you are
looking to purchase.
vi. College Funding: As you have experienced,
student loans can be quite a burden financially. If
you plan to contribute to funding Chad and Haleys
college education, start now. The earlier you start,
the more you will accumulate before they need it.
You want to put the money in accounts that will
return with a higher interest rate in order to make
the most of each dollar you invest. I would suggest
investing some of your funds in the stock market as
well as putting money in a certificates of deposit, or
CD, account. The stock market is volatile, however,
over time it has a positive trend. It is a risky place to
put funds, but it can also reap the greatest rewards.
A CD account will typically have a good interest rate
and it is federally insured. Just make sure you do not
need the money for anything sooner because there is
a penalty for early withdrawal.
vii. Retirement: Continue contributing to your
retirement accounts through your employers. Cory,
you have $2,500 in a retirement account with you
former employer. You have the option to roll that
over into an independent retirement account (IRA) if
you wish to do so. Many companies match
retirement contributions up to a certain percentage.
If your company does this, make sure to contribute at
least as much as your employer will match.
viii. Automobile: Continue making your $405 monthly
car payment on time. This will continue to reduce
your debt while also helping your credit score.
ix. Student Loans: Pay off your student loans as
scheduled. When possible, make extra payments in
order to reduce the principle of your debt.
2. Based on the issues identified in Question 1 and your
knowledge of the Dumont household, help Cory and Tisha
Complete Worksheet 1 to identify their short-term,
intermediate and long-term financial goals.
3. Complete Worksheet 5 for the Dumonts.

4. Develop a balance sheet for the Dumonts using

Worksheet 4. Do they have a positive or negative net
worth?
To find your net worth, we need to add up all of your assets and
then subtract all of your liabilities. After calculating all of your
assets and liabilities, your current net worth is $50,250.
5. Using information from the income and expenses
statements and the balance sheet, calculate the following
ratios:
Current Ratio: 2.71
i. The current ratio describes your ability to pay off
your short-term debts. At a minimum, this needs to
be at a value of 2.0, so your current ratio is actually
very solid.
Months Living Expenses Covered Ratio: 0.70
i. This ratio describes how long your monetary assets
can cover your monthly expenses. In other words, it
is how long your emergency fun can sustain your
current lifestyle. 3-6 months is adequate, but we
 really want you to be at a full 6 months. Currently
you are at 0.70, which is really low. You need to
immediately commit to making this number higher.
Debt Ratio: 35.82%
i. The debt ratio shows what percentage of your assets
is financed with debt. 35.82% is a decent number for
a family in your stage of life. Ideally you would like
this number to be a little bit lower, but you are not in
bad shape. If you take your precious jewelry out of
consideration, however, this number significantly
rises to 47.87%. Since Tisha said she would never
part with it, it is safe to say that you need to work to
reduce this number to a more manageable
percentage.
Long-term Debt Coverage Ratio: 6.98
i. Long-term debt coverage ratio relates the amount of
funds available for debt repayment to the size of the
debt payments. We want this number to be at least
2.5, so you are in a good spot at 6.98.
Savings Ratio: -11.19%
i. This ratio tells you the proportion of your after-tax
income that you are saving. It is recommended that
this ratio is at least 10%. Obviously there is some
work to do regarding your savings ratio. You will
need to cut out some expenditures in order to
commit more money to savings. Think of all of your
expenses and then categorize them as absolutely
essential and then not essential. The ones that are
deemed not absolutely essential need to be either
cut or reduced in order to free up more money for
savings and investment. One example I can think of
is daycare. If you can find a family member that is
willing to help look after Chad and Haley, it will save
you $10,000 each year. Even if you give them
money to cover expenses and maybe some extra on
the side, it will still be significantly lower.

6. Use the information provided by the ratio analysis to

assess the Dumonts financial health. What
recommendations would you make to improve their
financial health?

My first recommendation would be to improve your months

living expenses covered ratio. To do this, you need to also
increase your savings ratio. We want you to have your months
 living expenses covered ratio up to at least 3 and then ultimately
to 6. This gives you money you can fall back on in case one of
you loses your job and have to rely on savings to cover monthly
expenditures. The method of achieving this is to increase the
amount you are saving monthly. This may require you to
temporarily reduce your monthly expenditures, but it is a
necessity to your financial security. My next recommendation is
to reduce your debt ratio. This just means paying off debt.
Especially since you are looking to purchase a home in the next 3
to 5 years, this percentage needs to be low enough to
accommodate for the increase a mortgage will cause. The rest
of your ratios are good. Continue to keep these ratios in the
ideal ranges.

7. Do the Dumonts have an emergency fund? Should they?

How much would you recommend that they have in the
emergency fund?

Right now, you do not have an emergency fund. This is one of

the most essential aspects of your financial health. Your current
monthly expenditures are $6,291.42. The ideal range for an
emergency fund is 3 to 6 months. As quickly as you can, you
need to build up your fund to at least $18,874.25. That will
cover 3 months of living expenses. Ultimately, you want your
emergency fund to be $37,748.50. This amount would cover 6
months of living expenses. This fund also needs to be adjusted
along with changes in you monthly living expenses. This is
extremely important in case one of you were to lose your job or
there is another kind of unforeseen major expense that arises
and needs to be taken care of.

8. According the money article that Cory and Tisha read

they can expect to pay about $100,000 in tuition and
related college expenses when Chad enters college and
even more for Haley. The Dumonts hope that Chad will
receive academic scholarships that reduce their total
college costs to about $40,000. Assuming that the
Dumonts start a college savings program today and
manage to earn 9% a year, ignoring taxes, until Chad is
18, how much will they need to save at the end of each
year? How much will the Dumonts need to save each
year if Chad does not receive scholarships?

The key to investing for college is starting as soon as you can.

The sooner you start, the more time your money will have to
appreciate before it needs to be spent. College is an extremely
 expensive cost, so you need to start saving as soon as possible.
You also need to compare place where you can put your money
to appreciate. In this case, you chose an account or fund that
return 9 percent each year. This is a very good return on your
investment. If Chad receives academic scholarships that reduce
the total college costs to $40,000, then you will need to save
$1,537.33 at the end of each year to cover the cost by the time
he is 18. If Chad does not receive any academic scholarships,
then you will need to save $3,843.32 at the end of each year to
cover the cost of college.

9. How much will the Dumonts need to save at the

beginning of each year to accumulate $40,000 for Haley
to attend college if they can earn 9% on their savings?
Assuming that the Dumonts need to accumulate
$110,000 to fund all of Haleys college expenses, how
much do they need to save at the beginning of each year?
If, instead they save money at the end of each year, how
much will they need to put away every year to meet the
$110,000 goal if they can earn 9% compounded annually
starting today.

In Haleys case, you have a little bit more time to allow the
money you save for her education to appreciate. This is also
going to be important because Haleys college tuition and other
costs will be $10,000 more than Chads. To fund Haleys
education for $40,000 in this situation, you would need to save
$1,111.92 at the beginning of each year. If her cost is $110,000,
then you will need to save $3,057.79 at the beginning of each
year. If instead you decided to save money at the end of each
year, you will need to save $3,332.99 per year to fund her cost of
$110,000.

10. How much will Tishas Great Basin Balanced Mutual

Fund shares (currently valued at $2,300) be worth when
Chad enters college, assuming the fund returns 7% after
taxes on an annualized basis? How much will the shares
be worth When Haley turns 18? What will be the value of
the shares when Tisha retires at age 67, assuming a 9%
after-tax return and no deductions from the account?
What has been the actual annualized rate of return for
the fund since Tisha received it as a gift?

Tisha, you received a mutual fund account worth $1,000 when

you turned 21. Since then, it has appreciated to $2,300 in the
past 9 years. When Chad enters college at the age of 18, your
 mutual fund shares will be worth $5,931. When Haley turns 18,
your mutual fund shares will be worth $6,790. When you retire
at the age of 67, you mutual fund shares will be worth $55,784.
To date, your actual annualized rate of return for your mutual
fund shares has been 9.7%. My recommendation would be to
leave the funds in the account and let them appreciate until you
retire. This will give it the most time to grow and will have a
significant impact on your retirement funds. Only withdraw the
money if it is absolutely necessary to help pay for the costs of
either Chad or Haleys college expenses.

11. Recall that the Dumonts set up a savings fund for a

future down payment with gifts and contributions from
their wedding. How much will this market index fund
valued at $13,000 be worth in 3,5 and 7 years if they can
earn a current rate of return of 6%? How much will the
fund be worth in 3,5 and 7 years if they can obtain an 8%
rate of return?

You put $13,000 into a market index fun account for a future
down payment on a house. With this fund appreciating at 6
percent, in three years it will be worth $15,483, in five years it
will be worth $17,397, and in seven years it will be worth
$19,547. If instead the account appreciates at 8 percent, in
three years it will be worth $16,376, in five years it will be worth
$19,101, and in seven years it will be worth $22,280. When
purchasing a home, the typical down payment is 20 percent of
the homes purchase price. If you wait 5 years at an interest rate
of 6 percent, you will be able to afford a house worth $86,985. If
you wait 5 years at an interest rate of 8 percent, you will be able
to afford a house that is worth $95,505. Now you do not have to
make a 20% down payment so the value of your house may be a
little higher.

12. Assuming an 8% return for the current year from

their market index fund valued at $13,000 and a 15%
federal marginal tax rate, how much will the Dumonts
pay in taxes on their investment, either from their
savings or from current income, this year? By how much,
after taxes, will their account grow this year?

If your market index fund receives an 8 percent return this year,

the funds taxable income will be $1,040. At a 15 percent federal
marginal tax rate, your tax liability from the fund will be $156.
This means that your total after tax income will be $884. When
 you add that to the fund value, your new fund total will be
$13,884.

13. Assuming that Cory does nothing with his 401(k)

retirement account from his former employer and that
the account grows at a rate of 5% annually, how much will
Cory have when he retires at 67? If instead, Cory takes
control of the money and invests it in a tax-deferred IRA
earning 10% annually, how much will he have at age 67?

Cory, if you leave your retirement funds in the 401(k) with your
previous employer, you retirement account will be worth $14,480
upon retirement. However, if you roll it over into an IRA, earning
10 percent instead of 5 percent, your retirement account will be
worth $77,282 when you retire. With a 401(k), you put pre-tax
dollars into it and then pay taxes on the money when you take it
out. This will cause you to be taxed at your tax bracket at the
time of withdrawal. There is also a penalty if you withdraw the
money before the age of 59.5. In an IRA, you put after-tax
dollars into the account and then when you retire, you can
withdraw the money tax-free. My recommendation would be to
roll the current balance over into an IRA. Right now you are in a
relatively low tax bracket which means your will be able to keep
a higher percentage of the money that you contribute to your
account. Once you climb into different tax brackets, the strategy
might change but the goal is to always keep as much of the
money you make in your hands for retirement. Also, the IRA has
a 10 percent interest rate instead of a 5 percent interest rate.
This will allow your money to appreciate more over time and
ultimately the account will be worth more upon your retirement.

14. Using the income and expense estimates provided

by Tisha, calculate the Dumonts taxable income using
the 2014 tax information provided in the text.
Do the Dumonts have enough tax-deductible
expenses to itemize deductions?

As a family, you do not have enough tax-deductible

expenses to itemize deductions. Taking the standard
deduction versus itemizing will reduce your taxable income
more. The standard deduction is $12,400 dollars if you are
married filing jointly. Your itemized deduction for the year
would total $6,450. The more you reduce your taxable
income, the less taxes you will need to pay and the more
money you get to keep for yourself.
 Explain the tax ramifications of Corys student loan
interest, estimated to be $652 for 2014.

Cory, your student loan interest is deductible up to $2,500

per year. Since yours is estimated to be $652, the entire
amount will be tax deductible. This amount is calculated
into your adjusted gross income (AGI). From there, all of
the rest of the deductions and credits are taken out and
you find your total tax liability.

How much Social Security and Medicare taxes are

withheld from Cory and Tishas income?

The social security tax rate is 6.2 percent and the Medicare
tax rate is 1.45 percent. Since your combined gross
income is $98,000, $6,076 is withheld for social security
and $1,421 is withheld for Medicare.

What is the Dumonts total federal income tax

liability?

To find your total federal income tax liability, you must find
your taxable income and find out which tax bracket you are
in. With an adjusted taxable income of $64,248, you are in
the 15 percent federal income tax bracket. Then you
multiply the first $18,150 by 10 percent and then the
remaining balance by 15 percent. Those two values
together to find your total federal income tax liability. In
this case, your total federal income tax liability would be
$14,226.70. This is after you reduce your tentative tax
liability by another $2,000 because of the child tax credit.
Then adding that amount plus social security taxes and
Medicare taxes.

Do the Dumonts qualify for the child tax credit? If

so, how will it affect their federal income tax
liability? How will a payment or refund be
determined?

Since Chad and Haley are dependents under the age of 17

and your combined income is less than $110,000, you
qualify for the child tax credit. It will reduce your federal
income tax liability by $1,000 for each child. If you take
your total tax owed and subtract the taxes you have
 already paid, it will determine whether you will have a tax
payment or a tax refund.

15. Based on the total Social Security tax, Medicare tax

and federal income tax liabilities calculated above, how
close did Tisha come in estimating their tax liability? How
does the difference between the estimated and actual tax
liabilities change their financial situation? What
recommendations would you make?

Tisha, you were $7,773.30 off when you estimated your tax
liability. This is good news though! Now you have an extra
$7,773.30 to put towards expenses throughout the year. Now
instead of having negative $7,597 income available for savings
and investments, you will have $176.30 available for saving and
investments. This significantly helps your financial situation. I
recommend that you and Cory reduce your entertainment
expenditures as well as your day care expenses. Day care alone
is costing you $10,000 per year. If you can find a family member
who would be willing to look after Chad and Haley, your money
available for savings and investments would jump up to
$10,176.30. Then adding a reduction of entertainment expenses
would only help that number increase. This would make it a lot
easier to reach some of the financial goals we have talked about.

16. Calculate and interpret for Cory and Tisha the

differences among their marginal, average, and effective
marginal tax rates. How might these rates change with
life events, such as a salary increases or the purchase of
their home?

A marginal tax rate is the percentage of the last dollar you earn
that goes towards taxes. Since you are in the 15 percent tax
bracket, your marginal tax rate is 15 percent. The average tax
rate is your total tax liability divided by your gross income. In
your case, your average tax rate would be 14.52 percent. An
effective marginal tax rate is how much of the last dollar you
earn goes towards taxes. The difference is that it includes state
and city tax rates as well. All of these can change based on what
happens throughout your lives. If you experience a salary
increase, you may jump into the next tax bracket of 25 percent.
This would make your marginal tax rate 25 percent instead of 15
percent. It would also increase your average tax rate due to
more taxes and more income. When you purchase your home,
however, you will be able to deduct the interest you pay on your
home mortgage. This could possibly bring your taxable income
down a bracket into the 10 percent bracket. That would turn
your marginal tax rate into 10 percent and reduce your average
tax rate due to lower tax liability.