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Age and Cash Flows. How are cash flows related to your life stage or​ age?
Question content area bottom
Part 1
​(Select the best answer​ below.)
A.
As you age and your career​ progresses, your earnings will increase.​ Typically, cash inflows are lower for younger people just entering the workforce. As our careers​ mature, we tend to earn more money until retirement when our cash inflows tend to decline. Cash outflows tend to increase after we begin our careers and begin to acquire a home and raise a family. As we mature and approach​ retirement, our cash outflows will often fall as we pay off mortgages and no longer pay for the expenses associated with raising families.
B.
As you age and your career​ progresses, your earnings will increase.​ Typically, cash inflows are higher for younger people just entering the workforce. As our careers​ mature, we tend to earn less money until retirement when our cash inflows tend to decline. Cash outflows tend to decrease after we begin our careers and begin to acquire a home and raise a family. As we mature and approach​ retirement, our cash outflows will often fall as we pay off mortgages and no longer pay for the expenses associated with raising families.
C.
As you age and your career​ progresses, your earnings will increase.​ Typically, cash inflows are lower for younger people just entering the workforce. As our careers​ mature, we tend to earn more money until retirement when our cash inflows tend to decline. Cash outflows tend to decrease after we begin our careers and begin to acquire a home and raise a family. As we mature and approach​ retirement, our cash outflows will often fall as we incur additional mortgages for vacation homes and pay for the expenses associated with enjoying retirement.
D.
As you age and your career​ progresses, your earnings will decrease.​ Typically, cash inflows are lower for younger people just entering the workforce. As our careers​ mature, we tend to earn less money until retirement when our cash inflows tend to increase. Cash outflows tend to decrease after we begin our careers and begin to acquire a home and raise a family. As we mature and approach​ retirement, our cash outflows will often rise as we pay off mortgages and no longer pay for the expenses associated with raising families.
Estimating Disposable Income.

Angela earns ​$2,950 per month before taxes in her​ full-time job and ​$1,035 before taxes in her​ part-time job. Her employers withhold about ​$1,195 per month from her checks to pay taxes. What is​ Angela's disposable​ income? Why is it important to track disposable​ income?

Part 2
Budgeting is the process of forecasting future expenses and savings. When​ budgeting, the first step is to create a personal cash flow​ statement, which measures cash inflows and outflows. The main source of cash inflows for working people is their​ after-tax salary​ (disposable income) along with income from investments​ (such as interest on savings accounts and dividends from stock​ ownership). For budgeting​ purposes, disposable income​ (cash inflows) is typically the difference between gross income​ (salary) and income taxes.

To calculate​ Angela's monthly salary before​ taxes, use the following​ formula:

Monthly Salary=Full-Time Job Monthly Salary+Part-Time Job Monthly Salary

Therefore,

Monthly Salary=$2,950+$1,035=$3,985

​Angela's monthly salary is ​$3,985.


The amount Angela needs to pay taxes is ​$1,195.

Part 5
To calculate​ Angela's disposable​ income, use the following​ formula:

Disposable Income=Monthly Salary−Taxes
​Therefore,

Disposable Income=$3,985−$1,195=$2,790
​Angela's disposable income is ​$2,790.

Part 6
Disposable income is typically the difference between gross income​ (salary) and income taxes. It is important to track disposable income for budgeting purposes.
Change in Savings. ​Angela's monthly disposable income is ​$2,790. She has monthly expenses of ​$2,530 ​(including recreational expenses of ​$390​) and net cash flow of ​$260 per month. Angela makes a budget based on her personal cash flow statement. In two​ months, she must pay ​$300 for tags and taxes on her car. As a​ result, Angela can expect to save $2,820 in the next 12 months. Angela analyzes her personal budget and decides that she can reduce her recreational spending by ​$95 per month. How much will that increase her annual​ savings? What will her annual savings be​ now? Are there any other spending categories she might be able to​ reduce?


A reduction in an expense will increase savings.

The amount by which Angela could reduce her monthly recreational spending each month is ​$95.

The increase in her annual savings amount is the monthly amount of reduction to recreational spending times​ twelve, as shown in the following​ formula:
Increase in Annual Savings=Reduction in Recreation Spending×12 Months
​ Therefore,
Increase in Annual Savings=$95×12 Months=$1,140
The increase in her annual savings amount is ​$1,140.
Part 5
Her annual savings will be the current expected annual savings plus the increase to annual​ savings, as shown in the following​ formula:

Annual Savings=Annual Savings+Increase in Annual Savings

​Therefore,
Annual Savings=$2,820+$1,140=$3,960
Her annual savings will now be ​$3,960.
Part 6
Are there any other spending categories she might be able to​ reduce?
Yes.
Liability Levels. Ryan and Nicole have
​$267,310
in​ assets, and the following​ liabilities: ​

Mortgage 84,322
Car loan 4,715
Credit card balance 161
Student loans 25,650
Furniture loan (6 months) 1,890

What are their current​ liabilities? What are their​ long-term liabilities? What is their net​ worth?


Current liabilities are debts that will be paid off in the near future​ (within one​ year) and include credit card balances and​ short-term notes.

To calculate Ryan and​ Nicole's current​ liabilities, use the following​ formula:
CURRENT LIABILITIES= Credit card balance + Furniture loan

Current Liabilities=$161+$1,890=$2,051
The value of the current liabilities is ​$2,051.




Long-term liabilities are debts that will be paid over a period beyond one year and can include mortgages​ (housing), car​ loans, and student loans.
LONG-TERM LIABILITIES= Mortgage+car loan + student loan
To calculate Ryan and​ Nicole's long-term​ liabilities, use the following​ formula:
Long-Term Liabilities=$84,322+$4,715+$25,650=$114,687
The value of the​ long-term liabilities is ​$114,687.


Net worth is the difference between what is owned​ (assets) and what is owed​ (liabilities) and can be found using the following​ equation:
Net Worth=Total Assets−Total Liabilities
where total liabilities are the sum of current liabilities and​ long-term liabilities.


To calculate Ryan and​ Nicole's total​ liabilities, use the following​ formula:
Total Liabilities=$2,051+$114,687=$116,738
The total value of all liabilities is ​$116,738.


Therefore,
Net Worth=$267,310−$116,738=$150,572
Ryan and​ Nicole's net worth is ​$150,572.
Impact of Choice of Major on Future Net Worth.

Remi graduated with a degree in computer engineering and will start a job making ​$71,000 per year in​ after-tax income.​ Raina's degree is in political science and the job she was offered pays $59,000 per year in​ after-tax income. Assume Remi and Raina will live together and split living expenses of $54,000 per year. Remi and Raina each received $110,000 from their grandfather when they graduated college. Remi went to a public university and accumulated ​$32,000 in total student loan debt. Raina attended a private college and accumulated $182,000 in total debt. Using this​ information, what is the expected net worth of Remi in two​ years? What is​ Raina's expected net worth in two years assuming her student loan debt payment is ​$610 per​ month? Ignore other potential changes to net worth including purchases of​ assets, savings,​ investments, and interest on student loans.



To calculate Remi and​ Raina's expected net worth in two​ years, use the following​ formula:

Net worth=[(Annual income−Living expenses−(Monthly student loan payment×12))×2]+Net worth after graduation


Annual income is the amount each one makes per year in​ after-tax income.

Living expenses are split between Remi and Raina and can be calculated​ as:
Living expenses=$54,000 / 2=$27,000



​Remi's monthly student loan payment is​ $0 because she was able to pay off her debt with a portion of the money she inherited.​ Raina's monthly student loan payment is ​$610.



To calculate net worth after​ graduation, use the following​ formula:

Net worth after graduation=Amount received − Debt


​Therefore,
Net worth after graduation Remi=$110,000−$32,000=$78,000

Net worth after graduation Raina =$110,000−$182,000=$72,000




Therefore, using the information​ above, Remi and​ Raina's expected net worth in two years is calculated​ as:

Net worth Remi= [($71,000 − $27,000 − ($0×12))×2] + $78,000 = $166,000

Net worth Raina= [($59,000 − $27,000 − ($610×12))×2] + (−$72,000) = −$22,640

​Remi's expected net worth in two years is ​$166,000​, while​ Raina's expected net worth in two years is −$22,640.
Liquidity and Debt. Ryan and Nicole have the following assets and​ liabilities:

Home ​$135,000
Cars 31,500
Furniture 18,900
Stocks 13,600
Savings account 5,400
Checking account 1,215
Bonds 23,085
Cash 135
Mutual funds 10,125
Land 28,350
Mortgage 84,322
Car loan 4,715
Credit card balance 161
Student loans 25,650
Furniture note​ (6 months) 1,890

What is Ryan and​ Nicole's liquidity​ ratio? What is their​ debt-to-asset ratio? Comment on each ratio.


Liquidity represents the access to funds to cover any​ short-term cash deficiencies. A liquidity ratio of greater than 1.00 implies an ability to cover​ short-term liabilities and a liquidity ratio of less than 1.00 implies insufficient liquid assets to cover upcoming payments. A liquidity ratio can be found using the following​ equation:

Liquidity Ratio=Liquid Assets /. Current Liabilities
Liquid assets include​ cash, checking​ accounts, and savings accounts. Current liabilities are debts that will be paid off in the near future​ (within one​ year) and include credit card balances and​ short-term notes.


Therefore,
Liquidity Ratio= (Cash+Checking+Saving) / (Credit Card Balance+Furniture Note)

​= $135+$1,215+$5,400$161+$1,890=3.29
Ryan and​ Nicole's liquidity ratio is 3.29.



Ryan and​ Nicole's liquidity ratio indicates that for every dollar of current​ liabilities, they have ​$3.29 of liquid assets.



Debt levels that exceed assets could result in an inability to cover upcoming debt payments. A​ debt-to-asset ratio greater than 100.00 percent implies a negative net worth and a potential for not being able to pay off a debt.

Debt level can be measured relative to assets using the following​ equation:
Debt-to-Asset Ratio=Total LiabilitiesTotal Assets×100
Total liabilities includes current liabilities and​ long-term liabilities. Total assets includes liquid​ assets, household​ assets, and investments.



​Therefore,
Debt-to-Asset Ratio=[ (Total Liabilities. / Total Assets) ×100] ​= [(Current Liabilities + Long-Term Liabilties) /Liquid Assets+Household Assets+Investments) ×100]

Debt-to-Asset Ratio= [($2,051+ $114,687) / ($6,750+$185,400+$75,160) ×100 ] = 43.67%

Ryan and​ Nicole's debt-to-asset ratio is 43.67​%.
Ryan and​ Nicole's debt-to-asset ratio indicates the level of debt may be higher than​ desirable, which may lead to debt repayment problems.