Personal financial planning case study

Personal Finance Case #20

People who marry today have a 50/50 chance of becoming divorced. Michelle Foxe, 28, recently became a statistic. Married for 3 ½ years, she now lives at home with her parents. Her major goal is to get on with her life- both emotionally and financially. Before her wedding, Foxe had $8,000 in the bank. Today, she owes $2,000 on credit cards and $1,000 to her divorce attorney and has a $9,000 car loan balance. "I want to pay off our debts as soon as possible," says Foxe. "My ex-husband just lost his job, so he won't. Then I want to build up my savings again and start investing."

Foxe earns $29,300 annually, plus another $200 in interest. Her $11,000 net worth includes $550 in a checking account, $3,000 in passbook savings, $3,950 in an S&P 500 stock index mutual fund, $2,500 in U.S. savings bonds, a two-year old car worth $7,500, and a $1,000 computer. Her home furnishings from her previous married household, worth $4,500, are presently in a rented storage locker.

Short-term, Foxe would like to increase her savings to $10,000, pay off her credit cards, and be able to afford her own apartment. She is also planning to advance in her career and is taking advanced computer courses at a local college. In 3 to 10 years, Foxe would like to own a new car and a condo or house of her own. She says "I hope to be remarried with kids and earning a good salary with money in the bank."

Foxe's monthly expenses total $1,550. This includes $150 a month "rent" to her parents, a $250 car loan payment with 36 months remaining, $200 toward credit card debt and the attorney's fees, $100 for tuition, $100 for gas and car expenses, and $500 for items such as food, clothing, auto insurance, entertainment, and the storage locker rental fee. She also saves $250 a month in a stock index fund and U.S. savings bonds. Her father is a certified financial planner® and recommended investing in the index mutual fund for long-term growth.

Foxe has group term life insurance paying 2 ½ times her salary and employer-paid health insurance with a $1 million lifetime limit. Her car has 100/300/50 liability coverage and collision and comprehensive coverage with a $100 deductible.

Foxe admits that she has done absolutely no planning or saving for retirement. She wants to retire no later than age 65 and move to a state that has lower living costs and warm weather year-round. Her hope for her retirement years time is to "have money to do fun things and not become a bag lady." Her employer provides a 401(k) plan but, so far, Foxe has not signed up, even though her employer matches contributions up to 6% of workers' salaries. She also does not have an IRA.