Mayors Challenge for Economic Education. Case Study Narrative Ian & Kayla Garcia - Starting Out

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1 Mayors Challenge for Economic Education Case Study Narrative Ian & Kayla Garcia - Starting Out

2 Introduction Ian and Kayla, both 25, graduated university a few years ago and were married shortly thereafter. Ian and Kayla were lucky enough to find work in their chosen fields. Kayla is a coder for a large, online retailer. Ian is a nurse with aspirations of becoming a nurse practitioner after he gains some experience. Recognizing their hard, quality work both Kayla and Ian s employers are giving them 2% raises in their salaries next year. The Garcia s are expecting their first child by the end of the year. They are hoping to have a second child in the next couple of years. Cash and Debt Management With help from their parents, the Garcia s purchased a small, starter townhome a few years ago. Interest rates have subsequently declined since they took out the mortgage. They are wondering if refinancing their mortgage makes sense. Mortgage: Pre-approved: 30 year, 6% fixed; 27 years remaining. 30 year, 3.5% fixed. Ian and Kayla chose to pay for their own schooling by working and taking on student loans. The interest and payment deferral features of the student loans were appealing when the couple first took out the loans. A large outstanding balance is concerning to them now and they would like to pay the loans off early if possible. Both loans have the same terms and balance outstanding: Original Balance: $30,000 Interest Rate: 4.8% Term: 10 years Current balance: $22,455 Ian and Kayla would like to upgrade the furniture in their apartment. They used their credit cards to finance their wedding and honeymoon and the cards are now at their maximums. They are considering a pay day loan as a new source of credit to help buy the furniture. They plan to spend about $2,500. Credit Card #1: Credit Card #2: 24% APR, $150 annual fee, travel points, $8,000 credit limit 18% APR, $0 annual fee, $7,000 credit limit The Garcia's own two vehicles both of which are fully paid for. In preparation for their new child they bought a minivan for safety. This will be the primary vehicle they use when travelling with the baby. They also have Kayla s older vehicle for quick trips without the baby. The minivan is worth $35,000; the Kayla s vehicle is worth $5,000. Kayla and Ian estimate they spend 2

3 $100/month on gas, $1,000/year on maintenance and $2,000/year on registrations and other miscellaneous vehicle expenses. Getting out of debt ranks highly but the couple is unsure how they can get out of debt and while meeting their other financial goals. With their credit cards maxed, the Garcia s are worried about what would happen if an emergency were to happen and how they would pay for it or any other unexpected expenses. Retirement Planning While retirement is a long way off, the Garcia s current plan is to work until they are 65. They would like to make sure they receive the maximum Social Security benefits they are entitled to. Both of their companies offer 401(k) plans with 100% matching up to 6% of their salaries. Neither of them are participating. The Garcia s are interested in purchasing a vacation home when they are retired. However, if they could buy and enjoy it before retirement they would like to pursue that option as well. Having a good quality of living in retirement is very important to them. They have heard of the power of compounding interest but are not sure if they can/should start saving now with so much time left before retirement. Risk Management (Insurance) Planning The Garcia s life, disability and health insurance are covered in their benefits packages from their employers. Both packages are very comprehensive. Life insurance equals their annual salaries. Disability insurance covers 100% of their salary for 6 months and 75% of their salary after that. Health insurance is provided through an HMO. Premiums are $150/month for each of them. They also need to cover co-pays. They expect their co-pays to be $500 this year. Kayla s plan provides a choice to use a PPO but they would need to pay 50% of the total higher premium, which is $600/month. They believe they have adequate car and homeowners coverage on both property and liability. They have an HO-3 policy on their home with $250,000 actual value coverage for the structure and $1,000,000 liability coverage. They each have auto policies with collision & comprehensive coverage and $1,000,000 liability coverage. The Garcia s are generally risk averse and would like to ensure they have enough, but not too much, insurance. 3

4 Tax Planning The Garcia s are looking to minimize their income taxes and are hoping you can suggest a few ways to do so. They are also looking for tax advantaged ways to grow their savings. The Garcia s file their taxes under the married filing jointly status and have a 20% average tax rate. Economic Environment The Garcia s are generally aware of the health of the overall economy but would like to become a bit more informed on how inflation and interest rates could impact their financial goals. As they are looking to begin saving for retirement and a down payment on a vacation home would like a better understanding of the returns they could earn on their savings. Interest rates are expected to rise over the next few years. 4

5 Net Worth Statement Ian & Kayla Garcia As at Dec 31 Current Year Assets Checking $500 Savings $2,000 Investment Accounts $28,000 House $260,100 Vehicles $40,000 Personal Property $5,000 Total Assets $335,600 Liabilities Mortgage $186,175 Credit Cards $13,430 Student Loans $44,910 Total Liabilities $244,516 Net Worth $91,084 5

6 Cash Flow Statement Ian & Kayla Garcia For the Year Ending Current Year Revenue Salary - Ian $62,000 Salary - Kayla $72,000 Bonus - Kayla $5,000 Total Revenue $139,000 Expenses Food $8,400 Clothing $5,000 Utilities $9,600 Health Care $4,100 Entertainment $5,600 Regular Mortgage Payments $16,188 Property Tax $2,601 HOA/Townhome Fees $4,200 Credit Card Minimum Payments $4,714 Credit Card Annual Fee $150 Vehicle Operation $4,200 Home & Auto Insurance Premiums $3,700 Charity $2,000 Other $26,047 Taxes $27,800 Investment Account Savings $14,700 Total Expenses $139,000 6

7 Engagement It is near the end of the year and the Garcia s have approached you to help them with their financial plan. Describe how you would be compensated for developing the Garcia s financial plan. Identify and describe the Garcia s financial goals. Summarize the primary goals and provide a list of areas you would need to address to help the Garcia s meet them. Keep in mind that all goals related to the Garcia s financial wellbeing may not be explicitly stated in the information above. Prioritize their goals and indicate whether all their goals can be achieved based on your prioritization. Develop a list of recommendations to help the Garcia s meet their goals. If there is(are) more than one way to meet a goal provide a brief description of any alternatives. Provide the advantages (pros) and disadvantages (cons) of your recommendation and the alternatives. Develop a projected cash flow statement (budget) for the following year, incorporating your recommendations to help them manage their income and expenses. Develop a projected net worth statement for the end of next year, incorporating your recommendations. Consider inflation and any other assumptions you feel are necessary. Provide detailed explanations for the assumptions you would make regarding inflation, interest rates and rates of return for the duration of the Garcia s lengthy time horizon. Provide a brief description of how you would implement and monitor the Garcia s financial plan Provide a written financial plan (report) in MS Word and projected Net Worth and Cash Flow statements in MS Excel. The report cover should include the names of your financial planning team and your sponsoring teacher s name, phone, , school and school division. The report can be a MAXIMUM of 7 pages. The recommended length is 4-7 pages, not including the cover page, Table of Contents and your projected Net Worth and Cash Flow statements. An appendix may also be added with any supporting documentation and calculations deemed appropriate. Note an Easter Egg is hidden in this case. The easter egg is a Financial Planning area that, if identified and addressed, will provide judges with a major differentiating point between plans. To submit your report please visit: DUE ON OR BEFORE FRIDAY MARCH 3, 2017 by 5pm 7