Description
This case is meant to provide you with an opportunity to apply what we are learning. To make it meaningful, please role play. Think of yourself as the financial planner and you are tasked with building part of a financial plan for your client. Imagine that you are getting paid to do this, so make your finished product as professional as possible. Now the details: Using the Case Study and Excel Case Financial data for Brandon Tender, you need to create an Income and Expense Statement and Balance Sheet in Excel and then analyze the data by completing a Ratio Analysis Template. With the statements and the ratio analysis you will want to explain the strengths and weaknesses that you have uncovered. At the end of your assignment, you should provide appropriate follow-up goals for Brandon. You can use the example statements in your textbook (and PowerPoint slides), from chapter 4 when creating your statements. See pg 188 for Income and Expense and for the Balance Sheet see pg 197. You can also use the financial statement templates below (in the attachments). Feel free to modify them as needed. Note: make sure that your data is in annual terms for the income and expense statement. For instance, Brandon’s data is in monthly terms. As you build your statements, you’ll want to multiply by 12 to convert to annual terms. To turn in and for your grade: Step 1 – use the templates in the attachments and complete the the financial documents in Excel (nicely formatted) and then transfer to a Word document. (Income and Expense Statement – Annual amounts, Balance sheet, Ratios)Step 2 – Turn in a professional looking Word document that contains the following: 1. Cover page with your financial planning firm name, 2. pg 2 – basic introduction to cashflow management – address why cashflow management is important, the reason for it and how it can your client in the future, 3. the financial statements from Excel (income and expense statement and balance sheet. 4. ratio analysis (use the template from the attachment below) and 5. include a brief discussion on the strengths and weaknesses, and goal suggestions for your client based on the ratios and financial statements
Unformatted Attachment Preview
PFFP310 CASE STUDY
Detailed Client Information For:
Brandon Tender
Personal information:
Brandon Tender has approached you and asked for your help in developing a
comprehensive financial plan. He is single with one dependent – his daughter, Harper, age 5.
Harper will be starting kindergarten soon. Brandon wants to make sure he is on track financially,
which is why he has come to you.
Brandon works for Raytheon in Tucson. His title is Project Manager. He started there
about 7 years ago and does not have plans to leave. He would like to retire at age 62, but would
consider working longer if needed, and he hopes to live until at least age 90 after he retires.
Brandon currently rents a house in Tucson, where he and Harper live, but he would like
to buy a house next year. He has a dedicated investment account which he has been putting
money into regularly for a down payment.
Another goal and an area that gives him some anxiety is paying for Harper’s college
education. He doesn’t know where to begin or what his options really are. He thinks having
Harper go to a community college for two years might be best, but he wants your input.
Brandon has not put too much thought into his investment plan. Through his work, he has
a 403(b) plan. He puts in the required 5% and Raytheon matches it with another 5% of his
salary. Brandon also has a Roth IRA. Lately, he has been putting $300 a month into his Roth.
He also has some cash saved up for emergencies and money invested in his brokerage
account for his house down payment.
Brandon does not expect any inheritance from his family. He wants to be able to take
care of himself in retirement and plans to save and invest enough money to do that. He is
interested to know when an optimal time might be to take out social security and how that might
help with his retirement plans.
Brandon drives an old truck, and he has a dune buggy, which is for fun. Both vehicle’s
estimated values are in the financial spreadsheet that Brandon made available for this financial
plan. In the financial statement, Brandon has also listed other possessions and their estimated
value, but he does not plan to use any of the possessions to help fund his goals. They do add to
his net worth, however.
In addition to this information, you should look through the below fact finder and financial
statements that were completed during conversations with Brandon. You will find important
information in these documents. Since you didn’t interview him directly, feel free to ask
questions of your instructor.
Here is some additional information that may be helpful to you as you complete the various case
assignments.
403(b) contributions are pre-tax.
Inflation and Salary increases = 4.0%
Any real estate will increase by 3.0%
The insurance policies are renewed each year unless otherwise stated.
Auto policies are paid and renewed every 12 months.
1
Final Expenses are estimated to be $15,000.
Risk: He hasn’t taken a formal risk analysis, but he stated that he really doesn’t care what his
portfolio does day-to-day as long as it goes up over the long term. For instance, the 2008/2009
Great Recession would not be a concern for him. In general, he takes calculated risks, believing
that they will pay off in the end.
Rated Goals:
10 – Buy a home
10 – Save for Harper’s college education
10 – Charity contributions in retirement
10 – Retire at age 62 with adequate income.
9 – Make investment portfolio recommendations (not a funding goal)
Personal Information
Client
Full Name
Brandon Tender
Gender
Male
Age
32
Marital Status
Single
Email Address
[email protected]
Employment Status
Employed
Employment Income
$ 98,181.60
Citizenship
USA
State of Residence
Arizona
Age to Retire
62
Life Expectancy
90+
Standard Rates:
Base Inflation Rate
4%
Investment Rate of Return
8.5%
Income Tax Rate
Based upon current IRS tax tables
2
SOCIAL SECURITY:
Brandon has indicated that he will take Social Security starting at the date you recommend. He
did not give you his Social Security statements so you will have to estimate his benefit amount
using the Social Security website.
RETIREMENT PLANS:
1. 403(b) Plan
a. Owner:
b. Starting when:
c. Current Value:
d. Employee contribution:
e. Employer match:
f. Beneficiary designation
Brandon
The year Brandon retires
See Financial Statements
5% of income
100% up to 5% of income
Yes – Estate
2. Roth IRA – Fidelity
a. Owner:
b. Contributions:
c. Contributions Inflating:
d. Current Value:
e. Beneficiary designation
f. Contribution allocation:
Brandon
$3,600 annually
No
See Financial Statements
Yes – Estate
100% to current holding
INVESTMENT ASSETS:
1. Brokerage Account
a. Owner:
b. Cost basis:
c. Contributions:
d. Current Value:
e. Beneficiary designation
Brandon
N/A
$3,600 annually
See Financial Statements
Yes – Estate
DEBT INFORMATION:
1. Truck loan: He pays $283.71 per month on the loan and should have it paid in full in 24
months.
2. Student loan: He currently pays the minimum payment of $457.26 per month. He owes
$25,000 on the loan. See Financial Spreadsheet for more information.
PERSONAL AND BUSINESS ASSETS:
See Financial Spreadsheet
3
INSURANCE POLICIES:
See Financial Spreadsheet
Estate Planning Documents:
Document
Will
Includes Bypass Trust
Date Last Reviewed
Living Will
Financial Power of Attorney
Medical Power of Attorney
Brandon
No
No
No
No
No
No
4
Statement of Income and Expense for XX as of XX (Annual)
Cash Inflows
NDs Current
Percent
Current
Income 1
$
#DIV/0!
$
Income 2
$
#DIV/0!
$
Total
$
#DIV/0!
$
(Add other categories as needed)
Cash Outflows
Savings
Savings workplace plan
$
#DIV/0!
$
Home Savings
$
#DIV/0!
$
Education
$
#DIV/0!
$
E-fund
$
#DIV/0!
$
Total
$
#DIV/0!
$
Debt Payments
Mortgage
$
#DIV/0!
$
Auto Loan 1
$
#DIV/0!
$
Auto Loan 2
$
#DIV/0!
$
Student Loans
$
#DIV/0!
$
Total
$
#DIV/0!
$
Living Expenses
Auto Fuel
$
#DIV/0!
$
Auto Licensing
$
#DIV/0!
$
Auto Maintenance
$
#DIV/0!
$
Cable/Internet
$
#DIV/0!
$
Child care
$
#DIV/0!
$
Christmas/Birthday gifts
$
#DIV/0!
$
Church Donations/Charity
$
#DIV/0!
$
Clothing
$
#DIV/0!
$
Diapers/Supplies
$
#DIV/0!
$
Entertainment/Fun
$
#DIV/0!
$
Food
$
#DIV/0!
$
Hair/nails
$
#DIV/0!
$
Health club
$
#DIV/0!
$
Home maintenance
$
#DIV/0!
$
Miscellaneous
$
#DIV/0!
$
Personal Improvement
$
#DIV/0!
$
Pet Care
$
#DIV/0!
$
Phone
$
#DIV/0!
$
Rent
$
#DIV/0!
$
Utilities
$
#DIV/0!
$
Vacations/Travel
$
#DIV/0!
$
Total
$
#DIV/0!
$
Insurance
Auto Insurance
$
#DIV/0!
$
Property Insurance
$
#DIV/0!
$
Life Insurance
$
#DIV/0!
$
Disability Insurance
$
#DIV/0!
$
–
Percent
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
Identity Theft Insurance
Total
Taxes
Federal Withheld
Social Security
Property Taxes
Other – tax prep
Total
Total Savings, Expense and Taxes
Net Discretionary Cash Flow
Total NDs for E-Fund Ratio
NDs
$
$
–
#DIV/0!
#DIV/0!
$
$
–
#DIV/0!
#DIV/0!
$
$
$
$
$
$
$
–
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
$
$
$
$
$
$
$
–
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
Use the case data to complete the current column in annual terms.
Note: enter NDs for each item that is non-discretionary and add up the total at the bottom. Use this amount when calculat
m. Use this amount when calculating emergency fund ratios.
Balance Sheet – For XX as of XX (Current Values)
Liabilities & Net Worth
Current Liabilities
$
$
$
$
$
$
Total
$
$
Investment Assets
Total
$
$
Long-Term Liabilities
$
$
$
$
$
$
Total
$
$
Personal Use Assets
Total
$
$
$
$
Total Liabilities
$
$
$
$
Total Net Worth
$
$
$
Total
$
Total Assets
$
Assets
Current Assets
–
–
–
Note: Current liabilities include the value of the next 12 months of principal loan payments. Long-term liabilities any r
ments. Long-term liabilities any remaining loan value after the next 12 months.
Liquidity Ratios
Ratio
E-fund Ratio
Current Ratio
Housing Ratio 1
Housing Ratio 2
Debt-to-Total
Assets
Net Worth to
Total Assets
Savings Rate
Investment
Assets to Gross
Pay
ROI
ROA
Return on Net
Worth
Formula
Actual
Cash and Equivalents / Monthly
Non-Discretionary Cash Flows
Cash and Equivalents / Current
Liabilities
Debt Ratios
Housing Costs / Gross Pay
Housing Costs + Other Debt
Payments / Gross Pay
Total Debt / Total Assets
Net Worth / Total Assets
Ratios for Financial Security Goals
Savings + Employer Match /
Gross Pay
Investment Assets + Cash &
Equivalents / Gross Pay
Performance Ratios
End Investment – (Beg Inv +
Savings) / Beg Inv
End Assets – (Beg Assets +
Savings) / Beg Assets
End NW – (Beg NW + Savings) /
Beg NW
Note: Use the
In the
data from your
comment
income and
column,
expenses and
indicate which
balance sheets to
ratios are
compute the
Insert the benchmark number or looking great,
ratios. Put in the range for each ratio in the
okay, need
Actual column. benchmark column.
attention
Benchmark
Comment
Income
Last Paycheck – bimonthly (x 2 for monthly x 12 for annual)
Gross paycheck
4090.90
Federal income withholding
-435.34
Federal med/ee
-59.32
Federal OASDI/ee
-253.64
AZ State Tax withholding
-110.45
Retirement plan withholding
-204.54
Net Income
3027.61
Treat as ending Investments values
Fidelity brokerage acct (house down pymt acct)
Total
$ 51,900.00
Roth IRA Account – Fund All Goals
Total
$ 22,450.00
403(b) Plan Workplace Retirement Acct – Fund All Goals
Total
$39,000.00
Emergency fund (BofA Savings Acct) Fund All Goals
Total
$5,500.00
Checking Account Balance
Total
$1,200.00
Beginning Values (for Performance Ratios only)
Invested Assets
$
Assets
$
Net Worth
$
90,150
110,100
87,500
Mo. Budget (x 12 for annual)
Item
Amount
Church support
$850.00
Missionary support
$40.00
Rent
$1,200.00
City Utilities
$225.00
Garbage service
$22.64
Groceries
$275.00
Eating out
$250.00
Truck Insurance
$47.00
Health Insurance
$47.00
Dune Buggy Insurance
$20.00
Renters insurance
$11.33
Vehicle maintenance
$150.00
Amazon prime
$10.00
Credit card fee
$5.75
Hulu
$15.00
Truck Loan
$283.71
Student Loan
$254.30
Gasoline
$350.00
Phone bill
$61.00
Cable bill
$75.00
IRA Saving
$300.00
House Saving
$300.00
Fun
$550.00
After School Care
$200.00
Vacation
$250.00
Total
$5,792.73
Major Possessions
Item
Truck
Dune Buggy
Furniture
Electronics
Value
$8,000.00
$1,500.00
$900.00
$600.00
Fishing gear
Camping
Clothes
$500.00
$250.00
$500.00
Debt
Student Loan
Truck Loan
Monthly pmt
$457.26
$283.71
Insurance Policies
Carrier
Policy
All State
Auto-truck
All State
Dune Buggy
All State
Renters
Medical – HDHP
Kaiser
Life (employer pd)
NewYorkLife
Disability (employer pd) NewYorkLife
Next 12Mo Principal Only
Total debt
Interest
Payments remaining
$4,635.64
$25,000
3.72%
60
$3,177.02
$6,500
4.5%
24
Benefit Amt
?
?
Deductible Start Date Lasts
$500.00 12/31/2020 renewable
$500.00 12/31/2020 renewable
$750.00 12/31/2020 renewable
$1,400.00
9/1/2018 until I leave employer
$35,000.00
0
9/1/2018 until I leave employer
$2,900.00
0
9/1/2018 age 65 (3 mo elimination)
CLEARVIEW FINANCIAL
SERVICES, LLC
COMPREHENSIVE
FINANCIAL PLAN
Prepared for
Tyler and Mia Bedo
September 24, 2017
Prepared By – Student Financial Planner
Confidential
CASH FLOW ANALYSIS
2|P a g e
Cash Flow Analysis
Performing a cash flow analysis is essential to building a solid financial plan, which is why it is the first thing I
did. What I am looking for is quite simple: how much money is coming in (cash inflows) and how much
money is going out (cash out flows). You can see this below in your income and expense statement. Ideally
there is more money coming in than going out.
In your current case, I calculated that you have $350 more per year going out than coming in. This really isn’t
that bad at all. With just a few minor adjustments to your spending, you can easily have your inflows equal
your outflows.
In the Income and Expense statement I’ve included a “suggested” column for going forward. The suggested
column includes all the changes that I’ll be proposing in this plan. Please look over it carefully and let me
know if you have any questions or concerns. I will also point the specific changes out to you to make sure
there are no misunderstandings.
My goal is to help you reach all of your goals and each of my suggestions is with that in mind.
At the end of this section, I’ve included your Income and Expense Statement and Balance Sheet. The Income
and Expense Statement shows your current situation as well as how the statement will look next year with
my suggestions. However, so you don’t have to keep referring to the Income and Expense Statement as you
read through you financial plan, I have also included a “cash flow outcome summary” that you will see at the
end of most sections. This table is a way for you to see exactly how my recommendations in each section will
affect your cash inflows and outflows. The summary table looks like this:
Cash Flow Outcome Summary
Recommendation
Current
Lower Recreation
Lower Dining out
Lower Entertainment
Lower Clothing
(Cost) or Annual Savings
$100
$100
$100
$50
Cash Flow Balance Forward
($350)
($250)
($150)
($50)
$0
As I mentioned above, you are only spending $350 more per year than you are taking in. So by just lowering
each of the four items in the table a little bit per year you can easily be where your inflows equal your
outflows. At the same time, please know that these are just my suggestions. You will need to decide if you
want to pursue them or not.
Ultimately, I want to applaud you for the excellent position that you are in today. Because of it, the changes
that I’ll be suggesting shouldn’t be painful at all. Instead, I hope they will be exciting for you in that they will
help you achieve the goals you have, and at the same time, give you peace of mind knowing that you are on
track. With that being said, let’s move on to the next section!
3|P a g e
Income & Expense Statement – Tyler & Mia Bedo, January 1 – December 31, 2016
Income
Actual
Suggested Variable Expenses
Actual
Suggested
Tyler – Salary
$68,467
$68,467 Home
Tyler – Bonus
$34,233
$34,233 Utilities
$4,200 ND
$4,200
Mia – Salary
$32,496
$32,496 Home Repairs
$1,800 ND
$1,800
Unearned NonQ Div
$4,396
$4,396 Other – yard, etc.
$400 ND
$400
Unearned Interest
$600
$600 Total
$6,400
$6,400
Unearned Sec 79 Inc
117.63
117.63 Transportation
Total Income
$140,310
$140,310 Fuel and Maintenance
$1,500 ND
$1,500
Expenses
Licensing
$450 ND
$450
Fixed Expenses
Total
$1,950
$1,950
Insurance
Personal
Health***
$3,600 ND
$5,100 ND
$5,100
$6,450 Groceries
Life
$2,064 ND
$4,012 Dining Out
$3,300 ND
$3,200
Auto
$2,000 ND
$2,000 Personal Care
$1,200 ND
$1,200
Disability
$300 ND
$600 Clothing
$2,800 ND
$2,750
Home
$700 ND
$700 Telephone (land & cell)
$1,500 ND
$1,500
Umbrella/Liability
$175 ND
$2,700 D
$2,600
$300 Entertainment
Other misc. Insurance
$300 ND
TV
Satellite
$600
D
$600
$450
Total
$9,139
$14,512 Recreation
$2,700 D
$2,600
Taxes
Travel
$3,000 D
$2,900
Federal Income
$22,178 D
$12,578 Art (Gallery Savings)
$1,800 D
$1,800
State Income
$6,266 D
$6,266 Holiday Giving
$1,800 D
$1,800
FICA
$10,286 D
$10,286 Charity
$5,800 ND
$5,800
Property
$1,675 ND
$1,675 Dues
$1,800 ND
$1,800
Total
$40,405
$30,805 Subscriptions
$960 ND
$960
Debt Repayment
Pet
$420 ND
$420
Mortgage
$13,056 ND
$9,669 Housekeeping service
$960 D
$960
Auto Payment
$5,412 ND
$5,412 Medical/Dental/Eye
$1,080 ND
$1,080
Credit Card/Charge Ac
$5,100 ND
$5,100 Bank charges
$120 ND
$120
Total
$23,568
$20,181 Tax Preparation
$400 ND
$400
Savings/Investing
Total
$38,040
$37,590
Money Market Acct
$1,800 D
$1,800 Total Variable Expenses $46,390
$45,940
Tyler 401(k)*
$4,108 D
$8,458
Mia 401(k)**
$3,250 D
$5,650 Total Expenses
$140,660
$140,310
Annuity – Mia’s Ret.
$3,000 D
$3,000
Art/Home
$9,000 D
$67,212
$69,048
$1,800 Non-Discretionary Exp
529 Plan
$0 D
$6,732
Car Fund
$0 D
$1,431 Net Cash Flow
-$350
$0
Total
$21,158
$28,871
Total Fixed Expenses
$94,270
$94,370
Notes: ND = Non-Discretionary; D = Discretionary
Expenses occur annually, quarterly, monthly. For planning all items have been annualized.
*6% of gross (base) salary (Employer matches 3% of gross)
**10% of gross salary (Employer matches 3% of gross)
***Premiums paid pretax through Tyler’s work (125 plan)
4|P a g e
Balance Sheet – Tyler & Mia Bedo – 12/31/2016
Liabilities & Net Worth
Current Assets
Yield
Current Liabilities
JT Checking Account I.
$
3,500 0.00%
Visa Card
$
JT Checking Account II. (art/coll savings) $
5,000 0.00%
Master Card
$
JT Savings Account
$
10,000 3.00%
Mortgage-current portion $
JT Money Market Account
$
10,000 3.00%
Taurus-current portion
$
Total
$
28,500
Total
$
Insurance
H Cash Value Life Insurance – Tyler
$
8,750
W Cash Value Life Insurance – Mia
$
8,350
Long-Term Liabilities
Total
$
17,100
Mortgage
$
Investment Assets – Non Retirement
Taurus – LT portion
$
JT Miscellaneous EE Bonds*
$
25,000 3.50%
Total
$
JT Haley G&I Fund**
$
69,000 3.20%
JT Konza Fund**
$
43,000 1.75%
Total Liabilities
$
JT Ruth Fund**
$
13,000 4.00%
JT Sagebrush Fund**
$
8,000 0.50%
Total
$ 158,000
Total Net Worth
$
Assets
Investment Assets – Retirement
Tyler’s 401(k)
H Consumer Fund
H Graham Fund
W Tyler’s Traditional IRA (in a CD)
W Mia’s 401(k) – Rocket Fund
W Mia’s Rollover IRA – Ruth Fund
W Mia’s Traditional IRA (in a CD)
Conservative Annuity (Postdam FA)
Total
$
$
$
$
$
$
$
$
69,000
134,000
52,000
15,250
32,500
52,000
125,000
479,750
3,500
2,000
2,890
5,097
13,487
127,441
5,299
132,741
146,228
903,922
R of R
8.75%
4.10%
3.50%
14.00%
4.80%
3.50%
5.00%
Personal Use Assets
JT Personal Residence
$ 250,000
JT Furnishings
$
45,000
JT Auto 1: Ford Taurus (3yr-old)
$
20,000
JT Auto 2: Minivan Nissan Quest (5yr-old $
15,500
JT Yard Equipment – John Deere, etc.
$
8,000
JT Jewelry & Collectibles***
$
10,000
JT Mickelson signed golf driver
$
5,000
JT Golf clubs/other sport equipment
$
2,500
JT Golf artwork – Hartough lithographs (5 $
5,000
JT Boat-Alumacraft,Mercury motor
$
5,800
Total
$ 366,800
Total Assets
$ 1,050,150
*EE bonds purchased 12 years ago. Will earn deferred interest for next 18yr. Reach $30,000 FV in 5yr.
**Bedos’ basis in these assets is equal to 50% of the assets’ value
***Mia’s ring, paintings, china cabinet w/china, harp
5|P a g e
RATIO ANALYSIS
6|P a g e
Summary of Financial Ratio Analysis – Mr. & Mrs. Bedo
Ratio
Formula
Calculation
Comment
Benchmark
E-fund Ratio
Current Assets / Monthly
Non-Discretionary Cash
Flows*
(The
Bedos have indicated an
E-Fund ratio goal that
includes total expenses minus taxes) See Calc 2.
Calc 1.
28,500 / 5,601 =
5.09 months
Calc 2.
28,500 / 8,494 =
3.36 months
Calc 1: Good
Calc 2: The
Bedos
objective is
6 months.
3 – 6 months
Current Ratio
Current Assets / Current
Liabilities
28,500 / 13,487 =
2.11
Good
1.0 – 2.0
Front-End
Mortgage Ratio
Housing Costs (PITI) /
Gross Pay
15,431 / 140,310
= 11.00%
Excellent
≤ 28%
Back-End
Mortgage Ratio
Housing Costs (PITI) +
Other Debt Payments /
Gross Pay
(15,431 + 10,512)
/ 140,310 =
18.5%
Excellent
≤ 36%
Debt-to-Total
Assets
Total Debt (Liabilities) /
Total Assets
146,226 /
1,050,150 =
13.92%
Excellent
As a person ages, this ratio
should continue to decline.
Net Worth to
Total Assets
Net Worth / Total Assets
903,922 /
1,050,150 =
86.08%
Excellent
Should be between 90 100% as a person enters
retirement.
Liquidity Ratios
Debt Ratios
Ratios for Financial Security Goals
Savings Rate
Savings + Employer
Match / Gross Pay
(21,158 + 2,054
+975) / 140,310 =
17.24%
Good
Should be 10 – 15% at a
minimum for retirement
+incremental increases for
additional goal
achievement.
Investment
Assets to Gross
Pay
Investment Assets +
Current Assets / Gross Pay
(43,850 +
158,000 +
479,750) /
140,310 = 7.47
Excellent
Should be 3-4:1 by age 45
and 16 – 20:1 by retirement
age.
*Non-Discretionary Cash includes everything less income taxes, savings, entertainment, travel and some
additional miscellaneous expenses that are noted on the I&E Statement.
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Liquidity Ratios
Emergency Fund Ratio: Calculation 1: 5.09 months; Calculation 2: 3.36 months.
The emergency fund ratio explains how well your family could live in a crisis situation without having to
liquidate your investment (or illiquid) assets. The most sever crisis is typically job loss, but a crisis can include
waiting for disability income to begin (in your case you are fairly well covered in the event of a disability with
both short-term and long-term policies – more on this in the Insurance section), family health emergencies,
or the repair of major household items. I calculated this ratio twice. The first calculation is based on the
industry standard formula which is current assets divided by monthly non-discretionary cash flow. The result
indicated that if both of you were to lose your jobs you could live off your current assets for more than five
months. This is a good number for you and a testament to your saving efforts.
I also calculated your ratio based on your personal goal to have six months of emergency savings to cover all
expenses excluding income and FICA tax. Based on this calculation, you could get by for a little over three
months. To accomplish this goal, you will need to save approximately $22,464 more.
The benchmark for this ratio is 3 – 6 months’ coverage of non-discretionary expenses, and in some cases up
to a year. Based on this benchmark and both calculations, you are actually in a good position. It would be
fairly unlikely that both of you would lose your jobs or become disabled at the same time, in which case, you
could survive even longer given the additional income one of you continuing to work. Also, keep in mind that
you have the cash value of your life insurance available in an extreme emergency situation, which would give
you at least two more months to get back on your feet again.
Current Ratio: 2.11
The current ratio is useful because it tells us how well you can cover your short-term liabilities on your
balance sheet. The benchmark for this ratio is between 1 and 2, meaning that you have enough current
assets (cash and cash equivalents) to pay off all debt due in the next 12 months. You have a ratio of slightly
over two, which means you are in a good position here.
Debt Ratios
Front-End Mortgage Ratio: 11%
This ratio states that a person’s housing costs, which include property, interest, taxes, and insurance (PITI)
should not be more than 28% of gross income. As you can see from your ratio of 11% you are in an excellent
position here. A ratio of this amount will be very helpful in qualifying for the best interest rate if you pursue a
refinance on your home.
Back-End Mortgage Ratio: 18.5%
This ratio is more broad than the Front-End Mortgage ratio and includes all debt plus PITI. The benchmark is
to have a ratio of less than or equal to 36% of gross income. Again, you have an excellent ratio.
Debt-to-Total Assets Ratio: 13.92%
This ratio tells us how much of your assets are financed by borrowing. The general benchmark is to have a
ratio of less than 40%, but it is age dependent. As you near retirement, it is recommended to have a ratio in
the range of 0 – 10%. Your ratio indicates that you are in a great position regarding your debt as you are both
only in your 40s. This ratio will continue to decline as you pay off your house and continue to save.
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Net Worth to Total Assets Ratio: 86.08%
This ratio is the inverse of the Debt-to-Asset Ratio above. The ratio should be increasing overtime to the
point that it is between 90 -100% in retirement. Your ratio tells us that you own approximately 86% of your
assets. And again, the fact that both of you are only in your 40s, this is an excellent ratio. This ratio will
continue to grow as you pay off your house and continue to save.
Savings Ratios
Savings Rate Ratio: 17.24%
The Savings Rate Ratio tells us what percent of your gross income is going toward savings. The ratio includes
both your own savings plus any employer contributions. If a person is in their 20s and has the sole goal of
saving for retirement, the benchmark is to be saving 10 – 13% of gross income. Ultimately, the exact amount
that needs to be saved depends entirely on age, current savings, income and all financial goals. You are
definitely in the good range as far as the benchmark is concerned, but a more precise calculation will be
computed to determine the actual amount that you should be saving given your retirement and education
goals, while achieving a reasonable rate of return.
Investment Assets to Gross Pay Ratio: 7.45
This ratio gives us a more precise indication of being on track for retirement. It tells us how many years of
gross pay you have saved. In your case you have 7.45 years saved, which is excellent for both of you nearing
the age of 45. The target range is between three and four at age 45. By age 65, it is recommended to have
between 16 – 20 years of gross pay saved.
Ratio Summary
All of your ratios fall into the good to excellent range. I am very pleased by this as I hope both of you will be.
As a reminder, the ratios are just one tool we can use to indicated financial health. Now that we have
completed your ratio analysis, it will be important to continue monitoring them in the future. I would
recommend completing a ratio analysis annually to verify that the trends are headed in the right direction.
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