Objectives: To demonstrate an understanding of interest, equivalence, and the impact of repeated cash flows, and thinking about long term financial decisions
Complete the following scenario:
You graduate from the University at 25 years old, and immediately get a job where you earn $3000/ month (after taxes). You have student loans, a little credit card debt (both compounded monthly). You have the following goals
1. Live with significant other (i.e. no other roommates) by 30 years old (don’t worry about extra costs for children)
2. Be able to retire between 60 and 65 years old, and live comfortably (IE about $3000/ month income, don’t think about CPP or other items, and assume your employer doesn’t contribute to an RRSP or anything for you)
Assume you get a raise of $500/ month every 5 years, that you keep the same job until you retire, that all taxes come out BEFORE you see your paycheque and that inflation isn’t a thing. Clearly state any other assumptions you make (splitting costs with significant other ect.). For the 20 year gap between 35 and 55, assume all costs/ investment plans stay the same but that interest accrues.
Amount interest rate Minimum Payment/month
Student loan debt 50000 6.45%
Credit card debt 5000 19% 4%
$3000/ month (after taxes)
Starting Salary N/A
Monthly Housing Costs
(include heat, lights,
water in estimate) N/A
Monthly Food Costs N/A
Monthly Entertainment
Budget (include internet/ cell
phone costs here) N/A
High Interest Savings
Account 1.5%
Retirement Savings 3.45%
Assignment
1. Figure out your monthly budget based on these goals. You will have to choose
a. Reasonable cost of living expenses (These may change in the 4 blocks of interest)
b. How long you want to take to pay back student loans?
c. How much you want to spend on credit card/ student loan interest?
d. What age you want to retire?
2. Break your long-term plan up into 5 years increments. What does a month look like in each of these blocks (25-30years, 31-35years then jump ahead to 55-60years and 61-65)? Create a cash flow diagram of each block, and an overall balance sheet. In the time between 35 and 55 years, assume that you are putting the same amount into retirement, savings and debt each month and just calculate the overall change in the accounts). Show some basic math of how you did this.
3. Some questions to discuss
a. Do you want to save earlier for retirement or later? Why?
b. How would potential costs like cars, vacations, buying a house impact your plan?
Structure of the Final Report
1. Clearly outline your monthly budget for each of the 4 required time blocks including cash flow diagrams and balance sheets. Clearly label tables and figures.
2. Make sure you have communicated your choices for variable costs, loan repayment terms, changes in living expenses, state what savings you have at the start and end of each 5yr block.
3. Write a clear and concise summary of questions 3a and 3b.
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