Assume you and your spouse are planning for your future together. You two are thinking about buying a house, paying the bills associated with the house, paying your credit card bills, having enough money for enjoyment from month to month, planning for retirement [never too early!], and investing your money in more short term ways. This seems like a lot to handle, but you remember that your Mathematics of Money course prepared you well to understand the necessary specifics to work through each of those scenarios. Here is your financial picture:
• Your spouse and you each get paid 2 times per month and your net income [sum of 4 paychecks] is about $5600. This is a low estimation – you want to make sure you definitely can afford the cost of living so you know it’s a good idea to have a conservative estimation of your monthly income.
• You estimate that your average monthly utilities bill will be around $240 [water, gas, electric, tv/internet]
• You both have student loans and make a combined monthly payment of $800.
• You own your cars, so thankfully neither of you has a car payment!
• Cell phone bill is $100 per month total.
• You allocate $500 a month for extra expenses such as food and enjoyment.
Our goal here is to decide is the two of you have enough money to afford the following lifestyle:
1. You are looking to purchase a home and the following specifications are given:
a. List Price = $350,000
b. You can afford a 10% down payment
i. Therefore, your PMI every month will be about $100 for the first 5 years or so
c. Interest rate based on the market and your credit core = 3.5%
d. Mortgage Product: 30 year fixed mortgage
e. Property taxes = $6000
f. HOI = $900
Find the monthly amount that you will have to pay
HINT: Monthly Amount = (principal + interest) + (PMI) + (monthly property taxes) + (monthly HOI payment)
2. Your credit card bill is due on the 22nd of each month. The interest rate on your card is 18.5%. Here is a summary of an average credit card statement. Note that similar categories are consolidated and were grouped together. You only use your credit card for certain purchases, like gas, shopping, and misc. big purchases.
Action and Date Amount Balance
11/25 Misc. Purchase 1 $92.50 $92.50
12/09 Misc. Purchase 2 $149.99 $242.49
12/15 Misc. Purchase 3 $61.50 $303.99
11/23 – 12/20 Gas $325.25 $629.24
11/23 – 12/19 Shopping $462.55 $1091.79
12/22 Payment $1091.79 $0.00
a. How much in interest did you have to pay for this bill? Explain.
b. After paying your mortgage, utility bills, credit card bill, student loans, cell phone bill, and extra expenses, how much money is left over per month?
3. Suppose you want to have $500,000 [in “today’s dollars” – remember: Average Inflation rate per year over time is about 3.5%] in your 401(k) account in 40 years. For the types of investments you plan to make, you expect to earn 9% on your investments.
a. How much do you need to deposit into this account each month to achieve your goal?
b. If you want to split this up evenly between each paycheck [4 paychecks since each of you gets 2 per month], how much money should be automatically deducted from each paycheck?
4. Now, after setting aside this money for your 401(k) how much is left over? Do you have enough money to live this lifestyle?
5. You decide to take the rest of your monthly income and use it for a shorter term investment. Find the future value if you invest your combined remaining monthly income for a given month after 5 years at 8%, assuming that the interest is compound continuously. Would it be worth it to you to make this investment, or would you rather use this extra monthly money elsewhere? Why?
6. Suppose that instead of investing in the way that problem 5 explained, you took your remaining money and invested in the following mutual fund:
a. A specific fund [MCC Equity Fund] has assets totaling $15,735,962. There are 845,362 shares. What is the fund’s NAV?
b. If you invested your remaining money from this month into MCC Equity, how many new shares will be created?