Your sister Chris and her boyfriend Doug recently announced plans to be married after graduation in May. Although you are fond of them both and want their relationship to succeed, you are concerned about their financial future. Neither Chris nor Doug completed a personal finance course while in college. Chris is a spender who has known few limits on her wants since she was a teenager. Doug, on the other hand, has worked, saved, and invested since he was a teenager to help provide for college costs. He will complete college with approximately $12,600 in student loans. But their income in their first year out of college will total $90,000, due in large part to Doug's choice of major and practical work experience during college. Chris, who admits having no financial skill or interest, is content to let Doug handle all those matters, since he seems to be good at it and will likely earn more than she does.
1. The discussion of money issues is the first of a four-step process to help couples successfully manage their finances. The process might be summarized as (a) talk, (b) track, (c) plan and act, and (d) review and revise. Describe the steps and the objective of each.
2. Doug and Chris, similar to many young couples, are combining two life events: getting started and getting married. Integrate the planning steps and create a new list to ensure that Doug and Chris don't overlook anything.
3. Explain to Chris why it is important that she become informed and involved in her financial future-regardless of how well Doug fulfils the role he hopes to have of husband and provider. What dangerous myth should she avoid? (Hint: In answering this question, go back to the section “Women and Personal Finance” that closed Chapter 1.) ~
4. Chris and Doug's ideal is for Chris to work for a fewyears and then be a “stay-at-home mom.” w::;.~ If she invested $4,000 for eight consecutive years in a Roth IRA that earned 9 percent annually, how much would she have after 35 years? (Note: The first 8 years are an annuity, after which the balance will continue to grow, without deposits, for the remaining 27 years.) (Hint: This problem can be solved using a financial calculator, as discussed in Chapter 3, or the Money in Motion calculator, which is available in MyFinancelab.)
5. Identify three essential actions that Chris should take to ensure her financial future.
6. Help Chris and Doug consider the issues of joint or separate checking accounts and credit cards. Why are these important issues to resolve prior to marriage?
7. What financial issues should Chris and Doug review, and perhaps take action on, prior to the birth of a child?
8. Aside from the obvious pain and emotional turmoil to Chris, Doug, and their extended family that would be caused by a divorce, why is it financially sound advice to stay married?
9. Doug is anxious to repay his student loan debt quickly but he also wants to take advantage of the matching contribution on his employer-provided retirement account. Assuming his student loans are bank loans at a rate of 8.25 percent, determine his monthly loan payÂ ments over a 5-year term (60 monthly payments), using the time value of money tools you learned in Chapter 3.
10. If Chris and Doug lose 30 percent of their gross salary to taxes and benefits, determine their debt limit ratio (from Chapter 7) based on the student loan payment. How much additional debt repayment could they add and not exceed the 15 percent safety margin?
11. Advise Doug on the priorities of repaying student loans or other debts as well as including retirement savings in their budget. Assuming he has a choice of equity and fixed-income investment products, which category would you recommend for his retirement savings? Defend your answers.
12. Why should insurance protection be a critical component of the financial plan developed by Chris and Doug? What strategies can help keep insurance costs down?