*riti *a{ Ttti w ki rz g #ct *stio ns

1. What important career factors should Jon consider when evaluatrng hrs
oplions?
2' What [nporiant personal factors should Jon consider when decrdrrr"g
among his career options?
3 what recor"nencations would you give Jon in light or both the caiee.
unj pur.onut oirunrion.
4' What career strategies should today's workers employ in order 1o avoid Jon,s dilemma?

i..{;;1 . }.'::..4 2,1 Tb* Gorderns' Versio* of Financial Flanning

Burt and Fmily Gordor are a married couple in their mid-2cs Burt has good
a start as a bank manager
and Emrly works as a sales representative. Since their marriage 4 years
ago, Burt and Emily have been
living comfortably' Their income has exceeded their expenses, and
they have accumuiated an enviable
net worth This inciudes the $10,000 that they have built up in savings
and investments. Because their
income has always been more than enough for them to have the lifestyle
they desire, the Gordons
have done no financial planning.
Emily has just learned that she's 2 months pregnant. She's concerned
about how they,ll make ends
meet if she qults work after their child is born. Each time she and
Bufi discuss the matter, he tells her
not to worry becatlse "we've always managed to pay our bills
on time " Emiiy can't understanO fri, .it,-
tude, because her income will be completely eliminated. To convince
Emily there's no need for concern,
Burt points out that their expenses last year, but for the conrmon
stock purchase, were about equal to
his take-home pay. With an anticipated promotion to a rnanagerial positron
and an expected fi% pay
raise, his income next year should exceed this amount. Burt
also points out that they can reduce luxuries
(trips, recreation. and entertainment) and can always
draw down their savings or sell some of their stock
if they get in a bind when Emily asks about the long-run implications
for-their finances, Burt says there
will be "no problems" because his boss has assured him that he has a
bright future with the bank. Burt
atso emphasizes ihat Emiry can go back to work in a few years
i{ necessary.
Despite Burt's arguments, Emily feels that they should carefully
examine their financial condition
in order to do some seriot-rs planning. She has gathered the
following f inancial rnformation i;1. ;; r.r,
ending December 31, 2010.

Salaries
Take-home Fay Gross Salary
Buft
$u,20.j $64,$AA
intti'i ?q n4a
36,0C0

Item
Amount
faod
9EAn?
Ch-t!\ir:g
23AC
ltl,lfq;tqe p,;Vi;tet][!. !|, i:;i,;r.tJ 1,.rtptt!.V taXeS Ot 51,400
1 1t ti28
1,UUU
Cas. clacln; ,i,ffer r:.,r'r?.!, I 1 0ai1
i tusein ia Iurr i sh i nr]s
4,540
f e!spltrt'tp
a4u
Autc laart haiance
4,05A
C,J rilrn c n sasok ritygs/ircrits
7 5AA
Eanl, crr,'li: ;ard Ltaianct,.
Federa! inccnt laxes :
19.r,44
State incane iax
I nE,
i ;;*i';,';, ;; ;):a n { r r tt it ti c n s
t,650
CreCir carC !oan pay{nerls 121n
Cash a:t litnc or
u.)
2C07 Nissan Sentra
t5,0aa
8AA
blDmicvt'npr ;; irsiliJitcr ;.'t, rii:,,t$ paii
? 3AA

54* Cases
 i ) diit
i_; ii aff at"{rii b a i afi ct
i {1 ,185

Aitia i*saranrc prenii;ns paitl i,6ac

Tr;ilsi:criation 2,8e0
Cai:ie telsvisian 6Eii
[stintated value of hctne ! 95,B1a
i tifi ta LijtGpg 5,fi0t)
e; re a ti an antl en{erta i *ne nl 4,AAC
'4,
Auia iaan paywents 2,i54
Mtnsy nark1t accfruilt !)ala{we 'i iflti
iti,t"i,ase ttf cuntrrton stock 7,5i,0
Addiiian to fiofisy niarkel accoun! 50a
\,iatg.trc an hone 1$ilaii

C riti ea I Thinki n g Questi * n s

1. Using this information and Worksheets 2.1 and?.2, construct the Gordons'balance sheet and
income and expense statement for the year ending December 31, 2010.
2. Comment on the Gordons' financial condition regarding (a) solvency, (b) Iiquidrty, (c) savings, and
(d) ability to pay debts promptly. lf the Gordons continue to manage their finances as Cescribed,
what do you expect the iong-run consequences to be? Discuss.
3. Critically evaluate the Gordon's approach to f inancial planning. Point out any fallacies in Burt's argu-
ments, and be sure to mention (a) implications for the long term as well as (b) the potential impact
of inflation in general and specifically on their net worth. What procedures should they use to get
their financial house in order? Be sure to discuss the role that long- and short-term financiai plans
and budgets might play.

2.2 jim Pavlov Learns to Budget

Jim Paviov Eraduated from college rn 2009 and moved to Atlanta to take a job as a market research
analyst. He was pleased to be financially independent and was sure that, with his $45,000 salary, he
could cover hls living expenses and have pienty of money left over to furnish his studio apartment
and enjoy the wide variety of social and recreational activities available in Atlanta. He opened several
department-store charge accounts and obtained a bank credit card.
For a while, Jim managed pretty well on his monthly take-home pay of $2,893; but by the end ot
2010, he was having trouble fully paying all his credit card charges each month. Concerned that his
spending had gotten out of control and that he was barely making it from paycheck to paycheck, he
decided to list his expenses for the past calendar year and develop a budget, He hoped not only to
reduce his credit card debt but also to begin a regular savings program.
Jim prepared the following sumrnary of expenses for 2010.

Item Annual Expenditure

frent st 2.1aa
Ailc insurance 1 RqE
Auio raan paymcnls J,6!+U
;truto e.rperses {gas, repairs, and iees} !,cau
i,ti.!j.ij:l:l: 11t1'
iltsialinteil loan far s?reo 34U
Persaxi ctre 4?4

Fhune bIUU

t,ahte I v 444
Gas anC eledricity' 1 nan
l\'l-atll{:A! cAt-o llu .r

Derttsl /U
Grarcries 2,5AA
Di,ting out ? Ann
';1"_"
F*r;t{ure purcliases 1 2nn
t ttuu
Rccr*aisr, anil enlerlainnlent ? Qnn
Lilhet eYperisej uv9
,After reviewlng his 20i0 expenses, Jim made the fottowing assumptions about his expenses
tor 2011.

Cases 541
t.
r t'/.
i,
i
1 A1l expenses will remain at the sarne levels, with these exceptions.
a. Auto insurance, auto expenses, gas and electticity, and groceries will increase 5%.
b Clothing purchases will decrease to $2,250
c. Phone anci cable TV will increase $5 per nronth.
d. Furniture purchases will decrease to $660, most of whlch is for a new television.
e He willtake a l-week vacation to Colorado in july a't a cost of $2,100.
All expenses wili be budgeted in equal monthly installments except for the vacation and these
items:
a. Auto insurance is paid in two installments due in June and December'
b He plans to replace the brakes on his car in February at a cost of $220.
c. Visits to the dentist will be made in March and September.
3. He will eliminate hls bank credit card baiance by making extra monthly paYments of $75 during
each of the first 6 months.
Regarding his income, Jim has just received a smail raise, so his take-home pay will be $3,200 per
month.
1+S::

*ritica I T fui nki n g flu e sti *ns

iii
rift:.
1 a. Prepare a preliminary cash budget for Jim f or the year ending December 31 , 20'l 1 , using the
formal shown in Worksheet 2.3.
b. Compare Jim's estimated expenses with his expected income, and make recommendations
that will help him balance his budget.
Make any necessary adjustments to Jim's estimated monthly expenses, and revise his annuai
cash budget for the year ending December 3i, 201 1, using Worrsheet 2'3.
rii,i:
3. Anaiyze the budget and advise Jim on his financial situation. Suggest some long-ier-m, intermedi'
ate, and short-term financial goals for Jim, and discuss some steps he can take to reach them.
,rtttlir.i
rl::1]t;l

nli
.ii;itti

rEi:iai
irsil::.,1.1

3.1 The Raos Tackle Their Tax Return

Raj and Kavitha Rao are a married couple in their early 20s living in Denver. Raj earned $53,000 rn
2008 from his 1ob as a sales assistant. During the year, his employer withheld $4,975 for income tax
purposes. ln addition, the Raos received interest of $350 on a loint savings account, $750 interest on
tax-exempt municipal bonds, and dividends of $400 on common stocks. At the end of 2008, the Raos
sold two stocks, A and B. Stock A was sold for $700 and had been purchased 4 months earlier for
$800. Stock B was sold for $1,500 and had been purchased 3 years earlier for $1 ,100. Their only child,
Mahesh, age 2, received (as his sole source of income) dividends of $200 on stock of Hershey.
Although Raj is covered by his company's pension plan, he plans to contribute $5,000 to a tradr-
tional deductible IRA {or 2008. Here are the amounts o{ money paid out during the year by the Raos:
!u'lpdri'::t! :trtrl tieiititl cxnefill, hinftittthtrseri) $ ?CA
Jidit ciD ur"dr p{Qpelfu [dteS lii

,lisrEsl f3i,r'rn hoine ncr"tgage ,4,i48

ii;b! i: : ait l r i t: i t t i *n s ] ?frn

Clt it

Inial
ri
;-
ln addition, Raj incurred some unreimbursed travel costs for an out-of-town business trip
,4ji;;fit' iiaiei' $15,
Iaris 2a
ii."Jqi::4 5A

f,leai:; ies a,i,rsled fi 5A% cf tttst) JE

ictai 8360

Gritical Thi*king Guest ons

1. Using the Raos' informaiion, determine the total amount of their rtemized deductions. Assume
that they'll use the filing status of married frling lointly, the standard deduction fot that status is

Cases