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Financial Plan

Student

Institution Affiliation

Course

Instructor

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Case study 2: Ken Johnson and Tara Thompson

Introduction

Ken Johnson a 28-year-old computer specialist, and Tara Thompson, his 26-year-old

wife, who got married a short time ago and are now living in one of Ken's rented townhouses.

Among their greatest hopes are owning a home, starting a family, and building long-term

financial security; therefore, they would like to start building a solid financial base. Ken makes

$80,000 a year plus other benefits compared to Tara, who has a retail job that gives her $26,000.

In spite of their combined income, they contend with common challenges of budgeting and

financing significant life events. The plan will consider their financial situation, including

income, expenses, debts, goals and then provide advice so they can go the best way in the future

Baby Step 1 – Save $1,000 for your starter emergency fund:

Ken and Tara first step towards financial stability is to have a starter emergency fund

amounting to $1000. What is even more important for them now is that they have only $4,200 in

their savings account to add up the remaining $14, 000 and this has to happen quickly. This first

fund is an important cushion from unexpected car repairs or medical crises according (Chen et

al., 2021). This could include reviewing their monthly spending, renegotiating service contracts

to cheaper options, etc. Also, they might look for other sources of income that could accelerate

their savings accumulation, like taking on part-time jobs or freelance assignments. The increased

emergency reminds them of their commitment to maintaining financial responsibility and that

they can, despite the difficulties ahead.

Figure 1
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Source: https://i.pinimg.com/originals/2c/1a/4f/2c1a4f9ac3093056e9a7227ea30a0164.jpg

Baby Step 2 – Pay off all debt (except the house) using the debt snowball:

Now that Ken and Tara have established their starter emergency fund of $1,000, they are

ready to tackle Baby Step 2 on their journey towards financial freedom: the debt snowball

method to pay off all non-mortgage debt. In this systematic procedure, the debts will be listed

according to their smallest amount until the biggest one is addressed, neglecting interest rates.

For instance, if they have a $6,400 credit card debt and another student loan to pay amounting to

$1000 thousand, and also one car loan worth $220, they would begin by clearing out the money

owed for debts since it is the cheapest (Ozili, 2020). This psychological support is necessary to

give them the motivation and commitment needed to be victorious over their debt repayment

journey.

Baby Step 3 – Save 3–6 months of expenses in a fully funded emergency fund:

Now that Ken and Tara have successfully eliminated their non-mortgage debt, they find

themselves at a crucial juncture in their financial journey: Emergency Savings of three to six
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months of living expenses in Baby Step. This is a basic reserve not only to cope in cases of

reform but also as protection against ‘unknown’ financial crises. This kind of insurance does

everything possible to allow oneself to get by without falling into the rank-and-file pile of

debtors or entirely gobbling one savings (Panos & Wilson, 2020). In order to achieve this, Ken

and Tara need to continue saving discipline by directing a specific sum of his or her monthly

salary towards increasing the emergency fund. For example, if a couple needs to spend $4,000

per month on living necessities, they should save between $1,200 and $ 2,500 would require an

emergency fund in that range. By automating their contributions, they may achieve consistency,

sticking to the saving strategy and creating a steady development. However, it might not be very

encouraging to consider the necessity of accumulating a three-month to six-month reserve.

Baby Step 4 – Invest 15% of your household income in retirement

With the emergency fund carefully built by Ken and Tara to ensure stability, they are

ready for a more critical step-saving towards retirement, highlighted in baby step four of their

journey. In this stage, they are advised to contribute 15% of their salary towards retirement

accounts or pension plans, a prerequisite for securing their golden years. Therefore, it implies

that if Ken saves $ 4000 annually in his 421(k) (5% of the $80 OOO salary), he will receive an

extra contribution from his employer amounting to another (Chen et al., 2021). As their 401(k)

apart from other retirement savings vehicles like IRA, they could benefit by maximizing tax

benefits and diversifying portfolios.

Figure 2
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Source: https://tse2.mm.bing.net/th?id=OIP.1_d-rh5Is1i-ZSjzigXjEQHaFj&pid=Api&P=0&h=220

Baby Step 5 – Save for your children’s college fund:

The fifth step is an important stage in their financial pathway and thus has led Ken and

Tara to another significant issue they need to solve creating an academic atmosphere around

them. Evidently, securing their financial prosperity will ensure outsourcing shall always stay

pertinent, whereas investing in the education of children is a major assignment that needs well-

structured strategies. To achieve this bill, ken can choose other education-saving options, such as

$529 plans that offer more tax-advantaged benefits for any spending in school (Morgan & Long,

2020). For example, they can be allowed to put aside $200 of their income every month in a

savings plan known as the $529 and watch it increase tax-free through this many years so they

use these amounts, hence getting some funds, which is an important financial form when ready

with his college child. Besides, they may choose custodial accounts or prepaid tuition programs

in the case of their situation and inclinations.

Baby Step 6 – Pay off your home early:

After completing step 5 Ken and Tara arrive at Baby Step 6, which is a crucial turning

point in their financial journey: paying the mortgage early. With their urgent financial
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requirements satisfied and a solid base that they have created for themselves, they can now focus

on ultimately attaining mortgage liberty. To achieve this, Ken and Tara have a few tactical tools

available, which will speed up the payout process and minimize the total interest paid over the

entire duration of their loan. However, a good strategy is paying off an additional principal

payment towards the mortgage every month (Chen et al., 2021). For example, if they can pay

$1200 in monthly mortgage payments, then the best way is to increase it up to $1,500 and restrict

an extra amount of $ 30 to lessen the principal balance.

Baby Step 7 – Build wealth and give:

They reach Baby Step 7, a significant milestone in their financial journey: paying ahead

of schedule for the mortgage home. With their urgent financial requirements satisfied and a solid

base that they have created for themselves, they can now focus on ultimately attaining mortgage

liberty. To achieve this, Ken and Tara have a few tactical tools available, which will speed up the

pay-out process and minimize the total interest paid over the entire duration of their loan.

According to Morgan & Long (2020), a good strategy is paying off an additional principal

payment towards the mortgage every month. For example, if they can pay $1200 in monthly

mortgage payments, then the best way is to increase it up to $ 1500 and restrict an extra amount

of thirty dollars to lessen the principal balance.

Conclusion

By comprehensively trying to keep savings on the top of their priorities, managing the

combined monthly expenses of $1,925 and planning for milestones like buying a fishing boat at

$ 28,000 and purchasing a home within 12 months, Ken and Tara can start creating a better

financial future. Having declared a fairness principle, they are ready to lay a firm basis for future
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prosperity according to systematic financial knowledge and personalized counselling. On this

expedition, they will encounter a future endowed with possibilities and safety.

References
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Chen, Y., Kumara, E. K., & Sivakumar, V. (2021). Investigation of finance industry on risk

awareness model and digital economic growth. Annals of Operations Research, 1-22.

https://link.springer.com/article/10.1007/s10479-021-04287-7

Morgan, P. J., & Long, T. Q. (2020). Financial literacy, financial inclusion, and savings behavior

in Laos. Journal of Asian Economics, 68, 101197

http://pubdocs.worldbank.org/en/230281588169110691/Digital-Financial-Services.pdf

Ozili, P. K. (2020). Theories of financial inclusion. In Uncertainty and challenges in

contemporary economic behaviour (pp. 89-115). Emerald Publishing Limited.

https://www.emerald.com/insight/content/doi/10.1108/978-1-80043-095-220201008/

full/html

Panos, G. A., & Wilson, J. O. (2020). Financial literacy and responsible finance in the FinTech

era: capabilities and challenges. The European Journal of Finance, 26(4-5), 297-301.

https://link.springer.com/chapter/10.1007/978-3-031-14283-3_20
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