ASSIGNMENT #2 PERSONAL FINANCIAL PLANNING CASE: JENNIFER Jennifer, 25, is not unlike many young adults today.

Just a few years out of college, she is $93,200 in debt. Of this amount, $64,000 is owed on student loans and $29,200 is owed on two credit cards. "I kind of went overboard on credit in college," Jennifer explains. "Now I want to get this debt paid off as soon as possible so I can increase my savings." Jennifer isn't waiting to repay the debt, however, before she starts saving. She has an automatic payroll deduction of $700 going towards a money market mutual fund account. To date, she has accumulated $15,000, the account pays interest at a rate of 1.5% p.a Automatic saving appeals to Jennifer, who confesses a weakness for shopping. She'd like to save more, both for retirement and for emergencies. "I don't have much to fall back on if my car breaks down or I have some other emergency," she worries. After repaying her debts and increasing her savings, Jennifer wants to purchase a home and a new car within ten years. She is willing to assume some investment risk to achieve a high rate of return. Like many young college graduates, Jennifer has a negative net worth. In other words, at this stage of her life, her debts ($93,200) exceed her assets ($68,200) for a net worth of minus $25,000. Her assets consist of $3,200 in a checking account, her $15,000 mutual funds, and a $50,000 car. Jennifer shares an apartment with a friend and pays $1,400 per month for rent, plus $3,000 toward her debts. She earns $12,000 per month. Last year, Jennifer received a $3,740 tax refund and spent it on clothing and home furnishings. Jennifer's employer provides health insurance. She lacks a renter's insurance policy, however, to cover the potential loss or theft of her personal possessions. Jennifer also has employer provided disability insurance to provide income if she was unable to work and contributes $56 per month toward the premium. The policy only provides benefits for two years. Jennifer is not currently funding an IRA and could only guess at a retirement date in 40 years at age 65. She attended an employee benefits seminar two years ago and began her monthly investment plan as a result. "I learned about the awesome effect of compound interest," she notes. "As soon as I repay my debts, I will save more." Ideally, Jennifer would like to purchase her own home in 5 years time at age 30, but she expects that this goal may have to be pushed to 10 years given that average house prices start at $1,000,000. Jennifer would also like to purchase a new car next year for $150,000. Her employer has a car loan plan of 100% financing at 4% for 5 years. EXERCISE:
1.

Discuss the strengths and weaknesses of Jennifers financial situation

Prepare a financial plan for Jennifer to achieve her goals including loan and mortgage estimates. 3. Make appropriate recommendations including credit alternatives.
2.

ASSUMPTIONS: (a) House prices are expected to increase by 5% per annum (b) Jennifers salary is expected to increase by 6% per annum (c) Mortgage rates are expected to remain stable over the next 10 years at 6.5% per annum for 90% financing and 7.5% per annum with 95% financing. (d) Mortgage loans maximum term is to age 60. (e) Closing fees approx. 1.5% of the mortgage loan (f) Credit card rates are 2% p.a minimum payment is 5% of the outstanding balance. (g) Bank loan rates are 10% p.a for a partially secured debt consolidation loan.