Case Study 4: Personal Finance Course

Personal Finance Course, 11:373:353 (01)

Department of Agricultural, Food, and Resource Economics

Personal Finance Case #4

Hope Forma, 45, is a single parent of two teenagers. She is currently attending school part-time to earn a master's degree. She expects to finish in four years, which is exactly when her alimony will end. She earns $12,000 a year and receives $32,000 for next two years and $21,480 for the two years after that. She expects her income to at least triple when her schooling is completed.

Forma's short-term goals are to complete her degree and sell her $285,000 home and move into a smaller dwelling that is more affordable. She also wants to send her children to college and save for her future. "I know I need to downsize my lifestyle to be able to save for retirement," she notes.

The house has a $197,000 mortgage, which would leave $88,000 (minus selling costs) of profit when it is sold. Her capital gain would be less than $250,000 (for single taxpayers) so there is no tax liability. Forma would then like to buy a condo for less than $100,000 so that she is no longer responsible for snow removal and yard work.

Forma has $80,000 of cash assets, $72,254 of invested assets (including a $67,000 IRA), her home, and a vehicle and personal property worth $33,000, for total assets of $470,254. Her only debt is the mortgage, leaving her with a net worth of $273,254. Her IRA money is invested in CDs at a local bank and her cash assets are in a statement saving account earning 1.25% interest.

Forma noted that she has a will but it needs to be updated because of the divorce. She also plans to change her tax withholding to reflect her current economic status. She has $100,000 of whole life insurance and an employer-paid health plan (PPO) that covers her and the children. Her home and car are insured with $100,000 liability limits. She has no disability insurance.

Forma estimates that she spends $5,000 monthly ($60,000 a year), which is $1,334 more than the $3,666 she receives monthly ($44,000 a year). She's been using money received in her divorce settlement to make up the difference. As she's seen her savings dwindle, she has become more concerned about her finances and knows she needs to "do something" to get things in balance.

Forma would like to retire sometime between ages 59 to 64. She anticipates receiving Social Security, plus an employer pension, plus her current IRA and whatever else she saves in the future. Upon retirement, she'd like to buy a condo in a warm and inexpensive state and be financially independent of her children in her old age.