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Personal Finance - Financial Planning

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When Nina opened the letter from her aunt, she discovered a wonderful surprise. "My aunt has given me a gift of $12,000!" "Why would she do that?" mused Kevin. "I guess her investments have increased in value by much more than she needs. She wants to share it with family members." Nina shrugged, still in a little bit of shock. "I wonder what I should do with the money?" "Oh, I have some suggestions for you . . ." Kevin said. Recovering herself, Nina teased, "Wait a minute! When did this become our money?" Kevin threw his hands in the air. "Hey, I just thought I'd offer some ideas." After some discussion, Nina considered the following uses for the money:

Credit card debt —use a portion of the money to pay off credit card bills from her last vacation.

Savings —set aside money for a down payment on a house.

Long-term investments —invest the money in a tax-deferred retirement account.

Career training —use the money for technology certification courses to enhance her earning power.

Community donations —contribute funds to a homeless shelter and a world hunger-relief organization.

"Wow, I could easily use $100,000 instead of $12,000!" Nina laughed. "So what should I do?" "Some financial advisors recommend not doing anything for at least 6 months," warned Kevin. "You might be tempted to buy on impulse instead of spending the money on things with lasting value." "Well now I'm really not sure what to do!"

Questions

1. Which additional information might be necessary to know about Nina before determining which areas of financial planning should be her top priority?

2. How might time value of money calculations be used by Nina in her decision-making process?

3. What actions do you recommend that Nina take before making a final decision about the use of

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Solution Preview

Step 1
The additional information that might be necessary to know about Nina before determining which areas of financial planning should be her top priority are as follows: It is necessary to know if currently she has adequate accommodation or if she needs immediate accommodation in a house. Also, I need to know if the company where she works offers her pension and other post-retirement benefits and the value of these. I also need to know how much of her earning power will be enhanced with the technology certification courses. Finally, I need to know the value of community donations to Nina.

Step 2
Time value of money ...

Solution Summary

This solution explains personal finance and time value of money. The sources used are also included in the solution.

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Financial Planning: Personal

Situation 1:
Fran and Ed Blake, ages 43 and 47, have a daughter who is completing her first year of college and a son three years younger. Currently, they have $42,000 in savings and investment funds set aside for their children's education. With increasing education costs, they are concerned whether this amount is adequate. In recent months, Fran's mother has required extensive medical attention and personal care assistance. Unable to live alone, she is now a resident of a long-term care facility. The cost of this service is $4,750 a month, with annual increases of about 5 percent. While a major portion of the cost is covered by Social Security and her pension, Fran's mother is unable to cover the entire cost. In addition, Fran and Ed are concerned about saving for their own retirement. While they have consistently made annual deposits to a retirement fund, current financial demands may force them to access some of that money.

Situation 2:
"While I knew it might happen someday, I didn't expect it right now." This was the reaction of Patrick Hamilton when his company merged with another organization and moved its offices to another state, resulting in him losing his job. Patrick does have some flexibility in his short-term finances since he has three months of living expenses in a saving account. However, "three months can go by very quickly," as Patrick noted.

Situation 3:
Nina Resendiz, age 23, recently received a $12,000 gift from her aunt. Nina is considering various uses for these unexpected funds including paying off credit card bills from her last vacation or setting aside money for a down payment on a house. Or she might invest the money in a tax-deferred retirement account. Another possibility is using the money for technology certification courses to enhance her earning power. Nina also wants to contribute some of the funds to a homeless shelter and a world hunger organization. She is overwhelmed by the choices and comments to herself, "I want to avoid the temptation of wasting the money on impulse items. I want to make sure I use the money on things with lasting value."

1. For each situation, identify the main financial planning issues that need to be addressed.
2. What additional information would you like to have before recommending actions in each situation?
3. Based on the information provided and your assessment of the situation, what actions would you recommend for the Blakes, Patrick, and Nina?

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