Knowing how much to save annually for personal finances
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Susan is making saving plans for this year and next. She knows that her real income after taxes will be $50000 in each year for sure. The banks borrow money at 10% and lend it out at 15%. Susan has pledged donating $12600 next year to an orphanage. She hates having swings in her lifestyle, and enjoys living in exactly the same living conditions in both years, and she does not care at all what will happen after the second year, because she will be able to bequeath an incredibly large amount of money, but she cannot borrow towards that money.
a. How much should Susan save or borrow this year? How much should she consume?
How are the amounts that Susan should save and consume affected by each of the following changes (one at a time, keeping others constant at original values)?
b. Susan's current income rises from $50000 to $54200.
c. The income she expects to receive next year increases to $54200.
d. If she decides to donate $14700 to the orphanage.
e. All interest rates increase by 15%.
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Solution Summary
Money consumption is evaluated in this case. The expert determines how much to save annually for personal finances.
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In this problem Susan wants to use saving or borrowing to even out the differences between her money this year and next year. This year she has $50,000 (after taxes) and next year she will have $37,400 (after taxes and her charitable donation). We assume for this problem that all money received and paid in a given year happens in an instant, so there are essentially just two discrete points in time (this year and next year) with one year between them.
a) Since Susan will otherwise have more money this year than next, she should save some amount of money. Call ...
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