Mike And Mary Jane Lee's Yearly Income

Q 1 2 And 4q1 Mike And Mary Jane Lee Have A Yearly Income Of 65

Q 1, 2, and 4. Q1 Mike and Mary Jane Lee have a yearly income of $65,000 and own a house worth $90,000, two cars worth a total of $20,000, and furniture worth $10,000. The house has a mortgage of $50,000, and the cars have outstanding loans of $2,000 each. Utility bills, totaling $150 for this month, have not been paid. Calculate or use Worksheet 4 to determine their net worth, and explain what it means. How would the Lees’ ages affect your assessment of their net worth?

Q2 Using the preceding information, calculate the debt ratio for the Lee household.

Q4: A rumor of “right sizing” at Ojai’s engineering firm has him and his wife, Kaya, concerned about their preparation for meeting financial emergencies. Help them calculate their net worth or complete Worksheet 4, and calculate and interpret the current ratio, given the following assets and liabilities: Checking account $2,000; Savings account $4,000; Stocks $8,000; Utility bills $500; Credit card bills $1,000; Auto loan $2,600.

Paper For Above instruction

The financial stability and planning of households hinge significantly on understanding their net worth and related ratios, which reflect their assets, liabilities, and liquidity position. The case of Mike and Mary Jane Lee provides an insightful illustration of calculating net worth and analyzing debt ratios, crucial tools for personal financial assessment. Additionally, evaluating a household's current ratio, which considers liquid assets against short-term liabilities, offers further insight into their financial resilience.

Introduction

Net worth, often referred to as the personal balance sheet, is a measure of an individual or household's financial health at a specific point in time. It is calculated by subtracting total liabilities from total assets. Understanding net worth helps individuals gauge their financial position, plan future finances, and identify areas needing improvement. Key ratios such as the debt ratio and current ratio complement this assessment by providing insights into debt levels and liquidity.

Calculating Net Worth

For Mike and Mary Jane Lee, their assets include a house valued at $90,000, two cars worth $20,000 in total, and furniture valued at $10,000. Their liabilities encompass a mortgage of $50,000 and auto loans totaling $4,000. The utility bills unpaid amount to $150, which are considered current liabilities but are not yet paid, thus not reflected in the net worth calculation directly. Their cash assets are not specified, but for clarity, assuming they have cash savings, their net worth calculation follows:

• Assets: House: $90,000; Cars: $20,000; Furniture: $10,000; Total Assets: $120,000
• Liabilities: Mortgage: $50,000; Car Loans: $4,000; Total Liabilities: $54,000

Net Worth = Total Assets - Total Liabilities = $120,000 - $54,000 = $66,000

This indicates that Mike and Mary Jane Lee’s net worth is $66,000, revealing their financial cushion after debt obligations.

Interpreting this, a positive net worth suggests a healthy financial position, but the analysis also considers the composition of assets and liabilities, the ages of the individuals, and their future earning capacity.

Impact of Age on Net Worth Assessment

The ages of the Lees significantly influence their net worth evaluation. Younger households typically have less accumulated assets and may carry more debt, often in the form of student loans or mortgages. Conversely, older households tend to have higher net worth due to accumulated assets like home equity and retirement savings. Therefore, when assessing their net worth, their ages can contextualize whether their level of assets and liabilities aligns with their life stage. For example, if the Lees are in their early 30s, a net worth of $66,000 may be considered strong, especially if it is growing steadily. If they are in their 50s or 60s, this net worth might suggest a need for increased savings or better debt management strategies to ensure adequate preparedness for retirement and emergencies.

Calculating Debt Ratio

The debt ratio measures the proportion of total liabilities to total assets, indicating the level of leverage or debt burden.

Debt Ratio = Total Liabilities / Total Assets = $54,000 / $120,000 = 0.45 or 45%

This indicates that 45% of their assets are financed through debt. A lower debt ratio is generally preferable, reflecting lower financial risk.

For the Lee household, a debt ratio of 45% is moderate, implying that they have managed their debt relative to their assets reasonably well but could aim to reduce it further for greater financial security.

Assessment of the Household Known as “Right Sizing”

In the case of Kaya and her concern about “right sizing,” understanding their net worth, debt ratios, and current ratios helps in evaluating their preparedness for financial emergencies. They would need to assess their liquid assets against short-term liabilities. For example, if their liquid assets (cash, savings) are sufficient to cover short-term debts and unexpected expenses, their financial resilience is stronger. Conversely, high leverage or low liquidity would suggest the need for strategic adjustments, such as increasing savings or reducing debt.

Conclusion

Calculating and interpreting net worth and related ratios are vital steps toward personal financial health assessment. For Mike and Mary Jane Lee, their net worth of $66,000 and debt ratio of 45% depict a moderate financial position, influenced by their life stage and future earning potential. For Kaya and her husband, similar calculations inform their emergency preparedness, guiding strategic financial decisions. These tools enable households to make informed choices, improve financial resilience, and plan effectively for future goals.

References

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