The Gordons’ Version Of Financial Planning Burt And Emily Go

The Gordons’ Version of Financial Planningburt And Emily Gordon Are A

The Gordon’s financial situation, characterized by an apparent surplus and a relaxed attitude toward financial management, warrants a thorough analysis of their financial health and planning approach. This paper evaluates their financial condition by constructing their balance sheet and income statement for 2010, assessing their solvency, liquidity, savings, and debt-handling capacity. Furthermore, it critically examines Burt’s optimistic but potentially flawed approach to financial planning, considering implications for their long-term financial stability and the impact of inflation. Recommendations are provided for establishing effective short- and long-term financial plans to improve their financial resilience.

Paper For Above instruction

The financial analysis of the Gordons, Burt and Emily, reveals a mixture of current financial stability and potential vulnerabilities that could jeopardize their future security. Constructing their balance sheet and income statement based on the provided data allows for a comprehensive evaluation of their financial health, setting the stage for critical insights into their solvency, liquidity, savings habits, and ability to meet debt obligations.

Construction of the Balance Sheet and Income Statement

Balance Sheet as of December 31, 2010

  • Assets:
    • Current Assets:
      • Cash on hand: $485
      • Checking account balance: $485
      • Money market account balance: $2,500
    • Investments:
      • Common stock investments: $7,500
    • Auto: $15,000
    • Home (estimated value): $185,000
  • Liabilities:
    • Mortgage on home: $148,000
    • Auto loan balance: $4,650
    • Credit card balances: $675
    • Other debts (travel, credit, medical): Sum of $2,000 + $600 + $2,210 = $4,810
  • Net Worth: Assets minus liabilities = (Total Assets) - (Total Liabilities)

Calculating total assets: $485 + $485 + $2,500 + $7,500 + $15,000 + $185,000 = $210,970

Total liabilities: $148,000 + $4,650 + $675 + $4,810 = $158,135

Net worth: $210,970 - $158,135 = $52,835

Income and Expenses Statement for 2010

Income:

  • Burt’s take-home pay: $44,200
  • Emily’s take-home pay: $25,000
  • Total Income: $69,200

Expenses:

  • Food: $5,902
  • Clothing: $2,300
  • Mortgage payments (including property taxes): $1,028
  • Travel and entertainment: $2,000
  • Gas, electric, water: $1,990
  • Household furnishings: $4,500
  • Telephone: $640
  • Auto loan payments: $4,650
  • Credit card payments: $2,210
  • Federal income taxes: $19,044
  • State income taxes: $4,058
  • Social security contributions: $7,650
  • Auto insurance premiums: $1,600
  • Homeowner’s insurance: $1,300
  • Recreation and entertainment: $4,000
  • Trip to Europe: $5,000
  • Auto expenses: $2,800
  • Other: $680

Total expenses approximated at $66,960, indicating a surplus of around $2,240 for 2010. However, this surplus is likely to vary based on fluctuations in income and expenses.

Financial Condition Assessment

Solvency: The Gordons appear solvent, with assets exceeding liabilities by approximately $52,835. Their mortgage, though substantial at $148,000, is well secured by their property valued at $185,000, indicating adequate equity. Their net worth presents a relatively stable financial base, though dependency on home equity and investments suggests vulnerability to market fluctuations.

Liquidity: Liquidity is sufficient to cover short-term obligations, given their current assets, bank balances, and savings. However, their savings are relatively modest relative to their total assets, and most liquidity is tied up in investments and home equity, which are less liquid components.

Savings: The Gordons' savings and investments, including a $7,500 stock investment and a $2,500 money market account, are modest relative to their income and potential future expenses, especially considering the upcoming child and possible changes in income. Their saving rate appears low, given their income level, and their reliance on assets like stocks and home equity for future needs may not be sustainable long-term.

Ability to Pay Debts Promptly: Their debt levels are manageable with their current income, with total debt service well within their income capacity. The auto and mortgage payments are comfortably covered, though credit card balances may pose risks if not paid down promptly. Their debt obligations do not seem to threaten immediate solvency but could strain future cash flows if income falls or expenses rise unexpectedly.

Long-Run Implications and Management

If the Gordons continue managing their finances as they currently do, the long-term outlook hinges on maintaining or increasing income, controlling expenses, and properly planning for contingencies. Relying solely on current assets and a presumed income increase may be shortsighted, especially as inflation erodes purchasing power and increases living costs. Without a comprehensive financial plan, they risk underfunding retirement, healthcare, or their child's education, and becoming overexposed to market risks through their investments and housing equity.

Critical Evaluation of Their Financial Planning Approach

Their approach demonstrates a lack of formal financial planning, relying instead on optimism and anecdotal assurances of future income stability. Burt's arguments, asserting that "we've always managed to pay our bills," overlook the importance of systematic planning, especially given impending life changes such as Emily’s pregnancy.

Fallacies and Shortcomings: Burt’s overconfidence neglects the potential impact of unforeseen expenses, inflation, or market downturns. His argument about reducing luxuries and using savings or stocks in a crisis assumes that these options will always be available and adequate, ignoring market volatility and the opportunity costs of liquidating investments prematurely.

Implications of Long-term Considerations: Inflation gradually diminishes the real value of savings and investments, eroding net worth, unless accompanied by growth above inflation rates. Without a long-term plan incorporating inflation-adjusted goals, their financial security could diminish over time. Their current savings and investments are insufficient to sustain their lifestyle through retirement or unexpected events, highlighting the need for disciplined savings and investment strategies.

Recommended Procedures: Burt and Emily should develop a comprehensive financial plan, including detailed budgets, retirement savings plans, and contingency funds. Short-term budgets would help monitor and control expenses, while long-term plans should address retirement, education, and healthcare. Incorporating inflation projections, investment diversification, and risk management strategies would strengthen their financial resilience. Regular review and adjustment of these plans are essential as circumstances change.

Conclusion

The Gordons possess a stable but potentially vulnerable financial position due to their lack of structured planning. While their assets and income suggest solvency and liquidity, a failure to plan systematically exposes them to risks from inflation, market fluctuations, and unforeseen expenses. Burt's reliance on optimistic assumptions without procedural planning could compromise their long-term financial security. Establishing formal budgets, savings targets, investment strategies, and contingency funds are crucial. By adopting a disciplined financial planning approach, they can better safeguard their present wealth and ensure sustainable financial well-being for the future.

References

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