When one examines financial success for an individual or business what are the attributes does one inspect? Would you look at the individual’s or businesses’ gross income? Perhaps one can examine the educational level of the individuals to determine their financial success? Or maybe it is the individual’s drive and risk appetite that created their success? Maybe, success can be attributed towards the individual’s ability to design and implement that plan? Ultimately, each one of these questions plays a pivotal role in the success of an individual or business. The purpose of this memorandum is for the couple of Homer and Marge Simpson. Upon initial consultation with Homer and Marge, liquidity was a major concern. Both expressed interest in freeing up money in order to save for retirement. We will analyze Homer and Marge’s personal budget, their balance sheet and cash flow statements. There will be a series of recommendations that will free cash flow and help Homer and Marge obtain their desired goals.
Homer is currently 31 and his wife, Marge is 30. The Simpsons have three children Bart, Lisa and Margret. Homer has a bachelor’s degree in physics and he is three classes short of completing his master’s in nuclear physics and from there he plans on obtaining a PhD. Marge has a double bachelor’s degree in marketing and economics. Homer works for the Springfield Power Plant, as a nuclear technician and his annual income is $75,000. Homer is in-line for a promotion which would increase his annual salary 15%. He contributes 3% of his annual income towards his company’s 401(k). He has no other retirement plans. Marge owns a small bakery that has a business formation as a sole proprietorship. Marge’s bakery has no other employees and the business has gross sales of $150,000 and a net profit of $50,000. She contributes 10% of her net profit to a SEP IRA.
Homer and Marge purchased their home in 2010, the property value was at the time was $395,000 with a loan amount of $350,000. The mortgage is fixed for 30 years with an interest rate of 5.75% and it is an FHA loan. Their monthly mortgage payments are over $2,000 dollars a month. Homer has a small student loan debt of $15,000 for his master’s degree. Homer has yet to begin making payments since he is still in school, however once he graduates the monthly payments will be $230 a month. Marge on the other hand, does not have any student loans; however she pays $1,800 a month for rent. The cost of her materials to bake with is well over $2,300 and her utility costs are $1,500 a month. Both Homer and Marge have accumulated $6,000 in credit card debt and they make payments of $230. The total monthly expense payments are roughly $8,000.
The first area of concern is the substantial amount of short term and long term debt accrued by Homer and Marge. This means that the majority of their monthly income is going to pay off the debt and other expenses. The first suggestion to Homer and Marge would be refinance their home. With interest rates at record lows; the Simpson family would be able to refinance their mortgage at a lower rate. They have enough equity in their home to pull cash out and payoff all their credit card and Homer’s student loan, which happens to be combine $21,000. This will roughly free up $460 in short term debt payments and also lower their mortgage payments to $1,800 a month. The refinance would allow the Simpson family to save at a total of $660 a month.
Upon examining the information regarding Marge’s business it is evident that her expenses are eroding away her gross sales. There is nothing one could do with her rent; if she were to move locations it would hinder her business. Based on the space she is rented and location Marge is paying a reasonable amount of rent. The only solution is look for vendors that are significantly lower in price. Marge must find a vendor that will offer the same quality of products, but a lower rate than her current vendor. It would be advisable for Marge to lower her material expense by 15%. Another solution for Marge’s bakery is to introduce Marge to networking groups that will help her promote her business. This will increase her gross sales and allow Marge to keep most of her profits.
Once we have ascertained a flaw in Homer and Marge’s cash flow, next to work on their primary goal and that is setting money aside for retirement. Homer and Marge were able to eliminate their $660 a month in debt payments. Since Homer only has a 401(k) through work, it would be suggested that Homer open a traditional IRA, and Homer should allocate $300 a month or $3600 a year toward the traditional IRA. This will allow Homer to deduct his contributions from his income taxes and lower his adjusted gross income, which in return would lower Homer’s tax liability. The remaining $360 a month, Homer should allocate $260 a month into an investment account. This will allow Homer; to invest in the market and receive better returns than any fixed income products. Since the investment account is not held in a qualified plan, he will pay capital gains tax and dividend tax. The remaining portion should be placed in a savings account for liquidity needs.
If Marge is successful in lowering her monthly expenses by 15% and increases her gross sales, then Marge will see an increase of net profit to $65,000 a year. This means she will be able to contribute more money to her SEP IRA and she will be able allocate more money into savings and investment accounts.
The plan that was established for Homer and Marge Simpson identified a weakness in their cash flow. Majority of their income was going towards monthly expenses. The refinance of home allowed Homer to eliminate his student loan and credit card debt. The money that was saved, partially when toward a qualified retirement account; and it would lower the Simpsons’ tax liability and helped them saves money for retirement. The Simpsons not only lowered their money expenses, however they developed a plan that would allow them to save for retirement.