Susan Wong’s Budget Essay
Susan Wong’s Budget
Section I: Problem Description
Susan Wong graduated from State University and was hired by a computer firm in the Washington, D.C. area. In college, her parents provided money for Susan’s gas, telephone, and credit cards. Susan’s mother and father created a bank account to address her financial needs. Susan never had to be concerned about health, car, life, homeowners’ insurance; utilities; driver’s license and car license; magazine subscriptions; and other financial matters. As a student, Susan did not spend more that her monthly allotment, but she was not prepared to manage staggered bill payments common to working adults (Taylor, 2004). “In some months Susan’s bills would be modest and she would spend accordingly, only to be confronted the next month with a large insurance premium, or a bill for property tax on her condominium, or a large for credit card bill, or a bill for a magazine subscription, and so on the next month.
Such unexpected expenditures will result in months when she could not balance her checking account; she would have top pay her bills with her bankcard and then pay off her accumulated debt in installments while incurring high interest charges. By the end of her first year out of school she had hoped to have some money saved to begin an investment program, but instead she found herself in debt (Taylor, 2004, p. 378).” Frustrated by her situation, Susan decided to get her finances in order. She sold her condominium and moved into an apartment. This action allowed Susan to clear her outstanding dept and have $3,800 left over (Taylor, 2004). This paper presents a method for maximizing interest and paying the necessary bills on time. Using Solver found in Microsoft Excel and linear programming methods will prove to provide the maximized solution.
Section II: Alternative Solutions
There is only one solution that will be examined in this paper. The method is described below.
Alternative 1: Use linear programming methods to determine the maximum investment for select of certificate of deposits (CDs) with terms of one, three, and seven months during a calendar year.
Section III: Determine the Criteria
An interesting approach to this problem is to invest multiple short term CDs at various rates and different yields. For example, this choice examines the selection a one-month, three-month, and seven-month CD that yields 6%, 8%, and 12% per year nominal, respectively. This is a very complicated alternative, and this solution requires cautious planning to meet the needs of staggered payments. Therefore, the use of Microsoft Excel’s Solver and linear programming methods are required for determining the solution.
Section IV: Evaluate the Chosen Alternative
Table 1 shows the monthly break out of Susan’s bills. Her monthly salary is $2450 a month. She also will start with an initial investment of $3,800. This money was obtained for the sell of her condominium. Each month has varying liabilities and a constant salary as the source of funds. Therefore, without the initial investment, Susan would experience a shortage of fund in months of January, February, July, November, and December (see Table 1).
Below is a list of requirements needed to develop the model:
• Maximize the investment during the year
• Use a combination of a one-month, three-month, and seven-month CD that yields 6%, 8%, and 12% per year nominal, respectively
• Provide the necessary funds or pay fluctuating liabilities Since this is a financial application of linear programming, the constraint assets must equal the liabilities plus owner’s equity (Tracy, 2006). This statement can be expressed as follow: A = L + OE
Expressing this equation in standard form we have:
A – OE = L
Stated simply, for every month, the total income for salary and maturing investments (previous month) must equal the total liabilities (bills) and current month’s investment. This equation will define the monthly constraints. Model:
A = amount invested
t = terms of CD ( T = 1, 3, and 7)
m = calendar months
So, Atm = is the amount invest for term t in a given month m
All interest rates are determined monthly as follows:
6% => 0.06 x (1/12) => 0.005
8% => 0.08 x (3/12) => 0.02
12% => 0.12 x (7/12) => 0.07