Question

Marie appreciates the help you have given her in formulating her financial goals. By putting the goals within specific time frames, she has a sharper focus on the savings effort she must make to achieve her goals. Her current problem is one of estimating an amount to save each year. At first, this task seemed relatively easy, but its complexity began to grow when certain financial factors were considered. These factors are the expected inflation rate on the costs of goals and the rate of return she might earn on periodic savings.
Some of the goals you and Marie have discussed must be achieved out of current income or with borrowed funds; these include pursuing a college degree, buying a new car, and paying off college loans. Marie will focus on these goals later when she attempts to prepare a budget. Also, although Marie thought retirement planning was out of the question, you have convinced her that she should consider it, even though her retirement date is probably 40 years away.
Marie has four goals that she will consider in her current savings plan: (1) sending Jake to a golf clinic five years from now at a cost of $4,000; (2) making a $14,000 down payment on a condo 10 years from now; (3) saving $32,000 for Jake’s four years of college costs ($8,000 a year) beginning 14 years from now; and (4) accumulating $50,000 in a fund to be used when retirement begins in 40 years.
Assist Marie in preparing saving schedules for the planned goals. First, complete a simple schedule (Form 2.1) that ignores inflation and interest earnings. (This schedule will show a required annual savings amount of $2,500 ($100,000/40). Also, negative account balances will appear in years 16 and 17. This means Marie must borrow to meet her goals. For simplicity, assume that she will do this, but ignore any interest on the loans. Second, complete a schedule (Form 2.2) that shows a required annual savings amount when inflation and interest are considered. Assume an overall inflation rate of 3 percent and an investment-earning rate of 6 percent. The total required annual savings should be $5,386.
Since Marie expects that her income will increase over time, she will not start her savings amount at $5,386 per year. Instead, she will begin her savings plan at $2,000 for each of the first five years and then increase the annual amount by $500 in each of the following five-year intervals. Use Form 2.3 to determine if this is a workable plan.
Form 2.1
Simple Savings Plan
Form 2.2
Determining an Annual
Savings Amount
Form 2.3
Determining a Savings Plan


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  • CreatedMarch 19, 2015
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