Topic: financial planning Case Study: Jill and Jack

Can risky investments be justified in response to a crisis?

Background

Jill and Jack live in Orange County, New York. They are 45 and 47 years old, respec- tively, and have been married for 12 years. It is the second marriage for both of them, and between them they have four children. Jills 17-year-old daughter, Chloe, lives with them. Chloe has been an outstanding student. She is applying for financial aid, includ- ing loans, to attend Cornell and major in engineering. Jack supports a 14-year-old son and 17-year-old daughter, both of whom live with his ex-wife. His daughter has been a so-so student, but is a gifted artist. She wants to be a fashion designer and has been accepted at a private art school. Jill and Jack have an 11-year-old son of their own.

Jill is a high school graduate without professional training, though she has just returned to work as an aerobics instructora steady source of part-time income until last year, when she herniated a disk in her back. Jack is a college graduate who has risen steadily in sales for gas and oil companies. Most recently he was the very successful sales man- ager for a construction company and made about $200,000 a year. The couple owns a home. They have about $100,000 equity in a house that was valued at $400,000 when they bought it. Similar houses are now selling for $300,000. Jack has accumu- lated about $150,000 in his 401(k). Otherwise, the couple has no significant savings. They carry about $50,000 in credit card debt, most of it incurred paying for medical expenses not covered by Jacks health caremuch of it the extended physical therapy needed for Jills back injury.

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Case Study: Jill and Jack

Dilemma

The year is 2009, and the economy seems to be in free fall. Jill is teaching only two aero- bics classes a week and, without significant warning, Jacks company went bankrupt when the three major condominium projects they were working on were abandoned by their owners. Jack feels lucky that he can get any severance. He is given a small package12 weeks of income and 6 months of healthcare coverage. Even with the unemployment insurance Jack will begin collecting, within a matter of months, he and Jill will not be able to cover all of their day-to-day living expenses. Longer-term, they face the loss of health insurance, the loss of their home, and the loss of the prospect of sending their two daughters to college. Even nearer at hand, they face credit cardpayments, utility bills, and mortgage payments. Jack never had difficulty transition- ing from one job to another in the past, but this time he has been looking for 4 weeks without so much as an interview. Both Jill and Jack are proactive by nature, trimming their day-to-day expenses while looking at other opportunities.

Jack loves to cook and has always made excellent fresh salsa. He and Jill host many barbecues, and for years, friends have told him he would make a fortune selling it. Although he will continue to look actively for a new job in sales, this seems like the time to borrow from friends and family and finally follow through on that dream. Jill has a sister who seems moderately well-to-do and has helped them from time to time. She is in her late 50s. Jacks father is retired and lives in the house Jack and his three brothers grew up in. Jack believes it is fully paid for. Jack asks himself, If not now, then when?

In the meantime, Jill attends a Mary Kay party hosted by Maria, a fellow aerobics trainer. She is thrilled at the prospect of becoming a Mary Kay representative and comes home with a backseat full of samples. She has paid the $100 required to become a Mary Kay representative with their debit card and used a newly opened Mary Kay Visa card to place an order for $250 worth of wholesale product.

The future looks bright. The party was co-hosted by a senior sales representative who was able to give Jill a full orientation to becoming a Mary Kay representative. She told Jill that she could make an executive-level salary if she was willing to work at it. Holding even one skin care class a week, she would make $17,500/year, and a lot of consul- tants were making $100/hour. To get started, Jill had needed to buy inventory. The $250 recommended amount seemed reasonable, although she was leery of new credit

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card debt with no income. However, Jill accepted the reassurance that merchandise purchased on the card should be considered an investment rather than debt.

Maria has been in the program for 6 months. Although she has not yet made up her own $250 investment selling product, she is shifting her focus to recruiting others (like Jill) to join the program as sales personnel. Going forward, whenever Jill places a wholesale order, Maria will get a commission.

Task

Jill and Jack are faced with an uncertain job market and weeks, if not months, of unem- ployment for Jack. You are a financial advisor for Neighborhood Trust, a nonprofit that provides financial advice to low-income people in New York. Jill and Jack have come to you to ask whether Jill should continue to invest her time and money in Mary Kay or if Jack should start his salsa business.

You look at the materials you have brought to this first meeting. Your playbook for people who have lost their jobs is pretty standard. It varies by client, but to cover near- term expenses, in addition to a review of discretionary spending, it always incudes some mix of help from family, a renegotiated mortgage, home equity or other low-cost loans, drawing down a 401(k), and (unofficially), if the bank wont deal and a house is worth less than is owed on it, walking away. Longer term, you usually suggest job counseling (maybe this time for Jill) and community college for kids starting school if there are no good financial aid packages to be had. No magic bullets in any of it. But here are Jill and Jack. They are attractive, well-spoken, extroverted, and eager to dosomething. Should they consider salsa and Mary Kay?

Analyze the opportunities and risks presented by the dilemma Jill and Jack face. Pursue what you believe to be their best and worst options in enough detail to present them with a preliminary picture of their range of options. Identify what else you would need to know in order to make a final recommendation.

What one or two insights should Jill and Jack share about personal finance with their daughters who are getting ready to begin college?

Case Study: Jill and Jack

Case Study: Jill and Jack

Terms

Budgeting

Credit cards

Financial planner

Gross wage/net

income

Resources

Home equity loan Investments Long-term financial

planning Needs

Retirement plan Spending plan Trade-offs

Read the background info of the prompt and then answer the task using as many terms listed as you can. Minimum of 2 pages (double spaced). DO NOT exceed 3 pages double spaced. Thanks!