Use the S.M.A.R.T. planning model and information below to evaluate Alice's goals as an example.

a. pay off student loan

b. buy a house and save for children's education

c. accumulate assets

d. retire

e. travel around the world in a sailboat.

[Information of Alice's goals] After graduating from college, Alice has an immediate focus on earning income to provide for living expenses and debt (student loan) obligations. Within the next decade, she foresees having a family; if so, she will want to purchase a house and perhaps start saving for her children's educations. Her income will have to provide for her increased expenses and also generate a surplus that can be saved to accumulate these assets.

In the long term, she will want to be able to retire and derive all her income from her accumulated assets, and perhaps travel around the world in a sailboat. She will have to have accumulated enough assets to provide for her retirement income and for the travel. Figure 1.10 shows the relationship between timing, goals, and sources of income.

Alice's income will be used to meet her goals, so it's important for her to understand where her income will be coming from and how it will help in achieving her goals. She needs to assess her current Situation.

Alice's assets may be a car worth about $5,000 and a savings account with a balance of $250. Debts include a student loan with a balance of $53,000 and a car loan with a balance of $2,700.

Her annual disposable income (after-tax income or take-home pay) may be $35,720, and annual expenses are expected to be $10,800 for rent and $14,400 for living expenses food, gas, entertainment, clothing, and so on. Her annual loan payments are $2,400 for the car loan and $7,720 for the student Loan.

Alice will have an annual budget surplus of just $400 (income = $35,720 $35,320 [total expenses + loan repayments]). She will be achieving her short-term goal of reducing debt, but with a small annual budget surplus, it will be difficult for her to begin to achieve her goal of accumulating assets.

To reach that intermediate goal, she will have to increase income or decrease expenses to create more of an annual surplus. When her car loan is paid off next year, she hopes to buy another car, but she will have at most only $650 (250 + 400) in savings for a down payment for the car, and that assumes she can save all her surplus. When her student loans are paid off in about five years, she will no

longer have student loan payments, and that will increase her surplus significantly (by $7,720 per year) and allow her to put that money toward asset accumulation.

She decides that the alternative of reducing expenses is not feasible. She could increase income, however. She has two choices: work a second job or go to Las Vegas to play poker.

Alice could work a second, part-time job that would increase her after-tax income but leave her more tired and with less time for other interests. The economy is in a bit of a slump too unemployment is up a bit so her second job probably wouldn't pay much. She could go to Vegas and win big, with the cost of the trip as her only expense. To evaluate her alternatives. Laying out Alice's choices in this way shows their consequences more clearly. The alternative with the biggest benefit is the trip to Vegas, but that also has the biggest cost because it has the biggest risk: if she loses, she could have even more debt. That would put her further from her goal of beginning to accumulate assets, which would have to be postponed until she could eliminate that new debt as well as her existing debt.

Thus, she would have to increase her income and decrease her expenses. Simply

continuing as she does now would no longer be an option because the new debt increases her expenses and creates a budget deficit. Her only remaining alternative to increase income would be to take the second job that she had initially rejected because of its implicit cost.

The Vegas option becomes least desirable when its risk is included in the calculations of its costs, especially as they compare with its benefits.

Its obvious risk is that Alice will lose wealth, but its even costlier risk is that it will limit her future choices.

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Using the SMART planning model lets evaluate Alices goals 1 Pay off student loan Specific Alice aims to eliminate her student loan debt which currentl... View the full answer