Cheryl Said:

Marcia and Phil Helm a couple in their thirties have been married for several years. They have no children, ?

We Answered:

Marcia and Phil Helm, a couple in their thirties, have been married for several years. They have no children, and each has a professional career. Marcia is a trainee for a management position at a large department store, and Phil is an engineer at an electronics firm. Their careers have promising futures, but neither has exceptionally good income protection in the event of a layoff. The Helms have saved around $8000, and $7400 of it is in a 3.5% savings account at the credit union where Phil works. They have about $600 in a regular checking account (with Mid-City Bank) that doesn't pay any interest. The Helms' combined take home pay is about $5000/month, and Phil thinks they should take the $7400 out of their savings and invest in the stock market to earn a better return. He points out that, excluding their life insurance policies, they have no other investments. Marcia thinks this plan might be too risky, but she does agree that the 3.5% yield is not very good.

Recently, at a party, a friend suggested they take out certificates of deposit (CDs) with long maturities because the CDs were paying around 6% in interest. The Helms liked her advice and stopped at Phil's credit union to get more information on the CDs. After talking with the office manager for a while, though, they became more confused. He didn't favor CDs; although, the union had them available. He pointed out that interest rates on the new money market accounts were around 4% and didn't require "freezing" your money for a year or more. He also indicated that the union could offer a super NOW account that would allow the Helms to close their current unproductive checking account with Mid-City. This account would give them unlimited check writing privileges with no service charges and would pay 3% interest; however, it would require a minimum balance of $2500. If their balance went below the minimum in a month, interest would be only 2%.

The Helms left the credit union without taking any action. They have asked you for advice on managing their liquid deposits.

In 3-4 paragraphs, answer the following questions.
Do you feel the Helms' $8000 liquid balance is adequate? Explain.
Explain the relative risks and potential advantages of CDs. Explain under what condition(s) you would recommend them for the Helms.
Do you agree with Phil that some of their funds should be invested in the stock market? Explain.


Answers from Professor JH, PhD A+++

If the couple has been able to save $8000 in a few short years of their now $60,000 per year combined income they have demonstrated some discipline toward saving. There is no mention of credit card debt so I’ll assume there is little or none, but if there was that would directly influence my recommendations.



I noticed that no mention was made of a retirement plan or package with possibly matching funds available from either or both of their employers. Whether matching funds are available or not I would advise them to immediately seek out an employer provided or insurance company sponsored retirement plan investing between 6% and 10% of each of their salaries in a 401K. This would be pre-tax dollars, maximizes any employer contributions and reduce their tax liability (found money).



The $8000 of liquid assets currently in a 3.5% Savings account or non producing checking account is an excessive amount of cash to have on hand for emergencies or in case one of them lost their job. Most job losses due to downsizing or failure to perform are with some kind of notice; typically 2 weeks to a number of months, therefore the need for liquid assets is only for emergencies and most investments can be turned into cash within a month or two. CDs or a Money Market Account although low on the risk scale are typically low on the pay back percentage also. If the CD is bought for a longer term the low risk return should be higher than 6% then not easily available. If they are concerned about having cash available then I advise them to put $1000 in the 2% (3%) interest bearing Credit Union Checking Account eliminating Mid-City Checking Fees (more found money). Then I would find an employer, insurance company or Credit Union sponsored Mutual Fund to invest their balance of the $8000 in the 3.5% Savings. A mutual fund with an aggressive percentage in the Stock Market would provide the Helms with a balanced investment, professional managed and at a tolerable risk for their age. The rule of 100 – your age might guide them as to the selection of the mutual fund with the percentage in stocks. Pure investment in the stock market by an inexperienced novice will be a very risky venture.



$8000 at 3.5% APR in the Savings Account would net $11,842 in 10 years. Low Risk, Low Return, Easily Accessible. FV=PV(1.0+i)^n=$8000(1.0+.035)^10 or 1.4802 from the look up table (pg 447)



$8000 in a series of CDs averaging 6% APR would net $14,325 in 10 years. Low Risk, Low Return, Accessible on a schedule.



$8000 split between $1000 @ 2% + $7000 in a Mutual Fund averaging 8% would net $1,219 (Savings) + $15,112 for a total of $16,331 or a significant increase over their current plan. Relatively Low Risk, Higher Return, and Relatively Easy Access.



I would then recommend increasing the yearly amount contributed to their 401k to maximize yearly and “make up” balances as once again these are pre-tax dollars. Any additional income could be added to their mutual fund account. Finally I would recommend they set and stick with a plan for at least a year but review and possibly adjust their plans each following year.



References:

Winger, B and Frasca, R, Personal Finance: An Integrated Planning Approach, 7th Ed., 2008, Prentice Hall Publishers, Pearson Education, Inc.

Katherine Said:

Another personal finance question....?

We Answered:

Depending on their spending habits they should put the money in an emigrant direct or ING money market account. They should keep that money for emergencies and really should try to get it up to at least $10000 or preferably $15000 just in case something happens. Emigrant direct currently pays 5% apr ING is about 4.5%. This way it doesn't have to be tied up for a year or more and can be transfered electronically into your account if needed in about 3-5 days. Once this emergency fund is where you would like it to be, start investing everything else you have left over each month on higher yielding stocks.

Alexander Said:

Marcia and Phil Helm, a couple in their thirties, have been married for several years. They have no children,?

We Answered:

Where to invest the $7400 is secondary to the real important question, which is why have the Helms only saved $8000 under these circumstances? That is not nearly enough of a cushion and investing $7400 in stocks would only leave $600 in cash, which is a pitifully small cushion.

(If the Helms have other savings or investments not mentioned, I take it back -- but you didn't mention it.)

They should concentrate as much on controlling outgo as on improving their income, try to boost their savings up to at least 10% (20% or higher should be attainable with these salaries and no children).

Then after they have their finances more under control and have saved substantially more money, it may make sense to invest a portion of that into long-term investments such as stocks.

P.S. I do hope "neither has exceptionally good income protection" doesn't mean you do not have disability insurance. If so, stop now and go buy disability insurance.

Janice Said:

Pam and Mike Helm, who have no Children and both have a professional career. ?

We Answered:

1. Since there are no children, the $8000 should be enough for any emergency.
2. If you can get a good rate on a money market, then you would not have to get CD's. that would tie up your funds.
3. The stock market is dead. If they want to invest, let them get a fixed annuity. It might only pay 5 or 6% but there is no risk.
4. Most banks and credit unions can handles the funds

Denise Said:

help!!!!!!!!!!! please?

We Answered:

Do your own homework.
Do not cheat by asking people on the internet to do it for you.

Your degree won't be worth anything if you cheat.

(I'll take a tip from the third poster. If this was a REAL question, I'd be pointing you to look at Dave Ramsey's debt snowball for ideas and point out that risk is very real. Replacing a lost job generally takes at least one month for every $10K being replaced.)

Melanie Said:

please help explain and show how arrived at results?

We Answered:

whats the question?