The purpose of this exercise is to apply what you have learned about budgeting, debt, and assets to practice building a budget with the specific goal of reducing outstanding debt.
For this assignment, use the information and assumptions provided to build a budget and address the questions below.
You are a recent college graduate starting a new job earning $45,000 a year in gross income. During your schooling, you accumulate student loan debt that you want to pay off as much as possible in 5 years. After graduating, you also bought a car that will need to be paid off in 5 years. Use the below details and assumptions to show how you will pay off this debt over the next 5 years. When completing this exercise, breakout all of the information at least annually. For instance, the starting period should be January 2021 for simplicity and span 5 full calendar years.
Assumptions to Use:
For this exercise, you only need to assume the following. Unless otherwise noted, these values will not change over the next 5 years:
- Income: $45,000 in the first year, 3% raise each year afterwards
- Rent: $1,000 per month
- Utilities: $400 per month
- Insurance: $750 per year
- Cell Phone: $100 per month
- Food: $75 per week
- 401K investing: the company you work for matches your contributions 100% up to 3% of your salary. To maximize this benefit, you contribute 3% per year
- Marginal Tax Rate: 25%
- Average Tax Rate: 15.53%
- Student Loans:
- Student Loan Debt Amount: $50,000
- Student Loan Debt Interest Rate: 6% APY, compounded monthly
- Student Loan Term: 10 years remaining on your loans
- Car Loans:
- Car Loan Debt Amount: $15,000
- Car Loan Debt Interest Rate: 2% APY, compounded monthly
- Car Loan Term: 5 years remaining on your loans
- Given the assumptions on your student loans (assuming no additional payments are made), what is your monthly payment amount?
- Given the assumptions on your car loan (assuming no additional payments are made), what is your monthly payment amount?
- If you contribute 3% per year to your 401K, how much will be contributed in total over the 5 years? This is just calculating how much is contributed, this is not assuming any growth in the value of those contributions. This is looking for the total amount contributed to your 401K.
- Given the answer to Question 3, how much will be in your 401K at the end of 5 years if your annual contributions grow by 6% each year? For this question and for simplicityâ€™s sake, assume that growth occurs on the year-end balance.
- Create a 5-year budget given these noted details about your income, expenses, 401K, etc. Make this in a table breaking out revenue, expenses and showing the net income remaining at the end of each year.
- With the budget you created, you are wanting to make additional payments to your student loans to help pay them off sooner. To help see if this is possible, how much money is left over at the end of each of the 5 years?
- For your student loans, assume you make an additional payment (over and above your regular monthly payment) of $1,500 in December of Year 3, 4, and 5. (Hint: Make a full amortization table before and after these additional payments.)
- a. With those additional payments, how many months sooner will your loans be paid off?
- b. With those additional payments, how much do you save in total interest paid over the total life of the loan?