Alex Mikhailov recently graduated from college and moved to Atlanta to take a job as a market research analyst. He was pleased to be financially independent and was sure that, with his $45,000 salary, he could cover his living expenses and have plenty of money left over to furnish his studio apartment and enjoy the wide variety of social and recreational activities available in Atlanta. He opened several department-store charge accounts and obtained a bank credit card.
For a while, Alex managed pretty well on his monthly take-home pay of $2,893, but by the end of 2015, he was having trouble fully paying all his credit card charges each month. Concerned that his spending had gotten out of control and that he was barely making it from paycheck to paycheck, he decided to list his expenses for the past calendar year and develop a budget. He hoped not only to reduce his credit card debt but also to begin a regular savings program.
Alex prepared the following summary of expenses for 2015:
|
Item
|
Annual Expenditure
|
|
Rent
|
$12,000
|
|
Auto insurance
|
1,855
|
|
Auto loan payments
|
3,840
|
|
Auto expenses (gas, repairs, and fees)
|
1,560
|
|
Clothing
|
3,200
|
|
Instalment loan for stereo
|
540
|
|
Personal care
|
424
|
|
Phone
|
600
|
|
Cable TV
|
440
|
|
Gas and electricity
|
1,080
|
|
Medical care
|
120
|
|
Dentist
|
70
|
|
Groceries
|
2,500
|
|
Dining out
|
2,600
|
|
Furniture purchases
|
1,200
|
|
Recreation and entertainment
|
2,900
|
|
Other expenses
|
600
|
After reviewing his 2015 expenses, Alex made the following assumptions about his expenses for 2016:
1. All expenses will remain at the same levels, with these exceptions:
a. Auto insurance, auto expenses, gas and electricity, and groceries will increase 5 percent.
b. Clothing purchases will decrease to $2,250.
c. Phone and cable TV will increase $5 per month.
d. Furniture purchases will decrease to $660, most of which is for a new television.
e. He will take a one-week vacation to Colorado in July, at a cost of $2,100.
2. He will eliminate his bank credit card balance by making extra monthly payments of $75 during each of the first six months.
3. Regarding his income, Alex has just received a small raise, so his take-home pay will be $3,200 per month.
Critical Thinking Questions
1. a. Prepare a preliminary Income and Expense Statement for Alex for the year ending December 31, 2016, using the format shown in Worksheet 2.2.
b. Compare Alex's estimated expenses with his expected income and make recommendations that will help him balance his budget.
2. Analyze the statement and advise Alex on his financial situation. Suggest some long-term, intermediate, and short-term financial goals for Alex, and discuss some steps he can take to reach them.