Question

Kevin Jones, of Elon, North Carolina, is single and recently graduated from law school. He is employed and earns $9,000 per month, an awesome salary for someone only 26 years old. He also has $1,600 withheld for federal income tax, $520 for state income taxes, $690 for Medicare and Social Security taxes, and $220 for health insurance every month. Kevin has outstanding student loans of almost $80,000 on which he pays about $950 per month and a 0% loan on an auto loan payment of $300 on a Ford Fusion Hybrid he purchased new during law school. He is considering taking out a loan to buy a Kawasaki motorcycle.

Required:
a. What is kevins debt payments to disposable income ratio?
b. Based on your answer to part (a), how would you advise kevin about his plan.

Answer 1

Kevin Jones

a. Kevin's debt payments to disposable income ratio = 21%

b. The first question that Kevin should ask himself is whether he actually requires the Kawasaki motorcycle and for what purpose. Since he is already paying for a new auto that he purchased during law school, Kevin should try to limit his expenses to enable him save money for retirement. He has enough debts now. He should consider paying off his loans or rather investing some reasonable savings. The earlier he does, the better for him.

Step-by-step explanation:

a) Data and Calculations:

Monthly salary = $9,000

Monthly Deductions:

Federal income tax withheld = $1,600

State income taxes = 520

Medicare & Social Security taxes = 690

Health insurance = 220

Total deductions = $3,030

Monthly Disposable income = $5,970 ($9,000 - $3,030)

Debt payments:

Outstanding student loans = $80,000

Monthly repayment of student loans = $950

Auto loan = $300

Total monthly debt payments = $1,250

Debt payments to Disposable income ratio = $1,250/$5,970 = 0.209

= 21%