Question

Neil and Nancy are married with two children at home and a mortgage. Neil's net pay per year is $56,000 and Nancy doesn't have any income. Their mortgage payment of $1,500 includes insurance on their home. They have additional monthly expenses of $3,500. Neil contributes 10% of his earnings to a retirement fund and they have $16,000 in savings. There is a $500,000 life insurance policy on Neil but none on Nancy. As their financial advisor, what part of Neil and Nancy's financial plan would you encourage them to work on?

Answer 1

their current cash flow is negative since their expenses are higher than their income:

• monthly net income = $56,000 / 12 = $4,667
• monthly expenses = $1,500 + $3,500 = $5,000
• monthly cash flow = ($333)

they have 3 options:

• Option 1 (which I personally dislike) is that Neil contributes $4,000 less per year to his retirement account in order to balance their net income and expenses. The problem is that once he retires, his income will be much lower.
• Option 2 is that they lower their expenses a little bit, only enough to balance their cash flows.
• Option 3 is that Nancy gets a part time job, maybe a couple of hours per day which will allow her to earn money that can be used to cover some expenses.

Personally I believe that option 2 is the best, but if they definitely cannot lower their monthly expenses, then option 3 would probably fit them.