Personal Finance Situation

Question

Life Situation:            Financial Data:
Single                      Monthly Income $1,750

Age 21                     Living Expenses $1,210
No dependents         Personal property $7,300
College student        Savings $2,000
                              Student loan $3,000
                              Credit card debt $2,400
Shelby Johnson has a flair for grooming dogs and cats. She hopes to open her own pet salon when she graduates college. She is currently completing her sophomore year in business while working at a local pet store. Shelby has been living with a roommate (Melinda) in an apartment near her work in order to reduce her living expenses. However, she continually uses her credit card to make ends meet.
Her personal property consists of a 2005 car ($5,550) that gets great gas mileage, a television set with a DVD player ($400), a digital camera ($50), a laptop computer ($400), clothing ($300), and some furnishings valued at $600 (bed, dresser, lamp, clock, couch) with a total value of $7,300.
Questions
1. Given her current situation, list various personal financial decisions that Shelby may be considering at this point in her life.
2. Describe what short-term, intermediate and long-term goals Shelby should develop using “Setting Personal Financial Goals”
(Sheet 3) located at the back of this book.
3. What types of time value of money calculations would be helpful for Shelby?

Answer 1

Question 1: Current Financial Decisions

Shelby's facing these immediate choices:

Crisis-level decisions:

1. Stop the credit card bleeding. She claims $540/month surplus but keeps charging. she isn't expense tracking correctly or she's funding discretionary spending with debt. Figure out which.
2. Whittle down the $2,400 credit card debt aggressively. At typical 18-22% APR, she's losing $36-44/month just on interest.

Strategic decisions:

1. Keep the roommate or upgrade living situation? (Bad idea to upgrade right now)
2. Continue working part-time vs. increase hours vs. find better-paying work
3. How aggressively to pay down student loans vs. credit card vs. save for business
4. Whether to take on more student loans for junior/senior year
5. Start building an emergency fund beyond the $2,000 she has
6. Begin saving seed capital for the pet salon or wait until post-graduation

Question 2: Goal Structure

Short-term (within 1 year):

1. Eliminate credit card debt completely. At $540/month theoretical surplus, this should take 5 months if she stops creating new debt.
2. Build emergency fund to $3,000 (3-4 months of lean expenses)
3. Track actual spending for 90 days to find the leak between income and debt accumulation

Intermediate (1-5 years):

1. Graduate debt-free or minimize additional student loans
2. Save $10,000-15,000 seed capital for pet salon startup
3. Gain advanced grooming certifications and business management skills
4. Research and validate pet salon business model (market demand, competition, startup costs, revenue projections)

Long-term (5+ years):

1. Launch profitable pet salon business
2. Build business to sustainable income exceeding current employment
3. Establish retirement savings (Roth IRA, given her low current tax bracket)
4. Own business assets and potentially real estate

Question 3: Time Value of Money Calculations

Critical calculations:

1. Credit card payoff scenarios: Compare minimum payments vs. aggressive payoff. Show her the total interest cost of carrying that $2,400 at 20% APR for years vs. months.
2. Student loan analysis: Calculate total interest over 10-year standard repayment vs. accelerated payoff. Decide if extra payments make sense vs. investing in business.
3. Business startup capital: If she saves $500/month for 2-3 years, what lump sum does she have? What return does she need from the business to justify opportunity cost of not investing elsewhere?
4. Retirement savings: Show compound growth of starting a Roth IRA at 21 vs. waiting until 30. Even $100/month makes a massive difference.
5. Emergency fund opportunity cost: Holding $3,000 liquid vs. investing it. Quantify the insurance value of having $3,000 liquid for emergencies. How much is that peace of mind worth?