How to save money
CRITICAL THINKING CASES
2.1 The Lawrences’ Version of Financial Planning
Rob and Lisa Lawrence are a married couple in their mid-20s. Rob has a good start as an electrical engineer and Lisa works as a sales representative. Since their marriage four years ago, Rob and Lisa have been living comfortably. Their income has exceeded their expenses, and they have accumulated an enviable net worth. This includes $10,000 that they have built up in savings and investments. Because their income has always been more than enough for them to have the lifestyle they desire, the Lawrences have done no financial planning.
Lisa has just learned that she’s two months pregnant. She’s concerned about how they’ll make ends meet if she quits work after their child is born. Each time she and Rob discuss the matter, he tells her not to worry because “we’ve always managed to pay our bills on time.” Lisa can’t understand his attitude because her income will be completely eliminated. To convince Lisa that there’s no need for concern, Rob points out that their expenses last year, but for the common stock purchase, were about equal to his take-home pay. With an anticipated promotion and an expected 10 percent pay raise, his income next year should exceed this amount. Rob also points out that they can reduce luxuries (trips, recreation, and entertainment) and can always draw down their savings or sell some of their stock if they get in a bind. When Lisa asks about the long-run implications for their finances, Rob says there will be “no problems” because his boss has assured him that he has a bright future with the engineering firm. Rob also emphasizes that Lisa can go back to work in a few years if necessary.
Despite Rob’s arguments, Lisa feels that they should carefully examine their financial condition in order to do some serious planning. She has gathered the following financial information for the year ending December 31, 2015:
Salaries
Take-home Pay
Gross Salary
Rob
$52,500
2.1 The Lawrences’ Version of Financial Planning
Rob and Lisa Lawrence are a married couple in their mid-20s. Rob has a good start as an electrical engineer and Lisa works as a sales representative. Since their marriage four years ago, Rob and Lisa have been living comfortably. Their income has exceeded their expenses, and they have accumulated an enviable net worth. This includes $10,000 that they have built up in savings and investments. Because their income has always been more than enough for them to have the lifestyle they desire, the Lawrences have done no financial planning.
Lisa has just learned that she’s two months pregnant. She’s concerned about how they’ll make ends meet if she quits work after their child is born. Each time she and Rob discuss the matter, he tells her not to worry because “we’ve always managed to pay our bills on time.” Lisa can’t understand his attitude because her income will be completely eliminated. To convince Lisa that there’s no need for concern, Rob points out that their expenses last year, but for the common stock purchase, were about equal to his take-home pay. With an anticipated promotion and an expected 10 percent pay raise, his income next year should exceed this amount. Rob also points out that they can reduce luxuries (trips, recreation, and entertainment) and can always draw down their savings or sell some of their stock if they get in a bind. When Lisa asks about the long-run implications for their finances, Rob says there will be “no problems” because his boss has assured him that he has a bright future with the engineering firm. Rob also emphasizes that Lisa can go back to work in a few years if necessary.
Despite Rob’s arguments, Lisa feels that they should carefully examine their financial condition in order to do some serious planning. She has gathered the following financial information for the year ending December 31, 2015:
Salaries
Take-home Pay
Gross Salary
Rob
$52,500