Now that we’re halfway through the year, it’s a good time to recap some of our past lessons. One of the best ways to learn about money is through practice, so rather than reading about what we already learned, why not use an example from someone else? Take a look at the following case study, and then answer the questions to see how you do!
Hope wants to buy a condo for $150,000 because she wants to put down roots and invest her money in something that could grow over time. She has saved enough for a 10% down payment, or $15,000. She also has $10,000 in savings for an emergency fund, along with $3,000 in her retirement fund, to which she contributes 4% every paycheck to take advantage of full company matching. Her job brings in a steady salary of $1,900 per month (after-tax). Her current expenses amount to $1,400 per month, of which $900 goes towards rent. If she purchases a condo, her mortgage, homeowner’s insurance, and property tax would total roughly the same as rent. Luckily, she has no debt, outside of a credit card that she pays off monthly. She doesn’t mind taking public transportation, but is considering a car purchase in the next two years. Can Hope buy a condo?
(Note: Correct answers appear in green when clicked, and incorrect answers appear in red.)
What is Hope’s net worth?
Correct! Net worth is assets minus liabilities, meaning $15,000 down payment+$10,000 emergency fund+$3,000 retirement fund-$0 debt=$28,000. Hope’s personal assets, things like computers or furniture, may add a little more value, but they probably won’t tip the scale significantly.
What is Hope’s cash flow?
Correct! Cash flow equals income minus expenses, so $1,900 income-$1,400 expenses=$500 leftover cash flow.
Is Hope ready to buy a condo?
No, she doesn’t make enough money to support her expenses.
Since Hope has positive cash flow, and her expenses would not increase much with a condo purchase, she can afford to buy a home after all.
Yes, do it girl!
Hope is ready, given her monthly house payment would be roughly the same as current rent payments, and she still has money leftover each month.
In addition to a condo, can Hope also fulfill her wish to purchase a car in the next 2 years?
Correct! Hope is being responsible in waiting a while after her condo purchase to put another chunk of money into a big purchase. She may also have other expenses, for instance monthly HOA dues, that we need to factor into Hope’s expenses before deciding if she can afford monthly car expenses too.
Hope might be able to save more in the next 2 years to allow for a car purchase. She also has positive cash flow, allowing her to add a monthly car payment. However, she should be cautious to allow room for other auto expenses (car insurance, parking, gas, maintenance).
Hope seems to be on solid financial footing, but what might be missing?
Nothing, she is doing just fine.
More savings, especially for retirement.
Correct! Hope has positive cash flow and no debt, which is outstanding, but where is that leftover money going towards? Will she have enough for future purchases or goals? Will she be able to retire at a reasonable age, given her current savings rate?
How did you do? Did you enjoy this case study? Leave your comments below!
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Published by Alice Tong
Alice Tong is founder of Ace Academy, dedicated to teaching financial independence through basic principles of money. Her mission is to spread financial literacy to everyone, particularly children, in hopes that they grow up to become financially responsible adults and lead us into a brighter future.
View all posts by Alice Tong