PERSONAL FINANCE PAPER
PERSONAL FINANCE PAPER
John Smith is 32 years old; he is Mechanic Engineer from the University of Cornell. He has a wife and two children. He is working in full time in an automotive Shop in Albany, New York. He lives with his family in Lakeland, Florida. He works 160 hours a week in the shop receiving 5000 USD per month. His aspiration is to work in the automotive sector specifically in an automotive factory or a car accessory manufacturer. He wants to be economically free before his 50 years. He defines economically to have a passive income higher than his monthly expenses. In the intermediate term, he wants to work independently or in an own company without the dependence of a monthly paycheck.
■ Increase active and passive income each year.
■ Protect assets and reduce tax payments with a corporation.
■ Determine a budget structure.
■ Accumulate assets that generate income and reduce assets that generate expenses.
Increase active and passive income each year:
He has a job with an annual income of 60,000 dollars currently. The net income after taxes and deductions is 44,400 dollars. Almost 26% of his income is not available for John, and only 74% of his income is available to spend and to use. John tries to save money, but he is only able to save 2.15% of the total income for saving. John must avoid buying a new house or a new car because those assets will generate a monthly expense and liability that will reduce the capacity of John to generate new cash flow. John will need to acquire assets that can generate cash flow as equipment to lease, real estate or land.
Protect assets and reduce tax payments with a corporation:
The use of a corporation for income and expenses purposes gives several benefits to John. The most important are the tax benefit that has all the corporations over the individuals which are the revenue calculation. For the companies, the basic calculation for the revenue is the difference between income and outcome, in the case for individuals the revenues is almost the same value of the income giving to the corporations an advantage over the individuals. Although the use of the corporation to buy, assets could give benefits to the corporation to borrow money .
Determine an expenses budget structure:
John needs to determine a budget structure for himself and his future family. The assignation of percentages per item depends on of the consumption pattern of each and family. The Table 1 is the expense budget structure of the Smith Family.
Assets accumulation: The Smith Family must that allow them to increase the cash flow and achieve in the future the economic independence where the inflows are higher than the outcomes. Currently, the family has a free cash flow ( the difference between inflows and outflows) of 79.50 USD per month or 954.00 USD per year. The recommended assets that the family must acquire are:
■ Real estate assets to re-sell or lend.
■ Machinery and equipment
■ Food to sell
■ Business, metals, and other values
The free cash flow must be used to acquire new assets that increase the assets in the balance sheet and a positive cash flow.
Monthly and yearly Budget:
The Smith family has a gross income per year of 60,000 with a total tax percentage of 26%. The expenses of the family are divided in fourteen items (Table 1). The detail of the budget is the following:
Gross Income: 5,000 USD per month; 60,000 USD per year
Total tax percentage: 26%.
Total tax payment per year: 15,600
Analysis of budget:
The ABC of the expenses budget of the Smith Family is the mortgage payment, transportation, and student payment loan (Image 1). The mortgage payment is thanks to the recent purchase of a house for the family with a value in books of 170,000 USD and a mortgage of 30 years and an interest rate of 8.5%. The family decided to buy a house because the plan to live in the long term in Lakeland City and the monthly payments is less than 30% of the total cash inflow of the family. It is affordable for the family to pay for this house. The second most important expense is the transportation; they have two cars which require paying the loans for the two cars, insurance, gas fill and maintenance. The transportation costs are possible to reduce them selling the cars and using public transportation. The third most important cost is the student payment loan; this is the loan that John has to pay for his studies at the University of Cornell.
Image 1: Budget Pie.
Balance statement:
The family has the following balance sheet currently:
Tax payment calculation
According to the Internal Revenue Service, the legal entities in the country, individuals and corporations are subject to pay taxes to the different levels of government and the Social Security obligations. The Smith Family are subject to the following taxes and fees:
Federal government: 14%
Social security: 6.20%
Medicare: 1.45%
With a gross income per year of 60,000, the tax calculation is:
The family must pay 15,600.00 USD in taxes or 26,00% of the total income per year.
Conclusion
The Smith Family has positive cash flow per year, but not enough to build an emergency fund or make an investment with their money. The opportunity for the family to improve their positive cash flow in the short term is to reduce the budget in transportation selling the cars and using the public transportation. In the medium term, the family must work on a plan to create a corporation for entrepreneurship and taxes purposes. Corporations have better conditions than the individuals in the tax revenues calculations and payments. The family must educate themselves on financial issues to have the skills to take better financial decisions for their future.
Reference List
Sahadi, J. (14 August 2014). 7 things you absolutely must know about corporate taxes. Retrieved 20 April 2016, from CNN Money: http://money.cnn.com/2014/08/14/news/economy/corporate-taxes-inversion/
