Life sure has changed since you graduated from college ten years ago. Married with children, a couple of raises at work, and you are living in a nice starter house in the good part of town! Below are three scenarios to take a further look at your current financial situation.
You will submit the completed Word document. Please use the same document for all three parts, separated by appropriate headings.
Along with all the good news of your personal achievements, also comes a bit of bad news. As you reviewed your budget, you realized that you have amassed a fair amount of credit card debt. You and your spouse want to calculate how much you would have to pay each month in order to pay off each credit card in two years. You are utilizing a time method of payment instead of paying the minimum, since paying the minimum on your credit cards won’t make much of an impact on that debt.
Most credit cards have compounded interest (typically daily) which means that each day the interest rolls is added to the total and the next day you are charged interest on it as well. This goes on and on, which is why paying the minimum won’t help.
If you have credit card debt, some online calculators can accurately calculate how quickly you can pay off a credit card while taking the compounded interest into account. For this scenario, we will simply use an annual rate.
In the provided Word document, answer the following questions:
- You have a balance of $3,800 on your retail charge card. If the store levies a finance charge of 21 percent per year, how much monthly interest will be added to your account?
- What steps would you take to get back on track to a life free of delinquent credit card bills? Explain at least three steps.
You and your spouse also would like to save more. You currently earn $3,250 per month after taxes. You begin reviewing your savings strategies and current banking arrangements to determine if you should make any changes.
You have a regular checking account that charges a flat fee per month, write an average of 18 checks a month, and carry an average balance of $795 (although it has fallen below $750 during 3 months of the past year). Your only other account is a money market deposit account with a balance of $4,250. You try to make regular monthly deposits of $50â$100 into the money market account but only about every other month.
Of the many checking accounts your bank offers, here are the three that best suit your needs.
- Regular checking, per-item plan: Service charge of $3 per month plus 35 cents per check.
- Regular checking, flat-fee plan (the one you currently have): Monthly fee of $7 regardless of how many checks written. With either of these regular checking accounts, you can avoid any charges by keeping a minimum daily balance of $750.
- Interest checking: Monthly service charge of $7; interest of 3 percent, compounded daily. With a minimum balance of $1,500, the monthly charge is waived.
Your bank also offers CDs for a minimum deposit of $500; the current annual interest rates are 3.5 percent for 6 months, 3.75 percent for 1 year, and 4 percent for 2 years.
In the same Word document, answer the following questions:
- Calculate the annual cost of each of the three accounts, assuming that your banking habits remain the same. Which plan would you choose and why? Be sure to calculate the effective rate for the 3% interest compounded daily.
- What other considerations should you take into account when assessing your checking account and savings strategy?
For the past four months, you have been thinking about buying a Subaru Outback, but you feel that you can’t afford a brand-new one. Recently, however, your friend Martin has offered to sell you his fully loaded Subaru Outback 3.6R. Martin wants $26,900 for his Outback, which has been driven only 8,000 miles and is in very good condition. You are eager to buy the vehicle but have only $10,000 in your savings account at Central Bank. You expect to net $8,000 from the sale of your Chevrolet Malibu, but this will still leave you about $8,900 short. You are considering a loan from First Nation Bank of Arlington for obtaining the money:
Borrow $8,900 from the First National Bank of Arlington at a fixed rate of 6 percent per annum, simple interest. The loan would be repaid in equal monthly installments over a three-year (36-month) period.
In the same Word document, answer the following questions for this scenario:
- Determine the required monthly payments if the loan is taken out at First National Bank of Arlington.
- Compute (a) the finance charges and (b) the APR on the loan offered by First National Bank of Arlington. Show your calculations.
- What can you do to minimize the finance charges? Give at least three examples and how they work.