# Kyle and Linda are married with two children at home and a mortgage. Kyle's net pay per year is \$32,000 and Linda's is \$48,000. Their monthly expenses are \$3,500.

Kyle and Linda are married with two children at home and a mortgage. Kyle’s net pay per year is \$32,000 and Linda’s is \$48,000. Their monthly expenses are \$3,500.

Kyle and Linda each contribute 15% of their earnings to a retirement fund and they have \$5,000 in savings. They also have a \$100,000 life insurance policy on Kyle, but none on Linda.

As their financial advisor, what part of Kyle and Linda’s financial plan would you encourage them to work on and why?

a. Their plan for managing income. Their net cash flow is negative.

b. Their plan for managing their liquidity. They are not prepared for emergencies.

c. Their plan for retirement. They don’t contribute enough to meet their long term goals.

d. Their plan for protecting their assets. They should have life insurance on Linda.

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### 1 Answer

1. As their financial advisor, I would encourage them to work on:

b. Their plan for managing their liquidity. They are not prepared for emergencies.

Here’s why:

1. Net Cash Flow Analysis:
• Kyle’s annual net pay: \$32,000
• Linda’s annual net pay: \$48,000
• Combined annual net pay: \$80,000
• Monthly combined net pay: \$80,000 / 12 = \$6,666.67
• Monthly expenses: \$3,500
• Retirement contributions: 15% of \$80,000 = \$12,000 annually or \$1,000 monthly

Net cash flow: \$6,666.67 – \$3,500 – \$1,000 = \$2,166.67 positive monthly net cash flow.

2. Emergency Fund:
• They have only \$5,000 in savings.
• Given their monthly expenses of \$3,500, their savings would cover less than two months of expenses, which is not sufficient for emergencies.
3. Retirement Contributions:
• They contribute 15% of their income to retirement, which is a reasonable amount.
4. Life Insurance:
• While it is advisable to have life insurance on Linda as well, the immediate concern is their lack of liquidity.

Given their positive net cash flow, they should focus on building a more substantial emergency fund to ensure they are better prepared for any unexpected financial setbacks.