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Case Study

 

Background

 

Client Bob E.
Age 46
Occupation Computer Programmer
Family Status Married, 3 Children - Ages 12, 15 and 17
Income $100,000
Mortgage $480,000 - Home Value: $700K, $4,150 a month payment
Retirement Savings $400,000
Annual Tax Refund $0 - Owes
Total Other Debts $52,000

 

Goals

Needs $20,000 - $30,000 additional cash flow per year for the next 10 years. Bob wants to send his children to $35,000 / year higher-end public schools.

 

 

Basic Lifestyle Total Monthly Payment
Home Value $700,000 N/A
Mortgage Balance $480,000 $4,150
Home Equity Value $220,000 N/A
401(k) Balance $400,000 $1,500
Savings/Checking $5,000 $0
529 College Savings $100,000 $0
Children's Savings $25,000 $200
Annual State Tax Refund $6,000 $500
Credit Cards Balance $34,000 $340
Auto Loan $18,000 $500
MONTHLY CASH OUTFLOW   $7,190

 

After we recommended him to do a few adjustments 

 

Basic Lifestyle Value Monthly Payment New Monthly Pmt Incr in Cash Flow
Home Value $700,000      
*Mortgage Balance $560,000 $4.150 $3,667 $483
*Equity in Home $140,000      
*401(k) $400,000 $1,500 $333 $1,167
*Incr in tax for lower 401k contribution   $0 $239 -$239
*Savings/Checking $30,000 $0 $0 $0
*529 College Savings $0 $0 $0 $0
*Children's Savings $0 $200 $0 $200
*Annual State Tax Refund $0 $500 $0 $500
Credit Cards Balance $0 $340 $0 $340
Auto Loan $0 $500 $0 $500
MONTHLY CASH OUTFLOW   $7,190 $4,239 $2,951

*Potential impact on FAFSA/CSS PROFILE

 

Increase in Cash Flow $35,412 per Year

 

 

Our Strategy to Reduce the EFC

  1. Reallocating student’s savings reduces EFC by $3,370
  2. Protecting the 529 money reduces EFC by $5,640
  3. Eliminating State tax refund reduces EFC by $3,070
  4. Rationalizing 401(k) contribution reduces EFC by $1,350

 

 

Increase in Potential Financial Aid

 

                             1 Student in College                     2 Students in College

Original EFC:              $37,491                                                $21,965

New EFC:                    $24,059                                                $12,749

Difference:                 $13,432                                                $  9,216

 

 

The Opportunity Cost

 

Original Cost of College:          $35,000 ($420,000 spread over 10 years)

New Cost of College:                $20,289 ($243,468 spread over 10 years)

3 Children over 10 years would cost Bob an additional $176,532 if he made no changes, plus his student loans amounts could increase by an additional $354,120 due to his decreased cash flow during the college years if he doesn't make any of the recommended changes.

 

Total Cost of Doing Nothing: $530,652

 

 

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