Planning for Wedding and First Home You have just met with your newest clients,
ID: 2814858 • Letter: P
Question
Planning for Wedding and First Home
You have just met with your newest clients, Dave Groom and Alica Bride. The recently engaged couple is getting married in two years and is planning to purchase a four-bedroom home in Clarks Summit, PA in five years.
Currently, John and Mary have no money saved, and expect no monetary assistance from their families. They would like to have a wedding reception for 200 guests, and they would like to spend a weeklong, all-inclusive honeymoon in Cancun, Mexico after the wedding. Dave and Alica also expect the following wedding expenses:
Wedding Dress
$1,100
Photographer
$3,000
DJ
$500
Cake
$300
Limousine
$300
Dress Rehearsal
$800
The future Mr. & Mrs. Groom have asked you to help them save for their wedding and first home. Thus, your task is to create a financial plan for this couple, which should include the following parts:
a)Introduction of Goals and Objectives
b)Discussion of Assumptions
c)Calculations and Recommendations
Within your Calculations and Recommendations, be sure to address:
1) What types of investments do you recommend and why? Specifically, what percentage of their savings should be assigned to each investment type? Should these allocation amounts change over time? Explain.
2) Using local data from several sources, estimate the cost of the wedding reception and of the honeymoon to Cancun. What is the total cost of the wedding and honeymoon? How much will the couple need to save each month in order to raise this amount?
3) Using real data, estimate the cost of a home. After the wedding, how much will they have to save each month in order to raise enough funds to make a 20% down payment?
Additional Information:
Expected Inflation Rate 3%
Expected Return on CDs 4%
Expected Return on T-Bonds 5%
Expected Return on Corporate Bonds 6%
Expected Return on Stocks 10%
Wedding Dress
$1,100
Photographer
$3,000
DJ
$500
Cake
$300
Limousine
$300
Dress Rehearsal
$800
Explanation / Answer
Answer 1:
Since the inflation rate is 3%, therefore the present value of wedding items cost will be increased after 2 years. The following table will show the expected future value of all the items:
The future value is calculated by using excel formula: FV(rate,nper,pmt,PV)
Financial Planning: The monthly investment of each item in the following investment type. We have calculated the monthly investment by using PMT formula in excel: PMT(rate,nper,PV,FV)
If the Mr. Groom can fulfill his goal by investing everymonth in any of the above investment type.
In the stock, the monthly investment amount is = 240.69
In the Corporate Bond, the monthly investment amount is = 250.29
In the T-bill, the monthly investment amount is = 252.74
In the CDs, the monthly investment amount is = 255.20
The risk associated with the above investment:
Based on the priority of the goal and the risk taking capacity, the allocation amount should be changed over time. Because all the investment type depens on the market expectation. Therefore, every time based on market risk profile, the investment type should also be changed.
Items present value inflation rate period future value Wedding dress 1100 3% 2 1166.99 Cake 300 3% 2 318.27 Photographer 3000 3% 2 3182.70 Limousine 300 3% 2 318.27 Dj 500 3% 2 530.45 Dress Rehearsal 800 3% 2 848.72