# Week 3 Problem Set - Personal Financial Planning

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Personal Financial Planning Problem Set 3 1. Louise McIntyre’s monthly gross income is \$2,000. Her employer withholds \$400 in federal state, and local income taxes and \$160 in Social Security taxes per month. Louise contributes \$80 per month for her IRA. Her monthly credit payments for VISA, MasterCard, and Discover card are \$35, \$30 and \$20, respectively. Her monthly payment on an automotive loan is \$285. What is Louise’s debt payments-to-income ratio? Is Louise living within her means? Louise’s gross income monthly is \$2,000. Louise’s net monthly take home pay is \$1,360. Louise pays \$370/month on her credit card bills. The \$370 spent on credit card payments every month out of the monthly total take home pay of \$1,360 is 27.2%. The recommended debt to income ratio is 20% so YES Louise is living above her means. 2. Calculating Debt Payments – to – Income Ratio. Suppose that your monthly net income is \$2,400. Your monthly debt payments include your student loan payment, a gas credit card and they total \$360. What is your debt payment -to- income ratio? Monthly net income - \$2,400. Total monthly debt payments- \$360. Debt payment to income ratio - \$360 / \$2,400 = 0.15 or 15%. 3. Dave borrowed \$500 for one year and paid \$50 in interest. The bank charged him \$5 service charge. A- What is the finance charge on this loan? \$50 + \$5 = \$55 B- Dave borrowed \$500 on January 1, 2006 &amp; paid it all back at once on Dec 31, 2006. What was the APR? \$55 on \$500 or 11% APR C- If Dave paid the \$500 in 12 equal monthly payments, what is the APR? 20.3% 4. Calculating Simple Interest on a Loan. Damon convinced his aunt to lend him \$2,000 to purchase a plasma digital TV. She has agreed to charge only 6% simple interest, and he agreed to repay the loan at the end of one year. How much interest will be pay for the year? \$2,000 x .06 x 1 = \$120