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Suppose that your family has a combined annual income of $54,000 after taxes. You have saved enough money to put a $40,000 down payment on a house. Now you must decide what kind of lifestyle you will have.
Lifestyle 1: You buy a $300,000 home. Your monthly expenses (other than your mortgage payment) are $2,600.
Lifestyle 2: You buy a $200,000 home. Your monthly expenses (other than your mortgage payment) are $1,700. After 15 years, you sell this home and buy a $300,000 home.
Assume, regardless of lifestyle, the following will remain true:
- The interest rate on the home loan is 8% compounded monthly.
- All extra income received will be used to pay off the home loan. Once that has been accomplished, all extra income will be invested at 8% interest compounded monthly.
- After the home loan is paid, (for lifestyle 2, both home loans) if financial independence is achieved, you will work five additional years and then retire.
Note: In order to make this problem solvable, many of the real world factors have been simplified. Instead of a steady increase in both income and expenses, we assume both stay constant. We also assume that the home's appreciation rate will not differ from the inflation rate enough to substantially influence our scenario. Assume that property tax and insurance is included in monthly expenses. Ignore all closing costs.
- Figure out for each lifestyle when financial independence occurs, and how much is saved at the end of thirty years. Use the five steps given in class. Show all the work done in each step.
- Draw a thirty year timeline for each lifestyle. You will want to include events such as satisfaction of the home loan, the cross-over point (financial independence), and the amount saved at the end of the thirty years.
- Give a conclusion based on your results. How does the future look in each case at the end of the thirty years? Which lifestyle would you choose and why?