Williams took action by creating a budget and downsizing her lifestyle. Her brother pulled her house out of foreclosure by purchasing it, and Williams rented two rooms from him to share with her son. Employed as a title coordinator, she paid her bills faithfully and also used tax refunds, raises, or any windfalls to chip away at her debt. By 2008, after six years, her entire debt was paid off.

Today, Williams is leasing a house with the option to buy. She’s also pursuing a bachelor’s degree in finance at Wayne State University. Two grants cover just about her entire tuition. She teaches financial literacy classes in her community, sometimes without charging. She’s come a long way. “I learned to delay gratification and stopped using credit cards for a quick fix,” Williams says. “I use cash for everything now.”

It’s a New Year and time to make good on promises to order your finances. Here’s a guide to help you dig your way out of three common debts: credit cards, student loans, and taxes.

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CREDIT CARDS
Develop a game plan. Look at your statements, which show how much you need to contribute monthly to pay off the bill in three years or less. Use this payment schedule as a guide and pay the amount needed above the minimum on each card in order to reach or accelerate that goal. Apply any extra money toward the card with the highest interest rate. Once you’ve paid it off, apply that payment amount toward the card with the next highest interest rate, and continue until all the cards are paid. “Can you pay what’s required to get rid of the bill in three years for each of them? If not, get help,” says Gerri Detweiler, personal finance expert at Credit.com.

Contact your creditors if you’re in trouble. Once you realize you will have difficulty paying, tell your creditors. “Some creditors—for example, Bank of America—are coming up with hardship programs that reduce interest to as low as 0% for a period of time,” says Detweiler. You can ask any major credit card company if it has such a program, although you may need to meet certain eligibility criteria. Let them know what you can pay monthly and see what can be worked out.

Whatever you do, don’t skip payments. Skipping payments or paying 30 days after the due date can lower your credit score by 30 to 50 points.

Contact a nonprofit credit counseling agency. Start with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. A credit counselor will review your debt and budget, and assess what you can afford to pay back. You may be advised about enrolling in a debt management plan. Generally, the goal of these programs is to have you debt free in five years or less. You make payments to the agency and it pays your creditors. The fee is usually $50 or less to set up the program and then you’re charged about $25 monthly. In a case of financial hardship, fees may be waived.

Don’t raid your retirement fund. “Generally, your retirement money is not touched by creditors if you’re in a crisis,” says Detweiler. Debt settlement should be your last option, she adds. Recent changes in the law require for-profit debt settlement

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companies that offer their services via phone to disclose fees and estimate how long it will take to resolve a case, and the companies can no longer charge up-front fees. “If anyone asks for money up front, go elsewhere, because they aren’t following the rules,” says Detweiler. If your debt is forgiven through settlement, be aware that you may need to pay taxes on the forgiven amount.

STUDENT LOANS
Know your options. Today’s typical college grad leaves campus with more than $27,000 in student loan debt, and that figure has risen about 6% annually over the past five years, says Lynnette Khalfani-Cox, author of Zero Debt for College Grads (Kaplan Publishing; $14.95). Loan forgiveness programs can help. For example, those employed by a federal agency can make use of the federal student loan repayment program. Through the program, any federal agency a graduate works for can pay off up to $10,000 annually in federal student loans, up to a maximum of $60,000. For more information, visit www.opm.gov.

If you’ve fallen on hard times, speak up. If your federal loan is in default, filing a statement of financial status with the U.S. Department of Education may reduce your monthly payment. “You can also get forbearance if you’re unemployed,” Khalfani-Cox adds. You will still be charged interest, however. In addition, there are several payment options (among them, standard, extended, graduated, and income sensitive). With the income-sensitive and extended payment plans, for example, you can pay as little as $25 a month for up to 30 years. To learn how these options work, go to www.finaid.org/calculators. Khalfani-Cox advises paying what you can afford. “With federal regulations and reform, starting in 2014, new borrowers who pay their loans on time can have their remaining balances forgiven after 20 years.” Those who work for certain nonprofit, tax exempt, 501(c)(3) organizations can have their loans forgiven after 10 years.

Consider consolidation. As long as your loans are not delinquent or in collection, you can consolidate them into one new consolidated loan. To find out if you qualify, contact the Federal Direct Consolidation Loans Information Center. If you’ve already defaulted, you must bring your loans out of default by making three monthly payments on time in any amount you and the lender agree to. Read about the pros and cons of a consolidated loan at FinAid.org. Be aware that consolidating a defaulted loan does not remove the default from your credit report.

Take steps toward rehabilitation. To rehabilitate a defaulted federal student loan, contact the loan holder. If you don’t know which organization holds your loan, call the Federal Student Aid Information Center at 1-800-433-3243. Be prepared to make nine consecutive payments in the amount you and the loan holder agree to. Loan rehabilitation removes the default from one’s credit report; though, of course, it’s better to avoid defaulting in the first place. Khalfani-Cox estimates that nine

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months or more of late student loan payments will result in a credit score drop of 100 points, if not more. “Student loans can only rarely be written off in bankruptcy,” she adds, “but they can be [paid off and then] eliminated via loan forgiveness programs, service-based work, or if you become disabled.”

BACK TAXES
There are two things you’re guaranteed to face in life, the old saying goes: death and taxes. There isn’t much you can do about the Grim Reaper, but like most debts, a bill with the Internal Revenue Service can be negotiated.

Make a request. You can request an installment agreement using Form 9465 for a fee of $105, or $52 if using electronic funds withdrawal, or $43 if you meet certain income requirements. Even if the IRS doesn’t determine that you’re eligible for the lower fee, you can still request it using Form 13844. You’re guaranteed an installment agreement if you owe $10,000 or less, you’ve filed all returns on time for the past five years, and you agree to pay off the amount owed within three years, says Jean Wells, a certified public accountant, lawyer, and assistant professor at Howard University School of Business. If you owe between $10,000 and $25,000, you’ve filed all returns on time in the last five years, and you agree to pay off what you owe within five years, you can get a streamlined (meaning a financial statement isn’t required) installment agreement, but it isn’t guaranteed. Be aware that any installment plan will include hefty penalty and interest charges that will add substantially to what you already owe.

Make an offer. If you can’t pay the entire bill, even over time, you still have options. You can make an offer in compromise using Form 656, which like an installment agreement will require that you pay a fee ($150) for the privilege. “Without some extraordinary circumstance, an offer will not be accepted if the IRS believes that the liability can be paid in a lump sum or in installments,” warns Wells. You may need to send financial records in order for the IRS to determine if you can pay less than you owe. When dealing with Uncle Sam, it’s smart to have backup like a CPA, lawyer, or enrolled agent. An offer in compromise doesn’t have to be submitted by a tax professional, but it’s probably wise to consult one.

Know your rights. If there’s an exceptional circumstance and you can prove to the IRS that collecting the tax would create an economic hardship or would be unfair and inequitable (for example, you have a sick child that requires expensive and prolonged medical care and providing that care is what you spend most of your money on), you might have your back taxes forgiven. You can also request an abatement of interest and penalties in certain circumstances by submitting Form 843.

Debt isn’t created overnight, and it won’t disappear quickly. Acknowledge the problem, find solutions, and implement them. A thoughtful, step-by-step debt management plan can put you back in the black, and disciplined habits will keep you there.

Whether you’re single, married, divorced, or widowed, it’s vital to do a financial checkup regularly. Dr. Hughan Frederick and his wife, Nekeidra Frederick, understand the importance of staying on top of their finances. With two young sons—Hughan, age 3, and Caelen, age 18 months—the Fredericks know it’s important for them to keep track of every dollar they earn, spend, and save. “Doing a financial checkup pays off,” says Hughan, an obstetrician and gynecologist who has opened his own practice, Isis OB/GYN, in Alpharetta, Georgia. “We know where our money goes. We can account for it.”

Hughan and Nekeidra, ages 37 and 35, respectively, talk frequently with their financial planner, with whom they meet in person annually. They also meet with each other quarterly to discuss their budget and major purchases, and to set financial goals. “This economy has been a reminder that nothing is guaranteed,” says Nekeidra, who owns a public relations consulting business, Gunner Marketing Group. “We buy what we need instead of everything we want. We also review our finances to ensure that we are meeting our goals.” One of their goals is to make sure their sons are taken care of in the event that one or both of them should die. The couple has drafted wills and set up a 529 college savings plan for each child. They’re also vigilant about managing their credit, making sure to check their credit reports quarterly and pay off balances in full each month. During their annual financial checkup, the Fredericks make sure they’re on target with college savings, retirement, and insurance needs. They pay specific attention to whether they’re saving enough for college, whether their retirement accounts are properly diversified, and whether their insurance is adequate for their current stage in life.

Here are some guidelines to help you conduct your own financial checkup.

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CREDIT
Order your credit reports. Before you can conduct a credit checkup, you’ll need to order credit reports from each of the three major credit reporting agencies (Equifax, Experian, and TransUnion). You’ll be charged less than $20 for each report. Each year, you can order one free report from each bureau by visiting AnnualCreditReport.com (www.annualcredit report.com), so you can monitor your credit at no cost by ordering a report from one of the bureaus every four months. But for this end-of-year checkup,  it’s best to have all three reports. Adam Levin, chairman and founder of Credit.com, a consumer advocacy site, suggests that you ask yourself the following as you conduct your review: Am I keeping balances on my credit cards reasonable? Am I making payments on time?  Also be sure to check for errors. To correct any mistakes, write to the credit bureau and enclose copies—never originals—of any supporting documents, and ask for a correction or deletion.

Purchase your credit score. You can obtain your credit score for less than $20 from MyFICO.com. Many credit scores are available, and some lenders use their own scores, but the FICO score is the one most widely used by bankers and lenders. What’s a good score? John Ulzheimer, president of consumer education at Credit.com, says 700 used to be an excellent score, but it’s now considered average. “An elite score is now 750 or higher,” he says.

Monitor your credit utilization. Your credit utilization ratio makes up 30% of your FICO score. This ratio measures how much credit you’re using of the credit you have available. It’s best to use less than 10% of your available credit. Ulzheimer says, “Those with FICO scores of 760 or higher use just 7% of their available credit.” Having a lot of credit cards isn’t an issue, but using more than 10% of your available credit is. Once you have your credit report in hand, determine how much outstanding debt you have. Resolve to pay down as much of it as you can, because using too much of your available credit—even if you pay your bills on time—will lower your credit score. Most financial experts do not recommend closing credit card accounts, however.

Identify and change bad habits. All poor scores are not created equal. You could be missing payments, running up large credit card debts, applying for too many retail store cards, or all of the above. “Identify what you’re doing wrong and stop doing it,” says Levin. “Only then will your scores get to where you’d like them to be.”

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TAXES
Keep track of deductions and credits. Now is the time to prepare for filing your 2010 tax return. Because 2011 tax rates are expected to revert to pre-2001 rates, William Perez, an enrolled agent with Perez Tax Associates in San Francisco, advises planning this year’s taxes with an eye toward what may be higher tax rates in 2011. “You may want to accelerate income into 2010 to lock in a known tax rate now,” he says. “Similarly, you may want to defer any tax deductions until 2011, so they will offset next year’s income at presumably higher rates.” As this is likely the last year for energy-related tax credits, consider buying, if needed, energy-efficient appliances, or upgrading windows and doors, or making other energy saving moves, he advises. Life changes like getting married or having a baby can affect your taxes as well. Business owners or freelancers should also take into account any business-related expenses they can deduct.

Pay attention to changes in tax law.  If you’ve been preparing your own taxes you might want some help this year and next. “Some states are increasing tax rates for 2010 or reducing deductions,” says Perez, citing New York, New Jersey, Connecticut, and California. Many federal tax breaks and credits will expire this year. The top marginal income tax rate (for those with incomes above $200,000, or for married couples earning more than $250,000) is expected to revert from 35% to 39.6%; the top capital gains rate returns to 20% (affecting those same high earners); federal estate tax rates of up to 55% will return for net estates exceeding $1 million; and those in the 10% income bracket may go in to the 15%. More married couples may be affected by the so-called marriage penalty, in which some married taxpayers who file jointly may pay more in taxes than they would if they were single. Under the pre-2001 tax law, the penalty affected about 42% of couples, requiring them to pay an average of nearly $1,400 in additional taxes; however, about 51% received a tax bonus or a decrease in their tax bill, by an average of about $1,300.

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INSURANCE
Assess your needs. Are you properly protected? Do you have adequate life, health, home, car, and disability coverage? If you’re not sure how much life insurance you need, start by calculating what replacement income your family would need in the event of your death, says Michelle Oliver, president of the Oliver Financial Group, an independent insurance and financial services agency. Some financial planners recommend $1 million if you have minor children, but work with a fee-only planner to determine your family’s unique needs. To get an idea, use an online life insurance calculator like the one at Bankrate.com. As for what type to buy, weigh factors like affordability, your goals, your income, and your age. Most finance experts recommend term as the better option for most people. A 35-year-old nonsmoking man in very good health would pay around $60 a month for a $1 million, 20-year term policy, according to MetLife.

Don’t overpay. For example, if you purchase your own health insurance, make sure you’re not paying more than you need to for the coverage you actually use. According to eHealthInsurance.com, which sells health insurance online in all 50 states, the average monthly premium of policies it sold was $392 for families and $167 for individuals. (Premiums in New York and Massachusetts are much higher than the average.) Also, consider your utilization patterns over the past year. If you’re self-employed, you may be able to deduct health insurance premiums paid for yourself and your dependents as an “above the line” (without itemizing) business expense on your federal tax returns. Even if you’re not self-employed, if your qualifying medical expenses exceed 7.5% of your adjusted gross income, you may qualify to deduct expenses above that threshold. Before buying, discuss with a tax professional the tax implications of any health plan you’re considering.

Review existing insurance policies. Michael Kay, certified financial planner and president of Financial Focus L.L.C., offers a few questions for thought. Have you experienced any life changes that need to be reflected in your coverage, such as marriage, death, or birth? Are your health insurance deductibles too low? Can you lower your premiums by covering some risk yourself? Or, are your deductibles too high? They are if you don’t have the cash flow or savings to cover them. Also, don’t assume that employer-paid life insurance coverage is adequate; it typically equals just one year’s salary, hardly enough to keep your family going long term. Plus, if you lose your job you lose that life insurance. It’s a good idea to purchase your own policy and consider the employer-paid policy supplemental.

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ESTATE PLANNING
Start now. “As long as you’re not dead, there’s time to do estate planning,” says Lori Anne Douglass, a partner in the trusts and estates practice at the law firm of Moses & Singer in New York City. At a minimum, everyone should have a will and medical and financial directives in place. “Without a will, state law prevails,” says Douglass, and the state might not distribute your assets as you would like. What is most important: A will is the only place where parents of minor children can legally designate a guardian for them, Douglass notes.

Keep track of changes. The most significant news on the estate planning front is the expected rise in federal estate tax rates. Net estates that exceed $1 million in value may be taxed at the rate of 55%; only the first $1 million will be exempt. In 2009, the first $3.5 million was exempt. If the bar is lowered, many more people could be affected, says Douglass, who points out that $1 million isn’t hard to reach with real estate in the equation. “You need to know the federal and state laws and work with a lawyer who can help you plan for them,” says Douglass.

Take note of assets and changes. Identify assets that have increased significantly in value, and account for changes such as divorce or death that will affect your beneficiaries. Evaluate whether your estate documents are appropriate for where you are in your life now. If you expect to have assets valued at $1 million or more in 2011, have a financial professional do an estate tax analysis now to determine what your estate tax liability will be and to explore options for reducing or deferring it, advises Karen Lawrence-Webster, CPA, vice president and district manager with AXA Advisors.

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RETIREMENT PLANNING
Determine how much you’ll need. Generally, says Dawn Brown, a senior financial adviser with Altfest Personal Wealth Management, 10% of gross pay should be put aside for retirement, but much depends on your goals. Figure out an annual withdrawal rate of at least 4%, she adds, assuming a 60% equities and 40% fixed income portfolio. Don’t just guess how much you’ll need for retirement; tally your exact requirements annually using a retirement calculator such as the one at Bankrate.com.

Don’t underestimate your time horizon. You don’t want to risk running out of money during retirement. “Plan for a longer time horizon than your parents or grandparents,” says Barbara Walker-Green, personal wealth and retirement planning adviser with Advanced Wealth and Retirement Planning Concepts. Generally, the longer the time horizon for your investments, the more risk you’ll be able to take on. “Many people make the mistake of assuming too little risk because they focus on short-term volatility,” she says. “They may end up with portfolios that underperform and that keep them from reaching their goals.”

Maximize your employer-sponsored plan. Contribute at least the amount your employer will match. Make sure your portfolio is diversified among various types of investments and holdings and that the allocation fits your age, retirement goals, and time frame. Also, anticipate obstacles. “Think about significant changes that might occur in 2011, such as a child graduating, which may free up more cash. Or a teenager who will be driving and want a car, which may reduce how much you can save toward retirement,” advises Lisa Baskfield, a CPA and CEO of Baskfield and Associates CPAs.

SAVINGS
To keep your financial plan intact, you’ll need sufficient savings. Most financial planners recommend saving the equivalent of six to eight months of expenses. If you haven’t started building a cash cushion, now is the time. Make saving easier by having a set amount automatically deducted from your checking account regularly, or set up an automatic deposit into an online high-yield savings account from your paycheck. When an emergency occurs, this savings will keep you from maxing out your credit cards or raiding your 401(k).

Now that you know what to look for, start reviewing your finances. Conduct a thorough inventory, and commit to monitoring your progress as you go through 2011. By this time next year, you’ll be well on your way toward building wealth for you and your family.

–Additional reporting by Sheiresa Ngo

Last winter, Oklahoma City-based asset management firm FaithShares Advisors L.L.C. unveiled the first Christian exchange-traded funds (ETFs). These newly fashioned investment vehicles screen out companies that engage in businesses that Christians might find objectionable, such as alcohol, tobacco, and weaponry. They may also take into account a company’s treatment of its employees, its environmental policies, and corporate governance issues. “There’s a tug-of-war where investors want to make money but they want to avoid sin stocks,” says Thompson Phillips Jr., president of FaithShares. Simply put, a growing number of investors want to reap returns and make a difference.

FaithShares is hoping to attract investors who want to build wealth while remaining true to their denominational beliefs. The company hit the market in December with five ETFs: Baptist Values (FZB), Catholic Values (FCV), Christian Values (FOC), Lutheran Values (FKL), and Methodist Values (FMV). Those funds are joined by the first Muslim ETF, Javelin Exchange Traded Funds (JETS) DJ Islamic Market International Index (JVS), launched in July 2009 by Javelin Investment Management. According to research firm Morningstar, there are now more than 80 faith-based mutual funds and six ETFs. Over the last decade, assets in those funds have grown from less than $12 billion to more than $30 billion.

The trend is clear. The question is whether the movement toward mixing religious commitment and investing will take place among African Americans, who are more religious than the American public as a whole. A 2007 Pew Forum U.S. Religious Landscape survey found that nearly 80% of African Americans say that religion is “very important” to them, versus 56% of all U.S. adults.

FaithShares’ ETFs could appeal to someone like 26-year-old Grant T. Harris of Washington, D.C. Harris does his own research into companies whose stock he holds. “I only invest in companies that I feel are ethically and morally sound,” says the management and image consultant, who describes himself as a devout Christian. “And I don’t invest in anything that expressly goes against my core Christian beliefs and values.” Harris finds the new Christian investment products intriguing, but he’d like to see them develop more of a track record before he invests.

Should faith figure into the equation? Investing with a conscience can make you feel good, but what does it do for your retirement account? One positive aspect of faith-based investing, says Nathan Mersereau, president of Planning Alternatives in Bloomfield Hills, Michigan, is that people could be more motivated to save when they have investments that represent their belief system.

For most investors, though, it’s all about performance. Essentially, experts say investors should expect faith-based investing returns to mirror those of socially responsible funds. Last year happened to be a great one for socially responsible investing, or SRI. From Dec. 31, 2008 through Dec. 31, 2009, the Dow Jones industrial average rose 18%. SRI funds jumped more than 35% over the same period, observes Richard Dziak, vice president and investment officer with Wells Fargo Advisors L.L.C.

Steve Schueth, president of First Affirmative Financial Network L.L.C., which specializes in SRI, believes that with 2009’s returns “the myth has been dispelled that if you do good you have to take a lower return. There is no reason to expect underperformance.” Faith-based investors can expect returns similar to those of socially responsible investors because the companies held in both types of portfolios are likely to be the same. For example, FaithShares has about 85 to 90 recognizable names in its mix, including stakes in Google, Starbucks, Southwest Airlines, and Microsoft.

Despite their recent performance, there’s one glaring downside to faith-based and socially responsible investing: fees and expenses. “On average, the expenses will be more than [the average fund] because of the deeper and different research involved. Analysts are looking at a company’s policies, culture, and behavior, for example,” says Schueth. The truth is, says David Kathman, mutual fund analyst at Morningstar, “If it’s important to you to invest this way, then that’s the price you pay.”

Many investors object to investment decisions made with anything other than pure quantitative analysis. Yaron Brook, president and executive director of the Ayn Rand Institute, agrees with that sentiment. “You should evaluate an investment based on whether it achieves its intended goal,” says Brook. “In general, the goal of a business is to make money, not to serve a social agenda. Companies should be left alone to maximize their profits.” While that may seem a bit cold, Brook poses some questions for investors to ponder: “What does socially responsible investing even mean? Is it socially responsible to manufacture the weapons we need to protect ourselves in a time of war? Is selling alcohol socially responsible? And if not, what about Big Macs and M&M’s? Socially responsible is an undefined term that’s tailor-made for people who want to control what businesses can and can’t produce.”

Other experts point to another flaw in SRI and faith-based investing: a dearth of choices in asset classes other than equities. A purely faith-based investor, therefore, isn’t able to properly diversify his portfolio. “There are no SRI investment options with respect to emerging markets equity funds, emerging markets bond funds, or global strategic fixed-income funds. There are some SRI bond funds but they are primarily focused on government, municipal, and corporate debt in the U.S.,” admits Eric Lybarger, principal and owner of Evergreen Global Investment Group L.L.C., which specializes in investment advice and portfolio management.
The debate over religion-influenced investing won’t be settled anytime soon. In the meantime, those who purchase faith-based funds will be praying for outsized gains.

This article originally appeared in the May 2010 issue of Black Enterprise magazine.

(Photo by Gil Ford)

Dion and Sherrunda Adkins both grew up in families that struggled financially. “In our family you work until you die,” says Dion. “People have little savings and at 65 they are still trying to make ends meet. We want to change those traditions.” Today, the parents of Deanna, 4, and Dion Jr., 2, are working hard to do just that.

True to their commitment to financial betterment, the Vicksburg, Mississippi, couple juggles work with part-time schooling. Sherrunda, a 30-year-old licensed practical nurse, is studying to become a registered nurse, while Dion, 31, is working toward a bachelor’s degree in accounting. He is a manager–partner at a restaurant franchise who takes time off from school from January to June to focus on the seasonal tax business he started in 2009.

The Adkins have a household income of $146,000, plus $22,000 in a savings account, $2,000 in a checking account, $4,800 in a traditional IRA, and $800 in a 401(k) account that Sherrunda opened in 2009. They have about $5,000 in credit card debt and $3,000 in student loan debt from Dion’s first stint in college. The couple pays for their schooling out of pocket, about $5,000 a year total. The family’s biggest debt is a $126,000 mortgage on a three-bedroom, two-bath home they bought for $145,000 in 2005. Adding to their debt are three vehicles: a 2007 Chevy Tahoe, a 2003 Ford Taurus, and a 2007 Toyota Camry, for which they owe nearly $30,000.

The couple’s short-term financial goals include paying off their two credit cards and at least one of their auto loans. “This is important because we can use those monthly payments to help save for retirement and start a savings plan for our kids’ college,” says Dion. In addition, the Adkins plan to increase household income once Sherrunda becomes a registered nurse and Dion receives his accounting degree.

Dion and Sherrunda are not yet where they’d like to be financially. “We make a lot, but we could manage our money better,” says Dion. Sherrunda admits they have no written budget, and they pay bills as they come in. With two young children there are always clothes to buy. “Now at least they’re done with diapers. At one time they were both in diapers,” says Sherrunda. After one expense dissolved, another increased. The family’s childcare costs climbed from $190 every two weeks to about $310 in 2009.

THE ADVICE
Black Enterprise created a financial plan to help move the Adkins forward.

Get rid of a vehicle. Three vehicles for two adults are excessive. Downsizing will save money on maintenance, gas, and insurance.

Create a written budget. The Adkins should get out of the habit of winging it. “For three or four months they should keep track of everything they spend. Even a cup of coffee gets recorded,” says Herb White, a certified financial planner and president of Life Certain Wealth Strategies L.L.C. in Greenwood Village, Colorado.

Ramp up savings. Given the couple’s combined income, both their level of savings and their retirement investments are insufficient, says White. Ideally, Dion and Sherrunda should be saving 15% of their income. “If they can save 15%, they will be well on their way to achieving their goals,” he says. The couple should work to build emergency savings to cover six to nine months of expenses, about $30,000 to $40,000. Also of great importance, says White, they should be more consistent with saving money, as Dion admits that their pattern of putting money away has been erratic.

Target retirement. Once Dion and Sherrunda have more than $30,000 in liquid savings, they can begin to look at mutual funds and increase the amount saved in the IRA. Dion currently has $300 automatically deposited toward the IRA each month, but he should increase his deposit to reach the maximum of $5,000 a year.
Dion’s IRA consists of a single investment: the T. Rowe Price Health Sciences Fund. Instead of a single sector fund, he should consider an asset allocation fund, which includes a mix of stocks, bonds, and cash equivalents. These funds add diversification from various sectors, while also reducing overall risk.

The Adkins should also explore a Roth IRA. “They won’t get a tax break when they put the money in, but they have a long time for that money to grow and when it does, it comes out tax free,” says White. He adds that now is a good time. As of January 2010, the law allows those with income of more than $100,000 to change from a traditional IRA to a Roth IRA. In fact, the $2,000 contest winnings should be invested in a Roth, he says.

As for Sherrunda’s 401(k), once the couple is saving a minimum of 15% of their annual income, they should consider contributing a portion of that savings pre-tax to her account. “This would not only help them in working toward their retirement goal but would also reduce their current taxable income,” White says.

Increase protection. The Adkins need to enhance the protection of their assets. They have $150,000 in life insurance coverage on Dion, $10,000 on Sherrunda and $5,000 each on the children. White says this is a start, but he recommends that they go beyond their employer-sponsored insurance and get supplemental term policies of at least $250,000 each.

Dion and Sherrunda also need to get separate wills that cover the basics and a durable power of attorney and living wills so that if they are unable to make decisions about financial and medical issues, there will be directions in place.

This article originally appeared in the April 2010 issue of Black Enterprise magazine.

Smith, 30, made some tough choices to be able to pocket about $25,000 of the more than $35,000 in severance she received. She left New York where her living expenses were high (roughly $2,000 a month), and moved in for three months with her boyfriend in Pennsylvania where she paid $200 to $300 for rent. When she got her most recent job and returned to the Falls Church, Virginia, area she decided to share a townhouse with two other roommates. Smith pays $960 a month instead of the going rate of $1,300 a month for a studio apartment.
With a decent income and many of her expenses under control, Smith is ready to pursue her dream: amassing a net worth of $1 million by age 40, and semi-retiring by 55 with a net worth of $5 million.

There are two pressing financial issues standing between Smith and her goal, however. Smith owns a two-bedroom, two-bath condominium in Wheaton, Maryland, which she rents out for $1,644 a month. The condo is “no longer a good investment,” says Smith. Considering the state of the rental market she can’t charge as much as she’d like for the apartment. She’s about $300 short each month in covering the $1,924 mortgage and related expenses, such as the 8% of the monthly rent she pays to a property manager. Despite the fact that it’s losing value (she bought the apartment in 2005 for $360,000 and it was last appraised in January at about $325,000 according to real estate Website Zillow.com), annual property taxes have climbed from $1,200 to $3,000. And since it’s no longer owner occupied, Smith no longer receives certain homeowner tax benefits, or those she qualified for while in school. Ideally, when her tenant’s lease is up, she says she would like to sell.

Smith’s second biggest financial hindrance is the $135,000 in student loan debt she accumulated while getting her undergraduate degree in finance from Howard University in 2002 and law degree from Georgetown in 2008.
Smith has an entrepreneurial side that she wants to fully explore later in life when she enters semi-retirement. Eventually she would like to educate others about financial literacy and has begun conducting personal finance workshops.

THE ADVICE

Black Enterprise offers a strategy to help move Smith forward.

Sell the condo. The biggest threat Smith faces is her student loan debt of $135,000, says Aaron Smith, CEO, financial coach, and founder of A.W. Smith Financial Group in Glen Allen, Virginia. She should sell her rental property and use the proceeds to pay off the student loans. “There is an urgency to pay off the loans because it could slow her process of reaching her other goals. It also represents more than 100% of her income and it is unsecured,” he adds. If she can’t sell for a reasonable price, she should consider moving back into the condo.

Keep funding retirement accounts. Based on Smith’s current savings and an 8% rate of return, she would need to invest approximately $33,000 per year to accomplish her financial goals. Since retirement accounts have contribution caps, we recommend that she continue to contribute to more than one type of retirement account. She currently has both a traditional 401(k) and a Roth 401(k) and two traditional IRAs. A traditional IRA is the right choice for her because, unlike a Roth IRA, it has no income restrictions (with a Roth IRA her salary would have disqualified her from contributing the maximum allowable amount). If she hasn’t already contributed the maximum $5,000 for 2009 she can do so through April 15. She  should maximize her contributions for 2010 and going forward. In addition, she should streamline her accounts by downsizing to one IRA. Since the maximum contribution for 2010, no matter how many accounts one has, is $5,000, there would be no added benefit in having two accounts.

Ebony should also divide her 401(k) distributions among her traditional 401(k) and her existing Roth 401(k) for a 50/50 split. She would be able to contribute a maximum yearly contribution of $16,500. This would mean contributing $8,250 to each account. What’s the appeal of the Roth 401(k)? “Tax-free income at retirement,” says the financial coach. Since contributions are capped for each retirement account, maintaining the Roth 401(k) and the Continue the healthy savings habit. Since one of her goals is to have $1 million by age 40 and $5 million by 55, to get there she has to be aggressive with her savings. Smith should continue saving 25% of her income.

Explore entrepreneurial waters. Smith’s background of law and finance is ideal for what people are looking for in terms of someone who can help them with their money, says the financial coach. “Her skills are in demand. She has a platform and a process for a successful business,” he says. She should start now to work this venture into a viable business while she is employed full time. “The days of working for corporations for 30 years and getting your pension and going off into the sunset are in the past. We must diversify our skills and opportunities, just like we must diversify our investments,” he adds. Smith is working on her certification in financial planning, but has her licenses to sell investments and should begin to do so, along with her personal finance coaching. Having a business will also allow her to use her startup costs to reduce her taxes.

This article originally appeared in the March 2010 issue of Black Enterprise magazine.

Lundy, who is single, earns an annual $53,000 from her position as a physical therapist. She has about $25,000 in her 401(k), and roughly $15,000 in her checking and savings accounts. Other than her mortgage, her only debt is $30,000 in student loans. The 29-year-old has a bachelor’s degree in chemistry and physical therapy, a master’s in physical therapy, and is on track to earn a doctoral degree in physical therapy this August. Lundy went back to school because she would eventually like to teach physical therapy. The doctoral degree also increases her earning potential and offers options: She might, for instance, complement her current job with a part-time teaching position at a community college. Aside from the additional income, Lundy says she would enjoy sharing her knowledge.

Lundy isn’t afraid to go against the grain. In fact, she refused to let negative talk from some of her peers sway her when she announced plans to purchase her first home. “Some people have the mentality that you should wait until you get married to buy a house. Some even told me that if I had my own house, I would scare men off because they would think I’m ‘Miss Independent,’” recalls Lundy. “Well what if Prince Charming never comes? I have to take control of my life,” she says.

What sparked the idea of homeownership? A few years ago, Lundy attended a church conference that featured a 22-year-old homeowner. “I moved back home with my parents for a year to save, and I was able to come up with $10,000 for a down payment,” says Lundy, who rents out a portion of her house, which brings in $4,800 a year.

Lundy is looking for new ways to hone her financial plan, and seeks some reassurance that she is on the right track when it comes to building wealth.

THE ADVICE
Take advantage of tax breaks. Lundy should take advantage of the fact that interest paid on student loans is tax deductible. In addition, she may be eligible for perks such as the Lifetime Learning Credit, which offers up to $2,000 per year. Lundy can search the Internal Revenue Service Website and go to the section labeled “Tax Benefits for Education” for details.

Leverage education. Lundy will have her Ph.D. by August, and wants to teach in the future. Instead of waiting, Lundy should get started after graduation by teaching at a local college so she can bring in additional income and gain teaching experience. Lundy  should also look into consulting in the healthcare field to add another income stream. This will help her chip away at student loan debt.

Manage risk.  “Dasha’s on such the right course with her finances, my biggest concern is that something could go wrong and take her off course, such as a major accident or illness. I want to be sure she has sufficient disability coverage,” says Delia Fernandez, a certified financial planner with Fernandez Financial Advisory in Los Alamitos, California.

Lundy’s company pays for long-term disability, which covers 60% of her pay to age 65, but that doesn’t kick in until she’s been disabled for 45 days. So, she can either take money out of savings to bridge the gap, or pay an additional $5 a month for a short-term disability policy, which her company also offers. “It’s well worth it,” says Fernandez. Another risk management move: Lundy should place the $2,000 contest winnings in her emergency savings account.

Maximize retirement plan. Lundy is moving in the right direction. She’s contributing 10% of her salary to her 401(k), and her employer match is 6%. “If her account grew at only 7% per year, she would be able to retire at age 60 and spend what she’s spending now, plus have some extra for travel,” says Fernandez. Lundy should also look into investing in an IRA to complement her 401(k) so that she can build up retirement savings.

Fernandez says her 401(k) is in the Fidelity Freedom 2025 fund, which automatically allocates a portion of her funds to U.S. and international stocks and bonds, depending on her target date for retirement or other goals. Right now it’s 70% in stocks and the remainder in bonds. “This is an easy way to properly allocate your funds across different asset classes without having to make the investment decisions yourself,” says Fernandez.

Although Lundy says she feels like she needs to be better educated about finances, Fernandez says her instincts are on target. “She bought a house at 26 and still has savings. She is leading by example and will likely continue to do so.”

This article originally appeared in the February 2010 issue of Black Enterprise magazine.

As if school wasn’t enough, Gray works as an administrative assistant for the New York City Department of Environmental Protection. His annual income: $35,000, including overtime pay. For now, he lives with his mother and assists her with living expenses. He made a conscious decision to save money by not getting a car and instead relies on public transportation. His education is completely covered by financial aid. As for his finances, Gray has about $1,500 in credit card debt and roughly $4,500 total in his checking and savings accounts.

Gray wants to grow his money through entrepreneurship. But starting a business doesn’t come cheap. Ideally, he would like to own a gas station, preferably a British Petroleum (BP) station because he believes it’s a strong brand name and it is also a top leader on biofuels. Gray’s interest in the gasoline business comes from his belief that there will always be money to be made in the industry. “Gas is essential. There will always be demand, especially for affordable gas. Gas is like food, it’s needed.”

He’s open to either starting a new station or buying an established outlet. What’s standing between him and his dreams? Money. Gray says his preliminary research shows that he should expect to pony up a minimum down payment of $80,000 to purchase a small BP gas station.

“I know it will take time,” says Gray. He figures that once he is a police officer   he can make about $40,000 a year, plus overtime. So he’s willing to bide his time, foregoing a fancy car, and instead salting his money away. At this point, he says purchasing a house and car would eat up money. “I learned from watching other people mess up their finances. I’m determined not to go that route,” says Gray.

Gray’s plan is to first finish school and establish his career. Then he will work on starting a business. Once he feels he is stable, he will move forward with purchasing his first home. “I’m going to pay my bills on time, put money away, and stick to my goals. It’s easy to do the wrong thing and hard to do the right thing. You have to fight the temptation to give up. I know one day I’ll own a business.”

Black Enterprise offers a strategy to move Gray forward:

THE ADVICE

Gray is highly motivated and has many goals, but needs to focus and prioritize his plans. Overall, Gray is excelling at the fundamentals: “He has low expenses, low debt, the discipline to save, and increasing income potential. He is motivated to save because he wants to start a business and buy a home in the next five years,” says Lanta Evans-Motte, a financial adviser with Raymond James Financial Services Inc. in Calverton, Maryland. Evans-Motte says Gray could start his business and buy a home in the next five years, but we think it may not be the most prudent choice, as he is taking on two risky ventures at the same time, without adequate income or assets to back him up. He should work on one goal at a time, in the following order:

Build an emergency reserve. Before Gray pursues entrepreneurship or homeownership, he needs to get his personal finances in order. Gray will need at least six to eight months in emergency savings. He should apply the $2,000 contest winnings toward building his nest egg.

Prepare for increased living expenses. Gray plans to move out of his mother’s apartment after graduation. Currently, his monthly expenses are $500 to $600 a month. The average rent in New York City is $1,600, according to real estate Website Rent.com. Gray must also take into account additional expenses such as food, utilities, phone, and cable. Gray’s starting salary will be only approximately $7,000 more than his current salary, (average starting salary for New York City police officers is $41,975) and he will face additional expenses, so it would be in his best interest to get a roommate or rent a room in a house. This will help him keep costs at or near the current levels so that he does not overextend himself.

Prepare for homeownership. Gray should prepare by paying down credit card debt, keeping a good credit score, and building savings for a down payment on a home. There are special incentives for law enforcement personnel to encourage them to live in the neighborhoods where they work, says Evans-Motte. The benefits could include down payment and closing cost assistance, tax rebates, and reduced interest rates on mortgage loans. Gray should enroll in a homebuying class offered by a HUD-certified housing counseling agency and research first-time homebuyer programs and incentives.

Deepen the research. Gray should take the time to research franchise opportunities in other industries and think about whether he really wants to pursue a gas station before making a final decision. Evans-Motte also cautions that Gray should be aware of the costs attached with becoming a franchisee. The franchise fee could be small in relation to the other costs of operating a franchise such as the rental or purchase of the location, the royalty fee (usually a percentage of ongoing sales), regional advertising costs, and required products and equipment. There could also be a personal net worth requirement, which varies by the type of franchise. Potential franchisees typically need a net worth of at least $150,000 or more. However, there are some businesses that might require less. The actual cash requirement could be as little as $30,000 or as much a $1 million for some franchises.

This article originally appeared in the January 2010 issue of Black Enterprise magazine.

Along with the friendships and sense of adventure, Battles, now 45, misses the military’s financial perks—like the tax-free cost of living allowance. While in the Navy, Battles, who is single, received an annual base salary of $29,000, plus $16,000 in tax-free cost of living allowances.

Battles had a rude awakening when he retired and began working in the private sector. “I was making the same amount of money,” he says, “but I was being taxed more.” He bought a three-bedroom, two-bath home in Virginia Beach, Virginia, in 1996 for $86,700. Retiring from the military was a turning point for Battles. The change in his finances prompted him to take out a home equity line of credit so he could pay off his four credit cards, which had a total balance of $11,000.

“I wasn’t bringing home as much as I was used to,” says Battles, who now earns $56,200 as a senior investigator, conducting background investigations for a government contractor. Battles’ primary complaint is taxes. “I’m single, with no children, so I get hit hard.” For the last couple of years he has paid $2,000 after filing his federal and state taxes. “I’m being taxed on my take-home pay and my retirement check. When I was in the military, I owed maybe $20 or $30.”

Battles refinanced his home earlier this year, going from a 6% fixed interest to a 5/1 adjustable rate mortgage at 5.125%. When he refinanced, he separated the payments for homeowners insurance and property taxes, so that he pays them directly himself, rather than paying via an escrow account set up by the mortgage servicer. Battles says he got rid of the escrow so the money could sit in his account, earning interest.

Battles is looking for a way for Uncle Sam to take less of a bite. He is making $480 in extra payments monthly on his mortgage and hopes to pay off the 30-year loan in the next three to five years.

Helping him reach this goal faster is the fact that he recently took in a roommate, a friend whose rent pays half of his $430 monthly mortgage. Battles has no auto insurance or auto loan because he drives a company car.

The Advice
Kathy Williams, a certified financial planner with Williams Financial Services Group in Oklahoma City, assessed Battles’ situation.

Create a protection plan. Assuming his continued saving strategies and growth of his assets, if something were to happen to him he could be wiped out financially. It would be wise to see if his job offers discounted long-term care insurance,” says Williams. At 45, Battles can buy a policy at a cheaper price than he’ll be able to in his 60s. She suggests that Battles use the $2,000 contest winnings to pay the annual premium for a long-term care or disability insurance policy.

Battles should also get term life insurance. As a nonsmoker he might qualify for coverage as low as $10 to $20 a month. In addition, he needs disability insurance to replace lost income in the event that he is unable to work. And he needs to increase the liability limits on his homeowners insurance, specifically because he has a roommate.

Build retirement funds.  Battles should continue to invest 8% of his gross income so that he can get the match from his employer in his 401(k). Assuming an 8% projection and continued investing of at least 8% to 10% with employer matching, he could have an additional $500,000 or more in his 401(k) by age 62, particularly if he increases his contribution by 1% every year. His IRA would add another $165,000 or more assuming an 8% projection to his retirement savings.

Tackle taxes. Battles’ income range, $50,000 to $70,000, can be a tough tax zone when there aren’t a lot of deductions. He could consider increasing his 401(k) contribution to 10% to reduce his overall taxes and lessen the amount he’s putting into his brokerage account. He recently changed his Federal W-4 withholding status to single and zero, which Williams said should help alleviate some of the tax burden as well. Williams also advises Battles to be careful about selling stocks since he could incur a capital gains tax.

Learn from refinancing mistake. Battles’ 5-year ARM will reset in February 2014, at which point his interest rate will be adjusted higher each year. Battles says he wanted to refinance to get rid of escrow, which he couldn’t do with his previous lender. He was determined to be in charge of paying his own property taxes and insurance.

Williams says Battles should try to refinance his home to a fixed mortgage as soon as possible. “Refinancing to get rid of escrow is not a good reason to refinance. Refinancing is usually best if you can shave two percentage points off your interest rate, otherwise you’re really not coming out ahead, and he only went from a fixed 6% rate to an adjustable 5.175% rate. In five years the ARM rates could be sky high. He has a goal to pay off the mortgage in three to five years but if he can’t pay his mortgage off in five years, he’s going to be vulnerable. And if he does, he will lose the tax benefits from the mortgage, further adding to his tax bill.”

Be a strategic saver. Williams says it’s not wise to keep more than $30,000 in a checking account. You want your emergency fund to be accessible should you need it, but you don’t want a mountain of cash lying around. Williams recommends leaving one month’s worth of expenses in a checking account. For emergencies, Williams suggests placing six months of expenses in a money market account. He should also have another account for short-term goals.

This article originally appeared in the November 2009 issue of Black Enterprise magazine.

The Carrés are hardly unique. Through most of this decade, millions of Americans were drawn into the housing market. They came not simply looking to be homeowners, but with visions of becoming landlords and market speculators who could buy homes at low prices and flip them for profit. In those years, U.S. economic activity was powered by home building, home buying, the financing of real estate purchases, and consumers’ own desires to fill new homes with the furnishings of middle-class life.

The Carrés were no different. In 2002, they purchased their primary residence, a four-bedroom, two-bath, $220,000 house, in Lawrence, Massachusetts. In 2006, they bought a $292,000, three-bedroom, two-bath rental home in Cape Coral, Florida. Then there’s the two acres of land in Coral Spring, Texas, they bought for $57,000, and the 35 acres in Marianna, Florida, purchased for $60,000 the same year.

The housing market’s collapse has stripped wealth from millions of American households. Since the height of the boom in 2006, home values across the U.S. have fallen dramatically. By the end of 2008, more than 8.3 million homeowners nationwide owed more on their mortgages than their property was worth, according to a survey by mortgage market analysis firm First American CoreLogic.

The Carrés were no frenzied real estate speculators. There was logic behind each of their purchases. They bought land in Texas thinking the warm climate would make it an ideal place for Sherley’s New York-based parents to retire. The Florida rental property was supposed to pay for itself, but given the economy and the resulting glut of houses on the market, they haven’t been able to make a sale. They also haven’t been able to get much in rent. The most they’ve been able to charge is $1,000, but the monthly mortgage payment is $2,000. And the other plot in Florida? “I was supposed to flip that land quickly but it didn’t happen because of the market,” says Edenswear, 35.

As if declining assets weren’t enough, the Carrés, who have three children, are enduring another hallmark of the current economy: job loss. Last summer, Edenswear lost his job in sales, making $30,000 a year. That blow has made living on Sherley’s annual salary of $105,000 (which she earns as an assistant principal at a charter school) more difficult. In addition, the couple’s 2-year-old daughter Ilyana, recently started daycare, which costs $215 per week. The couple’s two other children are 10 and 8 years old. “The economy has had a major effect on our plans,” says Sherley, 36.

The couple, married for 11 years, owes about $600,000 on the two homes, for which they pay approximately $3,000 in monthly mortgage payments. As for the two plots of land, they own them outright. Sherley’s undergraduate and graduate school loans, however, total $50,000 and deferment ends later this year, when they’ll have to begin chipping away at that bill.

On the plus side, Sherley has $74,000 in her 401(k) at work. They each have $2,500 in individual stocks, a total of $7,000 in a mutual fund, and $4,000 in their savings and checking accounts. “It’s not enough,” says Sherley, who is becoming increasingly anxious. Says Edenswear, “If we could just sell the land or house in Florida, the profits would do a lot to change our situation.” Meanwhile, Sherley and Edenswear want to begin saving, not only for emergencies, but for retirement and their children’s college education. Sherley and Edenswear have learned the hard lesson that sometimes things don’t go according to plan. The reality check has inspired them to think twice about purchases and cut back as much as they can.

Despite everything, they’re optimistic. “We’re proud of the homes and the land we’ve purchased,” says Sherley. And they haven’t given up on real estate, as they hope their investments will eventually help them retire early.

The Advice

What is most encouraging about the Carrés’ situation is the optimism that the couple holds for the future. They are clearly thinking in the right way to prosper in the long term (i.e., plan for retirement, save for a rainy day, thinking twice about purchases large and small.) However, remedying their current situation will require them to rationalize some of their personal goals with the hard realities of the market. Never forget that for us to get to the long term we must always first go through the short term. So let’s start there.

The Carrés’ greatest short-term need is to increase cash flow. Because of the loss of Edenswear’s position, the family has experienced a 25% reduction in its gross income. Assuming a 25% marginal tax rate at the federal level, and a 5.3% marginal tax rate in Massachusetts, the after-tax value of Edenswear’s salary was approximately $24,400.  Assuming he is currently still unemployed, an immediate way to recoup 46% of his after-tax salary, or approximately $11,200 per year, is to remove their youngest child from daycare until he finds permanent employment. Hiring a babysitter on the days when Edenswear has to leave the home for an interview will be much less expensive than their current situation.

A second measure to improve not just short-term, but long-term cash flow is to refinance the mortgage on the family’s primary residence. Without specific information on the credit situation of the Carré family, I am assuming this is still possible, especially given Sherley’s employment in a high-paying job. With respect to their primary residence, the Carrés are suffering from a situation similar to some 20% of all American homeowners—negative equity. The Carrés are hurt to a much greater degree, however.

At current market prices, their primary residence has a loan-to-value ratio of 149%.  Lenders prefer this ratio not to exceed 95%, and the lower the better. Still, there’s hope. Part of the Obama administration’s Housing Affordability and Stability Plan is directly aimed at homeowners like the Carrés who are not currently in default but are likely to default on their mortgages due to their high level of negative equity.

There are many ways the Carrés could have their mortgage modified. The simplest method would be an interest rate reduction. Assume that they were able to achieve a modification that reduced their interest rate by 2% annually. This would save them approximately $400 per month, or $4,800 a year. If they were able to negotiate a modification that extends their mortgage’s term from 30 to 40 years, in addition to a reduction of their interest rate by 2%, this would save them approximately $600 per month, or $7,200 a year. Finally, if they were able to have their mortgage amount reduced to 105% of current value (difficult, but not impossible), maintain the term at 30 years, and receive a 2% interest rate reduction, they could save approximately $900 per month, or $10,800 per year. Let’s assume they achieved the middle option, extending the term with a rate reduction, and temporarily removed their youngest child from daycare until Edenswear found permanent employment, on a pretax basis, they could effectively replace 85%, or $20,800, of Edenswear’s lost after-tax salary.

n My final piece of advice will likely be the hardest to accept. The land that the Carrés bought to retire their parents on in Texas—sell it. Don’t get me wrong, loyalty to one’s parents is a laudable value. However, economic responsibility is also a laudable goal. By the Carrés’ own admission, they did not purchase the property with an eye to making it an income-producing piece of land. They currently receive no cash flow from it, and are unlikely in the near future to be able to build a home on it to house their parents. While it’s true that they are currently underwater on the property by approximately $46,000, they may be able to recoup some of this loss through capital gains reductions on their taxes. This could reduce their taxes by as much as $750 in the year of the loss (capital losses are limited to $3,000 against ordinary income), not to mention the approximately $11,000 in increased liquidity that they would receive from the proceeds of the sale.

Additionally, they could carry forward the remaining losses to future years for further tax savings. Collectively, all of these recommended cash flow improvements in the first year would increase their cash flow to $32,550 (or 133% of Edenswear’s after-tax salary).  Note that this solution does not have to leave the Carrés’ parents out in the cold. Instead of moving them to Texas, give them the rental property in Florida.

If they just replace the current amount of rent received, $1,000, then there is no loss. If they receive the property free and clear, then the foregone monthly rent will be a minor portion of the salary Edenswear receives from a new job.

This story originally appeared in the May 2009 issue of Black Enterprise magazine.

King’s saving skills proved helpful when she was laid off from her job in June 2007. She was a project manager with Fannie Mae until the company reduced its staff by several hundred. At the time, the economy was starting to sputter, so it took her six months to find her current position as a senior associate at an accounting firm. Her household income, which includes rental property, shrank from $145,000 to $105,000. Now, her mortgage payments make up a total of $3,200 each month, consuming 65% of her income—almost double the amount financial advisers suggest one should set aside for housing.

However, King found a safe haven in her emergency fund. She has more than $30,000 in reserves and nearly $25,000 in retirement savings. King is making an extra effort to manage her money—especially given the economy and widespread job losses. “It’s nerve wracking. I thought Fannie Mae was a sure bet. I didn’t see it coming; I was totally shocked. I had planned to spend my career there. I’m just thankful I had money in reserves. It could have been worse,” says King.

Despite her cash reserve, King, a divorcee and mother of a 6-year-old daughter, Rheanna, feels vulnerable. “The job market is twice as bad as it was last year because there have been so many layoffs.” In addition to her mortgages, she has an $8,000 car loan and $12,000 in credit card debt because she lent money to a relative and a friend.

King is proud of what she has accomplished so far and doesn’t want to lose ground. She has a goal of returning to Barbados, where she grew up. Her job has a global mobility program that could pave the way for her to eventually transfer there. After retirement, she hopes to become an entrepreneur and open a bed and breakfast in Barbados. She hopes her dream comes to fruition by the time she reaches age 50.

The Advice

David Hinson, then-president of Wealth Management Network in New York City, came up with a plan to keep King afloat in tough times and beyond.

Raise the rent to maximize cash flow. Currently, the North Carolina rental has a tenant who has been paying below market rent—$1,050—for the past four years (the market rate is $1,200). The rental, which is overseen by a property manager, is in a community experiencing new business growth, increasing the demand for rentals. Hinson suggests that King begin requesting the going rate. “Sylvia believes that she can  get market rent for the property, which will likely increase her net cash flow by more than 100%,” says Hinson. Although King has considered downsizing by selling her primary residence, it would be best for her to wait, not only because of the down housing market, but also because she is currently upside down on her mortgage.

Add more money to emergency fund. King’s cash cushion could stand to be beefed up because she is a single mother of a young child. With $30,000 in reserve and lifestyle costs of $4,000 a month ($3,200 toward mortgages, car expenses run nearly $250, and homeowners and life insurance make up another $400), Sylvia has a little more than six months of financial protection in the event of an unexpected illness or second layoff. She’s frugal with her spending, but she still needs to make changes if she is going to protect her financial foundation. King should add a minimum of $6,000 so that she’ll have at least eight months worth of expenses in reserve. Although financial advisers suggest three to six months, considering the economy, and especially if you have young children, you should stretch that to six to eight months.

Merge retirement accounts. “This may result in lower fees and allow her to manage her assets more efficiently,” says Hinson. He adds that King’s time horizon is nearly 30 years, so she should consider an investment portfolio that includes a healthy portion of domestic and international equities. Despite current market woes, there has never been a 29-year period in U.S. history where the stock market underperformed the bond and cash market, says Hinson. He recommends that she begin investing 70% equities and 30% bonds and cash in 2010. As her cash flow improves she should step up her retirement savings a notch, by adding $5,000 annually into her IRA, says Hinson.

Research financing for business. King should do her research now to see how she will finance her business. She should research startup costs as well as how much it will cost to operate her business each month.
The U.S. dollar and Barbados dollar should remain fairly stable at  1 USD = 2 BBD. For example, a $58,000 US savings will equal approximately 116,000 BBD—a substantial amount for a nation where the average annual income is estimated at 8,300 BBD.

If King follows the advice, retiring to Barbados to start her business is well within reach.

To receive an application for the financial fitness contest, send an e-mail to financialfitness@blackenterprise.com.

This article originally appeared in the March 2009 issue of Black Enterprise magazine.