Building Wealth

Ebony Smith seeks the tools to increase her net worth

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.

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  • RB

    I’m hopeful that when she gets her certification in financial planning that she will realize she was given bad advice. It makes absolutely no sense for her to be paying someone else’s mortgage when she owns a two bedroom condo in one of the wealthiest counties in the D.C. metropolitan area. Especially while the real estate market is slightly depressed. If she should sell anything she should sell her Cadillac and move back into her condo and take the subway from Wheaton to Falls Church. Then she can invest her insurance premiums and take advantage of the tax breaks for owner-occupants. It doesn’t make any sense for her to be taking a $300 loss each month on a rental unit when her tax breaks from being an owner-occupied homeowner would negate the $300 per month shortage. If she is currently sharing housing with two roommates she shouldn’t have any problem sharing a two bedroom condo with one roommate or better yet forget the roommate and use the extra room for a home office for her financial planning business. My accountant use to live in a condo and had a thriving home-based business and he didn’t even live on the subway line. He eventually sold it and bought a townhouse to operate his business from. The value of her condo will more than re-bound with the market given it’s location in one of the best school systems in the nation, with easy access to the D.C. subway line, in a designated arts district (one of few in the nation) and a host of ethnic restaurants. There is no business owner in their right mind that wouldn’t want to own real estate in that type of business district. It is such a disservice to give people such bad financial advice especially when they know nothing about the local market conditions of the people that they are giving advice to.