Drafting a Financial Plan

Dion and Sherrunda Adkins aim to build a solid future for their family

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.

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.

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