Eyes Wide Open

A newborn Son Prompts the Fleuriots to Create a Financial Plan

changes–both in the short term and over the long haul. Smith suggests the following:

Combine savings. The Fleuriots have adopted the concept of “yours, mine, and ours,” and they maintain separate accounts in addition to a joint account. Terri has $10,000 in a savings account and $3,000 in a checking account; Jean Emmanuel has $10,000 in a savings account and $2,000 in a checking account. Even baby Jean Pierre has a savings account with a $1,000 balance. The couple has another $10,000 in a joint savings account. Smith says the Fleuriots need to add a level of sophistication to their money management and view saving and investing as one endeavor. He recommends that they open a joint brokerage account and pool their savings. Smith also suggests setting aside some funds in a money market account (equal to three to six months’ worth of living expenses) and investing the rest of their money in no-load value mutual funds and dividend-paying stocks.

Invest in value funds. Smith suggests the Fleuriots invest in value mutual funds. He recommends the foreign large-blend Vanguard Global Equity Fund (VHGEX), the mid-cap blend Third Avenue Value Fund (TAVFX), and the large-value Heartland Select Value Fund (HVFAX). “Doing so will give them a more balanced portfolio,” says Smith. “It will also minimize volatility in accordance with their long-term objective, which is to own four investment properties in the next three years.”

Create an L.L.C. Smith says the couple should create a limited liability company to hold their present and future real estate. In addition to providing certain tax advantages, an L.L.C. would shelter their personal assets from potential lawsuits relating to their rental properties. Because Terri acquired the Maryland property prior to their marriage, it is currently solely in her name. Smith recommends that the couple place only the Maryland home in the L.L.C. and divide the percentage of ownership in a manner that Terri is comfortable with. Because there is significant equity in the home, the Fleuriots could apply for a line of credit, which they could use to help buy additional rental properties that would be held under the L.L.C.

Open a Section 529 college savings plan. Smith suggests that the couple start saving for their son’s education with an initial deposit of $1,000. Thereafter, they should contribute $100 or more a month. He recommends that the Fleuriots apply a portion of their rental income toward the 529 plan.

Open a Roth IRA account. Terri and Jean Emmanuel each contribute 6% of their salary to their employers’ 401(k). Because liquidity is important for them right now if they want to buy three investment properties in three years, Smith says they shouldn’t worry about increasing their contributions–they’ll each have another 30 or so years in the workforce. However, they should open a Roth IRA with the $2,000 contest winnings. Money in the account will grow tax free.

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