The advice usually offered by financial advisers is to avoid trying to keep up with the Joneses, but people may want to keep up with Christopher and Genevie Jones. At 29 and 30, they are a model of financial prudence: Their combined six-figure income places them in an enviable position as they dodge debt traps and accumulate savings–the Joneses have $25,000 in a joint account.
Yet they aren’t satisfied.
“I feel good about what we’re trying to do, but I want to be sure we’re doing all we should to reach our financial goals. Can we do better?†asks Genevie.
Married just two years this September, the couple has been quick to focus on finances. They paid the remaining $6,000 on the car loan for Genevie’s 2008 Nissan Altima, and have been working on eliminating their combined school loan debt of more than $26,000. Otherwise, besides the $17,338 owed on Christopher’s Dodge Charger, they have $800 on a Lowe’s credit card and $1,900 on a bank credit card. “Our priority now is the student loans, and Christopher’s car loan, which has a 1.9% rate,†says Genevie, a radiation therapist and supervisor of a radiation oncology clinic. Christopher, an operating manager, is also going to school part time to finish up his bachelor’s degree in electrical engineering.
The couple has $6,500 in a checking account and $120,000 in retirement savings. But still, they have nagging questions. “Will my retirement and his pension be enough? Should Chris have something to supplement his pension? We’re trying to do the math, but what’s realistic?†asks Genevie.
The couple is seeking financial advice because of their plans for the immediate future as well. For one, they would like to start a family soon. Also, within the next couple of years, they plan to move out of their condo in Indianapolis and purchase a three- to four-bedroom home. Though they realize that such moves will increase their expenses considerably, ideally they would like to live on one income.
Although they draw up a budget at the beginning of each year, Genevie admits that they stray from it as the months go by. Their weakness is food, so they’re planning to cook more meals at home. They now spend as much as $1,500 a month on restaurants and groceries.
“Our focus now is diminishing the amount that we eat out. Otherwise, we are fairly good stewards of our money,†says Christopher.
Adds Genevie, “We have to be mindful of excessive spending. Just because it’s there doesn’t mean it should be used. We don’t argue about money, it hasn’t been an issue, and we want to make sure it doesn’t become one. What’s key is for us to be open and honest and set goals.â€
The couple is ready to move to the next financial level. Says Christopher, “I am most excited about the life we are building together and our plans for our future children.â€
The Advice
Black Enterprise teamed up with Ivory Johnson, a certified financial planner and founder of Delancey Wealth Management in Washington, D.C., to advise the Joneses. Though they have a strong foundation for their life together, they still have work to do.
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Establish an emergency fund. Christopher and Genevie spend an estimated $5,000 a month. Should either become unemployed, given the difficult employment environment, it could take six months or longer to get another position. If Genevie suffers a disability, there may be a waiting period before her disability insurance kicks in. (Christopher doesn’t have disability insurance.) “They should aim to maintain a balance of $30,000 in savings to provide a meaningful cushion against unforeseen expenses,†says Johnson. They need to sock away about $5,000 more to achieve that goal.
Ramp up retirement savings. Christopher should open a Roth IRA and contribute the maximum of $5,500 a year. He doesn’t have
access to a defined contribution retirement plan at work, but his company does offer a pension; Christopher’s now has $25,000 in it. Genevie has roughly $95,000 spread across a 403(b) employer contribution plan, a Roth IRA, and a Roth 401(k). About 70% of her 403(b) is in equities, as is about 85% of her 401(k).Given Christopher’s pension and projected savings, “they are on track to have a comfortable retirement,†says Johnson. The couple would ideally like to retire between 60 and 65. However, if Christopher had begun saving earlier they would have been far ahead of the game. Johnson says that if he had started saving $1,000 a month at 21 and his investments returned 6%, he would have more than $2.58 million by age 65; if he waited until 31 though, he would accumulate around $1.33 million by 65, a significant difference of $1.25 million. Johnson recommends an investment strategy of 80% equities and 20% alternative asset classes, such as commodities and real estate, to offset the volatility of the market.
Explore alternative investments. While Johnson says Genevie has a well-diversified portfolio–about 30% in international stocks, about 23% in balanced funds, and about 7% in commodities–they should spread their investing wings a bit to include alternative assets. He recommends that they put 15% to 20% of their portfolio in real estate investment trusts or REITs, precious metals, and commodities because they are tangible and not correlated with the market, though they can go down.
Prepare for house purchase. Johnson says that the bulk of their debts will be exhausted in 2015, and by 2016 Christopher’s car loan and Genevie’s student loans will also be paid. By then, their only debt will be their mortgage. “These obligations consume more than $14,000 each year, and those resources would now be available to pay a mortgage,†says Johnson. They can set a target of saving $20,000 for a down payment.
Once those debts
have been satisfied, the couple will be ready to purchase a house. Instead of selling the condo, Johnson recommends renting it. The couple believes it could rent for $900 a month, effectively turning their current residence into an income producing asset that can be depreciated. “A $90,000 rental property can offer a $3,272 a year deduction if depreciated over 27 1/2 years,†says Johnson.In the meantime, they would do well to use the $2,000 prize money to refinance the condo. The interest rate on their mortgage is 6.2%. Johnson says they could refinance and likely get a 15-year fixed mortgage at 2.75% to 3.00%. They would save about $100 a month and could commit part of the savings to the house down payment.
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Also, refinancing would provide an opportunity to add Christopher’s name to the mortgage to increase his credit score. He says he hasn’t established much in the way of credit except for his student loans. “He would benefit from the timely payment of a debt that accounts for 35% of the FICO score,†says Johnson.
Get ready for an addition to the family. When they bust their budget now the ramifications are not that serious; however, when they have a family, the more they adhere to their budget the better off they will be. Johnson says they can use apps such as Check (formerly Pageonce) to keep a budget, or Mint.com. “Automate everything so the savings and debt payments happen before they see the money,†he advises.
Johnson estimates childcare costs in Indiana at $10,000 a year; having two children could mean they would need to tweak their goal of retiring between the ages of 60 and 65; living on one paycheck may not be feasible either. “Genevie said that family members may be available to watch their children. These arrangements should be discussed and cemented in advance of starting a family. Folks say one
thing at the barbecue and change their minds later.†It also wouldn’t hurt to research alternatives, so they’ll know what to expect to pay should arrangements with family fall through.Once they start a family they can reassess their budget and expenses. They can start saving for college with an account established under the Uniform Gift to Minors Act. Putting away $250 per child, per month should be affordable and would provide enough for them to subsidize their children’s education. The couple can transfer the money to an UGMA 529 plan before the child reaches the age of 17.
Manage risks. Genevie has disability coverage, but Christopher doesn’t. Because it costs less, he should ask about employer-sponsored disability insurance. If it’s not available, he should purchase a private policy.
The Joneses have sufficient life insurance, but Johnson says their whole life policies–they each have $150,000 at $155 a month–are expensive and unnecessary. They also have term polices. If they cancel their whole life policies, they will have to pay surrender charges that are in effect for about five years. However, Johnson recommends terminating the contract anyway unless the charges are exorbitant. They should also get an umbrella insurance policy in case they are sued. Johnson says umbrella insurance can be found for around $250 a year for a minimum $1 million policy.
Build a legacy. The couple is vulnerable in the area of estate planning. Johnson encourages them to draw up a will, a durable power of attorney, a healthcare power of attorney, and a living will.
“Christopher and Genevie aren’t the stereotypical young couple who buys first and asks questions later,†says Johnson. “They use debt responsibly and pay it back ahead of schedule. They are proof that the little things make the big things happen if you follow these five simple steps: go to school, work hard, live within your means, save money, and don’t do anything stupid.â€