Rhonda And Marvin Vinson of Lilburn, Georgia, are living the American dream. Married 15 years, the couple has money in the bank–a little over $60,000–plus a home worth $375,000, stocks and stock options valued around $50,000, more than a quarter of a million dollars in retirement funds, and zero balances on their credit cards. The Vinsons also have three children, 6-year-old twins Kyle and Kamryn, and 8-year-old Sydni.
One of the couple’s biggest concerns is preparing for their children’s future, which includes setting up college funds. “That is one of the areas that we need to jump on the ball and take care of now,” says Marvin, 38, a solutions architect with Oracle.
The couple has been extremely careful with protecting their estate. After 9-11, the couple re-evaluated their estate plan, explains Rhonda, 39. The Vinsons have drafted wills, living wills, durable power of attorney for healthcare, durable power of attorney for property, and a living trust. They currently have a $1.7 million life insurance policy on Marvin and a $250,000 policy on Rhonda. Additionally, Marvin has $450,000 in accidental death insurance and $110,000 in disability insurance.
To make marriage and money work, couples must learn to communicate, compromise, and commit to the process of joint financial management. The Vinsons have done an exceptional job of planning and carrying out their goals. “If you look at where we were 15 years ago and where we are now, it is like night and day,” says Marvin, referring to the numerous credit card and student loan debts they once had. “I use to be more of a spender. But now, with having three kids, I think I have calmed down a lot and have learned a lot as far as saving,” adds Rhonda. Now their only debt is a $104,000 mortgage and a $17,000 car loan.
Marvin is the family’s primary source of income–bringing in $200,000-plus annually–and Rhonda is a full-time, stay-at-home mom. The couple developed the practice of maintaining the same modest lifestyle regardless of changes in the household income–good advice for any family. Although Marvin works for one of the worlds’ largest software companies, the technology industry is frequently subject to shifts that can result in
unexpected layoffs and other disruptions, says Danny Freeman, financial adviser at Darda Wealth Management. “By being debt-free, Marvin will give himself the option of being able to weather the storm.” This means should he lose his job, Marvin can take the time to find another job or seek entrepreneurial opportunities.THE ADVICE
BLACK ENTERPRISE asked Freeman to review the Vinsons’ financial situation. “They currently have about $4,200 in discretionary income each month. This represents an excellent capacity to save and pay off all remaining debt,” he says. Freeman adds that the Vinsons’ debt-to-net worth ratio is 17%, which is excellent.
The following are Freeman’s recommendations to Marvin and Rhonda Vinson:
Pay off remaining debt within the next three years. The Vinsons should continue to make regular payments on the car loan, which has three years left on it. They should also invest $2,500 a month in a municipal bond fund. Any income earned would be exempt from federal taxes, and at the end of three years, the Vinsons should have enough money to liquidate the bond and pay off the mortgage.
Open three college savings accounts.
It is very likely that the Vinsons will have three children in college at the same time. The estimated cost to educate them is in excess of $286,000. Investing anywhere from $1,450 to $1,700 per month should cover that cost. However, Freeman suggests the couple begin by investing $1,000 in college savings accounts starting with $500 per month for the oldest child and $250 per month for each of the twins, using the $2,000 contest winnings to jump-start the accounts. These amounts should increase once their home and car are paid off.Consider setting up a bypass trust. The Vinsons need to give some thought as to how to distribute their estate. Their children could see their inheritance shrink by 30% or more because of estate taxes, which could be reduced through a bypass trust. Under such an agreement, the surviving spouse would control the trust and could make distributions for him or herself or the children. Additionally, any capital appreciation on the assets inside the trust will pass on without estate taxes.
Reallocate some funds. The Vinsons have $123,313 in
cash and investment assets outside of their 401(k) plan. Of this amount, $72,907 is sitting in checking accounts or money market accounts earning 2.4% or less. Freeman suggests they keep the equivalent of one year’s living expenses, about $40,000, on hand as cash in the money market account and move $30,000 into income-generating investments, including some corporate or municipal bonds. Additionally, they should increase the amount automatically transferred to their E-Trade account to $1,000 per month.Reposition assets in 401(k) plan. Marvin has too much money allocated to international equities, which have performed well over the last three years but are aggressive and volatile. Marvin’s exposure to international equities should not exceed 10%–it is currently at 21%. He should shift funds to the large-cap value portion of the 401(k) plan.
All of these changes would shift the Vinsons’ overall asset allocation to 75% equities, 15% fixed income, and 10% cash. Marvin should constantly monitor their assets to help manage investment risk as well as any interest rate risk.
Financial Snapshot: Marvin & Rhonda Vinson
|
HOUSEHOLD INCOME |
|
| Gross Income | $200,000 |
|
ASSETS |
|
| Cash | 72,907 |
| Stocks | 50,406 |
| 401(k) | 260,096 |
| Value of Home | 375,000 |
| Value of Cars* | 60,000 |
| Total | $818,409 |
|
LIABILITIES |
|
| Mortgage | $104,000 |
| Car Loan | 17,000 |
| Total | $121,000 |
| NET WORTH | $697,409 |
*ACCORDING TO KELLEY BLUE BOOK.