Aaron And Melanie Ferguson have taken solid steps toward building the $1 million retirement cache they are determined to create in 20 years. Since they married 11 years ago, Aaron, 39, has faithfully put away at least 10% of his gross pay in an employer-sponsored retirement account, and Melanie, 34, has managed to save 11% of her gross salary when working part time.
The Fergusons are savings fanatics. They are saving not only for retirement but also to strengthen their emergency fund and begin college funds for their children, Malcolm, 5, and Micah, 2.
Aaron and Melanie are both engineers. He is a systems engineer for the Department of Defense but is currently on loan to the United States Military Academy at West Point, teaching electrical engineering and computer science. The family relocated from Maryland to West Point, New York, last year so Aaron could take the three-year assignment. Melanie is on a leave of absence from her part-time job in Maryland, which she plans to return to when their stint is up in West Point. In the meantime, she is concentrating on raising the children. Despite the fact that they will temporarily be a one-income family, Aaron vows to maintain his commitment to max out on his retirement plan. He currently saves 14% of his $100,000-plus salary. The government matches 3% of his salary as well. The Fergusons’ retirement investments, including an IRA, total more than $200,000. This is a direct result of their decision to honor DOFE principle No. 2: to save and invest 10% to 15% of after-tax income.
Early in their marriage, the couple couldn’t figure out where all their money was going. Melanie decided to collect the receipts for all their purchases. They soon realized they were blowing money on eating out, going to movies, and buying cassette tapes. Melanie set up a budgeting system on the computer and since then they have abided by DOFE principal No. 4: to engage in sound budget, credit, and tax management practices.
The Fergusons now have a detailed budget, with money allotted for each goal, no matter how small. “Even if it’s only $10, we’ll designate that money for the furniture account,” Melanie says. Everyone in the family has a “fun” allowance of $50 a month, much lower than the $100 a month the couple allotted when they were both working.
The Fergusons are big fans of coupons and make sure they buy most items when they
are on sale. They don’t let their children bust the budget by caving in to their every demand. A great deal of the toys their children own were bought on sale or by relatives. The Fergusons also trade children’s clothes with friends. “We live within our means,” Aaron stresses. “When we bought homes in the past, we could have bought a bigger house, but we chose not to.” The couple sold their home in Maryland before moving to West Point. They are renting for now and plan to buy a new home when they move back to Maryland.By sticking to a budget, the Fergusons have found that they don’t need to rely on credit cards. When they use credit cards, they pay the balance in full each month. They understand the credit game: “If you have good credit, you can get anything; doors are open to you, and you are given the best interest rates,” says Aaron. “I like the fact that I don’t have to panic if someone needs to do a credit check.” They are also mindful of the fact that their children are watching them. “I want our children to see us paying our bills,” says Melanie. “I want to set a good example.”
Although they thought they were doing well on their own, Melanie persuaded Aaron to pay $350 for a financial adviser in 1998 to help them get the best possible performance from their investment dollars. After a year, they started seeing satisfying returns from their highly diversified portfolio. They’ve also become more conscious of tax strategies. Along with their Roth IRAs and other tax-deferred retirement savings vehicles, they will soon open a 529 plan for the children’s college education, which will allow them to invest more money tax-free.
While the Fergusons are pleased with their financial position, they do have some financial challenges. Currently, they have three months of expenses saved in an emergency fund, and they hope to increase that to six to nine months worth of expenses. They have $75,000 set aside for the house they will buy when they return to Maryland, but they expect to save more aggressively since housing prices are increasing and interest rates are climbing. Their goal is to put down at least 20% on the house. “We lived outside Baltimore, and already we probably couldn’t afford to buy the house we sold last year,” says Aaron.
With continued patience and discipline, the Fergusons should be able to stay on track toward their financial goals. If you’d like to join them, they offer the following advice:
Save for what you want. The Fergusons say never buy anything on a whim. They believe all purchases that cost a significant amount should be saved for. “It’s not how much you make, but how you spend and save that matters,” says Aaron.
Establish a budget and stick to it. Budgeting will keep you disciplined. “You’ll stick to a budget if you also set financial goals. You have to be motivated by something,” says Melanie. She also recommends making small changes in your lifestyle, such as bringing your lunch to work to stretch your budget and increase your savings.
Use credit sparingly. Melanie says credit cards should be used primarily for emergencies. If you must charge something, pay off the balances each month. The Fergusons also stay ahead of the credit game by keeping the borrowing limits on their credit cards low. “We don’t want a card with a limit of more than $5,000,” says Aaron. “Even though we can afford more, we don’t want more. And if they increase our limit, we call them and tell them to lower it.”