Last year, William Hampton, 27, decided that he’d rather shape young minds than build automobiles. It all started six years ago when he volunteered with a group of kids at his church and then became a mentor with the Big Brothers Big Sisters program. Until recently, Hampton enjoyed the $80,000 salary he earned as a manufacturing engineer with a major Detroit automaker. But his values began shifting the more he volunteered and recognized the lack of mentors and role models in his community as well as the quality of education kids were receiving–especially in the inner city. This September, Hampton will make a bold career move, becoming a math teacher in the Detroit Public School system under the Teach for America organization. His expected annual salary: $43,000.
“In college I studied engineering because I always excelled in math and science, and the salary of an engineer was appealing,†admits Hampton, who graduated from Tuskegee University in 2005. “But then I realized that it wasn’t about the money anymore. I wanted to do something more fulfilling.â€
When Hampton first landed a job in the auto industry, he felt invincible. The job of maintenance supervisor offered Hampton everything he wanted. Fresh out of college, he leased a car, bought a house, co-signed on a car loan for a relative, “and was just blowing money on anything I saw that I wanted.†Then the economy slowed and his $80,000 income dropped to $66,000 after his employer cut overtime pay.
“But my bills didn’t stop coming,†says Hampton, noting that he quickly readjusted his habits, so as not to become a casualty of his spending. He turned in the leased car two years ago, and bought a 1997 Mercury Grand Marquis. He started cooking at home, cancelled his $40 a month gym membership, and now opts to do his own minor auto repairs rather than taking his car to the shop. “Just the other day I replaced a turn signal switch which the dealer tried to charge me $500 to fix,†says Hampton. “I bought the part for $166 and installed it myself.â€
Even in the midst of a slowing economy and a shrinking paycheck, Hampton reduced his consumer debt from $6,000 to $500 in one year, simply by paying more than the balance due. He has also been contributing 10% of his earnings to his 401(k) plan. (His employer matches his contributions up to 6%.) Hampton is also chipping away at his student loans, which currently total $30,000.
While Hampton was successful cutting costs in some areas, he’s faced difficulties reducing his housing expenses. It’s not news that Detroit is one of the hardest hit housing markets in the country. Hampton has tried to sell his three-bedroom house to get out of a $1,172 monthly mortgage and alleviate his debt burden. He had plans to use the savings to generate more cash flow. But Detroit is far from a seller’s market. Home prices there are at their lowest level since May 1994, according to the Detroit Free Press. The city had a 9.1% year-over-year drop in home prices through December, the worst decline among the nation’s 20 metropolitan areas in the S&P/Case-Shiller National Home Price Index. Detroit is one of 11 cities posting new home price lows since peaking five years ago, according to David Blitzer, chairman of the Index Committee at Standard & Poor’s. “Despite improvements in the overall economy, housing continues to drift lower and weaker,†said Blitzer in the report.
In March 2008, Hampton’s house was valued at $116,000. Today it’s worth $39,500, according to Zillow.com, an online real estate index and search engine. Even though that decline means he’s underwater in his mortgage, he is currently up-to-date with all his payments.
Nationwide, homeowners like Hampton are also plagued with conservative home appraisals. New federal laws, such as the Home Valuation Code of Conduct passed in May 2009, push for more realistic home values as a way of safeguarding homebuyers and lenders. But with large gaps between the home price and appraisal, sellers can’t get their dollar amount because buyers can’t secure the financing. Reportedly, Detroit-area real estate agents have complained that up to 40% of their recent deals unraveled because appraisals were too low.
“Through all my cost cutting measures, I haven’t been able to tuck away enough money if a disaster happened, such as losing my job,†says Hampton. His concern is valid. Michigan automotive employment fell from 316,300 in 1999 to 173,600 in 2007, a decline of about 45%, according to the Center for Automotive Research, a nonprofit think tank based in Ann Arbor, Michigan.
Hampton’s new career isn’t much different from the auto industry when it comes to future job prospects. Detroit public schools have been in financial turmoil for several years. Former Michigan Gov. Jennifer Granholm hired an emergency financial manager in March 2009 to fix the district’s $305 million deficit. State education officials took further measures to address budget woes in February, ordering 70 schools to be closed, while boosting class sizes to more than 60 students by 2013.
Hampton is committed to his new path, but his decision to join the teaching profession will reduce his income by another $23,000, which means that once again, he must put his finances under a microscope.
Now, he’ll need to calculate the true cost of pursuing his passion, especially since he plans to get engaged within the next month.
- Adhere to a strict budget. Hampton has done a good job of initiating budget cuts and has consistently allocated 10% of his paycheck to his 401(k). However, he needs to establish an emergency fund of between six and eight months of living expenses. He should use the $2,000 financial fitness winnings to start his cash cushion. For the next seven months (while he is still at his current job), Hampton has the potential to save about $350 per month. If he does so, this will add about $2,450 to his savings for a total of $4,450. He should put this money in a high-yield savings account. Hampton also needs to pay off his consumer debt. He should use his expected $1,000 tax refund to pay off his $500 credit card balance. The remaining $500 can go into his emergency fund. After he begins his teaching job, “it’s going to be very, very tight,†Fulbright says. After paying his mortgage and student loan bills each month, Hampton won’t have any extra cash to contribute to savings. But given the high demand for African American male teachers, especially in math, Hampton should look into working with afterschool programs or tutoring positions. The additional work after school, and during the summer months, can generate additional income and help Hampton build up his cash reserves. On average math tutors with Hampton’s experience and education can make $19.39 an hour, according to Payscale.com, a compensation data firm.
-Â Stay put. Hampton should stay in his current home until the economy improves. Selling it now would be costly. Moreover, if he adheres to this new budget he should be able to afford his mortgage payments. Hampton has a three-bedroom home and should consider renting out the extra two rooms to help offset the mortgage until he gets married and can benefit from being part of a dual-income family. If Hampton rents each room out for $586 per month, he can cover his monthly mortgage payment of $1,172. Since his home’s value has dropped significantly, refinancing or modifying his existing loan is most likely not an option.
-Â Â Pay back 401(k) loan. Hampton has $35,000 in his 401(k). Three years ago he borrowed from this retirement plan to pay for his car. He must pay off the existing balance of $1,750 before he leaves his current employer. In most states, borrowers have 60 days after they leave a job to pay back any outstanding 401(k) loans. But Hampton has been making regular installments directly from his paycheck and will have the loan paid off in two months. Once he starts his new job, he should continue contributing 10% or more of his income to his retirement account. The state will match his contributions up to 3% of his salary. Fulbright cautions Hampton to avoid tapping into his 401(k) for loans and instead rely on emergency savings. If Hampton were to lose his job and be unable to repay the loan within 60 days of separating from his employer, he’d have to pay a 10% penalty on the balance of the funds (since he’s not yet 59 1/2) and he’d also owe taxes on the money, explains Fulbright.
-Â Consolidate student loans. Hampton has a total of $30,000 in student loans; two private loans–$5,500 at 9.75% and $4,200 at 7.75%–the remaining $20,300 are federal loans, which carry interest rates under 3%. Fulbright recommends that Hampton contact the lender of his highest interest-rate loans and request a loan consolidation. If he’s not able to consolidate them, Hampton’s focus should be to pay off the highest interest-rate loans first. He’s paying
$200 a month in total on his high interest-rate loans. If he puts $150 on the highest interest-rate loan (9.75%) he could pay the loan off in a little more than three years. While aggressively attacking that loan, he should use the remaining $50 toward the loan with the second highest interest-rate (7.75%). After paying off the first loan, he can then start applying that money to the second loan and have it paid off in just under five years (assuming he continued to pay the $50 for the first three-plus years). He should make whatever the minimum payments are on the lower interest-rate loans for which he currently pays $165. After paying off his two highest interest loans, he can apply the $200 to the lower interest-rate loans (now contributing $365) and be debt-free in about eight years assuming he does not take on any more debt. Hampton should also look into loan forgiveness programs offered through Teach for America.-Â Avoid cosigning for others. Hampton cosigned on a vehicle for a relative. Although the owner has been up to date on payments, if he were to default on the loan Hampton would become liable. When a person asks a friend or relative to cosign it means they either have bad credit, no credit record, or a history of not paying bills. This is why almost all states require a co-signor to be told in writing of the risks of co-signing for someone. The co-signor is being asked to guarantee the debt. Therefore, if the borrower doesn’t pay the debt, the co-signor will have to. Fulbright suggests that Hampton be clear with friends and family, letting them know he cannot afford to incur any extra debt if they were to default.
- Create a financial plan before getting married. Hampton is planning to propose to his college sweetheart in the upcoming weeks. Before planning for a wedding and getting married, the couple should sit down and access their finances and come up with a plan. There is no right or wrong time to get married but they should pick a time when they are on strong financial footing. “They shouldn’t go into debt to pay for it,†adds Fulbright.Â