When It Came To Managing Their cash flow, William and Julanda Starks were once directionless. Now they have a detailed plan for budgeting their money. Why the big change? “Julanda had been working part time. When she switched to full time this fall, it was an opportunity to see how we could best use the additional income,” says William.
Julanda, 32, works as a grant liaison for a school district in Columbia, South Carolina, and earns a salary of $25,000. William, 33, is employed as an auditor and earns $35,000. Their monthly net income is $4,000 and they average about $2,400 in monthly expenses. At the end of each month, there was about $1,600 in discretionary income that couldn’t be accounted for — at least not until William started tracking household spending using a Microsoft Excel spreadsheet. “We eat out a lot during the week with both of us working. Then we’ll go out on the weekends as a family,” he says. “We were probably spending hundreds a month on entertainment.”
The couple looked for ways to cut back. “I started bringing my lunch to work about four days a week. And when I cut out breakfast at work, I save $35 to $40 a week,” maintains William. Furthermore, since the family’s three vehicles are all paid for, William re-evaluated the high insurance premiums he and Julanda were paying: “We switched to collision only, saving about $150 a month.”
Now that the Starkses have a better sense of where their money is going they are able to set some goals — in writing. Priority No. 1: Pay down debt. The couple owes $42,000 in student loans and about $9,000 on credit cards. “The majority of our debt came from when I was in college. I was only working part time so I just paid the minimums. In the past, we used credit cards for Christmas and vacations. It added up,” William explains.
William and Julanda will need to save all the money they can to achieve goal No. 2: Build college savings for their children, Tiffani-Shae, 8, and Tyler Aaron, 2. Says William, “We’ve been inconsistent. One month we might save $100; another month, $200. I want us to have a set target that we meet all the time.”
The Starkses have $1,500 in a savings account and $1,200 in a checking account. When it comes to their retirement savings, William has $21,000 in a 401(k) with a past employer and $3,000 in his current 401(k). Julanda has just begun contributing to her employer’s 403(b) plan. At some point, the Starkses would like to trade up to a larger house. They owe about $74,000 on their home, which they purchased five years ago for about $80,000. The property has since appreciated to $110,000.
The couple also has plans to go back to school for advanced degrees to increase their earning potential. William wants to get a master’s in accounting, a CPA license, and perhaps an M.B.A. Julanda wants to get her master’s in nursing and become an RN or a teacher. Their biggest obstacle is that they would have to pay for their education themselves. They are both employed by the government and aren’t eligible for employer-paid tuition.
William has thought about getting involved in the vending machine business part time to supplement the family’s income. He estimates that he could get his business up and running for $10,000 and make $400 a month for spending 20 to 25 hours servicing three or four snack machines.
The Starks family has their work cut out for them but they’re encouraged. “We’ve just started with a budget. So far we’ve been able to stick to it,” says William. “We’re staying the course.”
THE ADVICE
BLACK ENTERPRISE had Danny Freeman, a financial adviser with Darda Wealth Management in Winston-Salem, North Carolina, review the Starks’ finances and goals. He says they’re on the right track by addressing their debt. “The key thing for them to remember is that they didn’t accumulate it overnight, so they shouldn’t try to get rid of it overnight,” says Freeman. “They should develop a systematic plan to attack their debt, and with discipline and improved budgeting, they should be able to eliminate it completely in three years or less.”
Here are Freeman’s recommendations:
Get strategic about debt. The Starkses have two credit cards with relatively low balances of $1,000 and $1,500. Unfortunately, those cards have high interest rates, around 18%. Freeman says the couple should pay off those two cards in 18 months by increasing the payment on one of them to $70 a month and increasing payment on the other to $100 a month. Taking care of that small debt will free up money to be put toward other debt.
He
also advised the family to pay at least $150 a month on their other, higher-balanced debt. “They should consider using cash lump sums, such as tax refunds or bonuses, to accelerate the liquidation of credit card debt,” he says.Reallocate retirement assets. Freeman says the 401(k) William has from his former employment is overexposed in cash and fixed income; those two classes hold a little more than 50% of his assets. “This is of particular concern because as interest rates rise, fixed income investments can be negatively affected and possibly underperform,” he says. Freeman would like to see the 401(k) reallocated to the following: 10%, Pimco Total Return; 25%, T. Rowe Price Mid-Cap Value; 50%, Dodge & Cox Stock; 15%, EuroPacific Growth. Freeman says that because William is still young and because these funds are designated for retirement, he can assume more risk, which will give him the opportunity for more return.
Start the children’s college funds. If the children attend four-year public universities in South Carolina, it will cost William and Julanda between $200,000 and $240,000. At that price, they would need to save $800 to $900 a month. Based on their current income, that’s not feasible, but it’s important that they don’t delay saving any longer. Freeman suggests using the $2,000 contest winnings to start 529 college savings plans. He recommends putting $1,500 toward Tiffani-Shae’s account and $500 toward Tyler’s. Freeman’s choice is the Future Scholar 529 College Savings Plan. As South Carolina residents, the Starkses will receive a state income tax deduction for their contributions. The plan has several age-based, diversified portfolios, as well as other investment choices. William and Julanda can learn more at www.futurescholar.com
.Go back to school. Freeman says William may want to get his CPA certification before his master’s in accounting or M.B.A. “It will cost less than a master’s degree and will raise his marketability, which is the primary goal.”
Julanda getting a master’s in nursing definitely makes good sense, says Freeman, adding that there is a shortage of skilled nurses and demand probably won’t decrease any time soon. Freeman also points out that with the bigger salary William could make as a CPA, he would be better able to pay for his master’s degree or help Julanda out with hers. Freeman says the Starkses should view going back to school as an investment based on the expected cash payoff. While they must be careful about taking on additional debt, if the payoff is substantially higher incomes, they will have a greater capacity to handle paying off their debt.
Put off the entrepreneurial venture for now. Freeman says William should wait on pursuing the vending machine opportunity. Running a business is not easy, even when it is part time. While the vending business is legitimate and can be lucrative, it can be hard to break into, cautions Freeman. “Established firms may be already servicing the most desirable locations. And while there could be opportunities with smaller businesses or new businesses, it could take years to accumulate enough of those to generate any meaningful income.”
Financial Snapshot: William & Julanda Starks
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HOUSEHOLD INCOME |
|
| Gross Income | $60,000 |
| ASSETS | Â |
| Checking | $1,200 |
| Savings | 1,500 |
| William’s 401(k) | 24,000 |
| Julanda’s 403(b) | 2,000 |
| Value of Home | 110,000 |
| Value of Cars* | 12,900 |
| Total | $151,600 |
|
LIABILITIES |
|
| Mortgage | $74,000 |
| Student Loans | 42,000 |
| Credit Card Debt | 9,000 |
| Total | $125,000 |
| NET WORTH | $26,600 |
*ACCORDING TO KELLEY BLUE BOOK.