Getting More Bang For Your Buck - Page 2 of 4

Getting More Bang For Your Buck

fund the children’s college education is likely beyond their reach.

But what really concerns Hinson is the Whittington’s psychology on money. “Dwayne considers his home the piggy bank. He considers tapping into retirement assets as ‘no big deal’ if necessary.” Hinson says the Whittingtons don’t show enough concern about their credit card debt. And he is concerned that Dwayne, “considers retiring early as reasonable, all while he is thinking about buying a bigger home and taking money out of the home to pay for the children’s education.”

Hinson devised a wealth-creation strategy for the Whittingtons:

Right now the family is relying solely on the savings from their combined corporate incomes. Given the economic climate, having all their hopes on one golden egg is too risky. Hinson recommends they pursue investment real estate. Not only does the couple have an interest in doing so, but Hinson says over time, it would provide a secondary income and an educational funding source. Ideally, between now and retirement, he would like them to buy as many as seven properties. To get started, they should choose properties that are close by, for ease of management. Once they’ve learned the ropes, they should diversify into other areas. They will need to craft a real estate investment plan.

While retiring at 55 sounds good, it’s nearly impossible, unless the Whittingtons hit the lottery. The couple should wait until age 62, thereby giving themselves a 20-year window to continue preparing for their golden years. They should maintain an 80% equities to 20% fixed-income investment mix in their portfolio during much of that time.

Mina puts the maximum 14% of her salary into her thrift savings plan at work. Dwayne says he is committed to doing the same starting this year. In addition, Hinson says they should open an IRA and make the maximum family contribution so that they can reap the tax benefits.

Although the Whittingtons recently refinanced and have only four years to go on their mortgage, Hinson explains, “In shorting their amortization they are paying off their mortgage faster, but in doing so, they are eliminating a primary tax benefit. And they are increasing equity in an illiquid asset class, while simultaneously leaving high interest credit cards and other debt instruments intact-a very inefficient financing approach.”

Consolidate debt with refinancing proceeds. Currently the Whittingtons have an estimated net equity of $44,000 (equity net of first and second mortgage, and a 20% holdback of equity in the property). Hinson says they should attack their debt as follows: $13,800 toward Dwayne’s debt, $6,048 toward his car, and $16,400 toward Mina’s debt. This would clean up their balance sheet as they prepare themselves to invest in real estate. Also, he says they would free up $20,000 in annual cash flow, reduce their monthly cost structure, and free up debt capacity-a plus in the event either becomes unemployed or some other unpleasant circumstance arises. After debt reduction, they would