Hard Lessons in Home Economics - Page 2 of 3

Hard Lessons in Home Economics

The couple, married for 11 years, owes about $600,000 on the two homes, for which they pay approximately $3,000 in monthly mortgage payments. As for the two plots of land, they own them outright. Sherley’s undergraduate and graduate school loans, however, total $50,000 and deferment ends later this year, when they’ll have to begin chipping away at that bill.

On the plus side, Sherley has $74,000 in her 401(k) at work. They each have $2,500 in individual stocks, a total of $7,000 in a mutual fund, and $4,000 in their savings and checking accounts. “It’s not enough,” says Sherley, who is becoming increasingly anxious. Says Edenswear, “If we could just sell the land or house in Florida, the profits would do a lot to change our situation.” Meanwhile, Sherley and Edenswear want to begin saving, not only for emergencies, but for retirement and their children’s college education. Sherley and Edenswear have learned the hard lesson that sometimes things don’t go according to plan. The reality check has inspired them to think twice about purchases and cut back as much as they can.

Despite everything, they’re optimistic. “We’re proud of the homes and the land we’ve purchased,” says Sherley. And they haven’t given up on real estate, as they hope their investments will eventually help them retire early.

The Advice

What is most encouraging about the Carrés’ situation is the optimism that the couple holds for the future. They are clearly thinking in the right way to prosper in the long term (i.e., plan for retirement, save for a rainy day, thinking twice about purchases large and small.) However, remedying their current situation will require them to rationalize some of their personal goals with the hard realities of the market. Never forget that for us to get to the long term we must always first go through the short term. So let’s start there.

The Carrés’ greatest short-term need is to increase cash flow. Because of the loss of Edenswear’s position, the family has experienced a 25% reduction in its gross income. Assuming a 25% marginal tax rate at the federal level, and a 5.3% marginal tax rate in Massachusetts, the after-tax value of Edenswear’s salary was approximately $24,400.  Assuming he is currently still unemployed, an immediate way to recoup 46% of his after-tax salary, or approximately $11,200 per year, is to remove their youngest child from daycare until he finds permanent employment. Hiring a babysitter on the days when Edenswear has to leave the home for an interview will be much less expensive than their current situation.