Pursuing the American Dream - Page 2 of 2

Pursuing the American Dream

The Advice

David Hinson, president of Wealth Management Network in New York City, offers some guidance to help Cherry bolster his assets and cash savings. Also weighing in are Ivory J. Johnson, director of financial planning at Scarborough Capital Management in Annapolis, Maryland, and Carla J. Cargle, founder of Genesis One Wealth Builders in Sugar Land, Texas.

Nix the new home. Although the new house is already built, Hinson strongly advises that Cherry and his fiancée not go through with purchasing it, but instead take the penalty. As a second option he suggests they rent out the home and live in the property Washington currently owns. They would be in a better position if they rented the home to a tenant and used the additional income to pay down outstanding debt and increase savings. “By opting to put down only 3.5% and borrow the rest to build the new home, Cherry has nearly doubled his cost structure at the very time he desperately needs to preserve cash,” Hinson says.

Boost reserves. Cherry’s cash reserve is $7,200. This is dangerous because he is overleveraged on his mortgage obligations, and cash flow problems are just one tenant vacancy away. Once married, Cherry and his fiancée should make an effort to live on one salary for three years and save the remaining salary, advises Hinson.

Protect real estate investments. A primary concern in real estate investing is vulnerability. Tenants, guests, and even trespassers may sue. Should such persons prevail, they could attach properties, bank accounts, and personal possessions to satisfy the court’s judgment, says Johnson. He recommends Cherry create a limited liability company to safeguard his real estate properties. “He needs to preserve his wealth and protect it from the claim of creditors.”

Establish an estate plan. Johnson also recommends that Cherry set up a living trust to hold and manage his properties. In the event of his death, a trust agreement will protect Cherry’s assets from probate, shelter his assets from creditors, and pass on assets to heirs with limited hassle. Johnson notes that $500,000 in work insurance and $1 million in term life insurance is sufficient for the time being to cover Cherry’s properties, but it won’t be when children enter the picture. He suggests replacing and adding more coverage now while the cost is relatively low because of Cherry’s age.

Manage tax refund and adjust withholdings. Cherry should use his anticipated $13,000 tax refund to pad his emergency savings account. In addition, he should adjust withholdings so that his tax payments equal his tax liability. Of the total refund amount, about $9,000 is from income; the remaining sum is from property tax rebates.

Temporarily reduce retirement contributions. Cherry should temporarily reduce his 15% contribution to his retirement plan to about 8%, suggests Cargle. With his employer providing a 5% match, he is in a position to put away 20% of his income toward retirement annually. Assuming an annual rate of return at 10%, he will accumulate roughly $3 million by the age of 60, says Cargle.

To receive an application for the financial fitness contest, send an e-mail to financialfitness@blackenterprise.

This story originally appeared in the June 2009 issue of Black Enterprise magazine.