Malcolm Johnson has had a good handle on his money since retiring seven years ago from professional football. The former wide receiver’s NFL career spanned three years with the New York Jets, Cincinnati Bengals, and Pittsburgh Steelers, and one year with the Ottawa Renegades of the Canadian Football League. Johnson, 32, wasn’t a top earner, but he made about $250,000 per season to play the game he loved. Upon leaving professional sports, Johnson’s severance was a lump sum of $30,000.
Johnson made some key financial moves to help himself and his family transition to life beyond football. Even at the height of his pro career, he made the most of every dollar he earned, spent money conservatively, and followed the rule of “pay yourself first,†a lesson he learned from his parents.
Today, Johnson and his wife of nine years, Joanne, have a favorable balance sheet. The Los Angeles couple has positive net worth taking into account their cash savings, investments, and more than a million dollars valued in real estate. However, they still have a sizeable amount of debt–about $1 million, the bulk of which includes two mortgages. The first is a mortgage balance of $450,825 for a 30-year jumbo fixed-rate loan at 6.25% on their current 1,100-square-foot home with three bedrooms, one bath, and separate guest house. They purchased the home for $765,000 in 2006. The second mortgage has a balance of $436,000. They took on a 30-year fixed rate loan at 4.88% earlier this year to finance the purchase of a 3,000-square-foot house, with five bedrooms and four baths. The Johnsons bought their new home, which was in probate, for $545,000. Renovations to the home, which are under way, are estimated at $62,400. The couple set aside the full amount from cash savings for the repairs.
“We had been looking for a bigger house to accommodate our family [which includes their children, 4-year-old Luke and 6-year-old Kaya] and the likelihood that my mother-in-law will be moving in with us in the next three to five years,†says Malcolm. “The downturn in the real estate market presented a great buying opportunity in Lafayette Square, a gated, family-friendly neighborhood in the heart of Los Angeles.â€
The college sweethearts, who attended the University of Notre Dame as undergraduates, have
advanced degrees and outstanding education loans. Malcolm earned an M.B.A. from Carnegie Mellon University in 2006. He owes $31,270 on his student loan. Joanne, 33, holds a law degree from the University of Southern California, which she obtained in 2001.Malcolm’s gross pay is $153,000 as vice president of the commercial real estate finance group at a multinational bank. Joanne recently bid farewell to her position as in-house counsel for an energy drink company. Joanne says she hopes to find a job “that is a good long-term fit, more personally fulfilling, and offers work—life balance.†Before Joanne left her job in January, the couple’s combined household income exceeded $250,000 a year. Living on just Malcolm’s salary, their monthly net is around $8,925. With bills and loan payments adding up to $12,936 a month, the Johnsons now have a $4,011 financial shortfall. They’re dealing with the shortfall by using their savings.
Luke and Kaya’s line item on the monthly budget adds up to about $1,500. This includes Luke’s $950-a-month pre-school bill, as well as various activities, such as gymnastics, basketball, and after-school theatrical plays.
The Johnsons plan to make up the shortfall by renting their old home for about $3,200 a month. The mortgage payment is $2,612, which would net them $588. “Instead of having to take a big loss by selling our old house we can at least break even while we wait for the resale market to recover,†says Malcolm.
The Advice
Black Enterprise devised a game plan to help the Johnsons reach their goals.
Stop the bleeding. The Johnsons have a shortfall of $4,011 each month. While they plan to rent out their old house for $3,200 a month, they will still need $811 more to fill the gap. In addition, there are no quarantees they’ll be able to find a renter quickly or that they’ll be able to charge enough rent to cover the cost of carrying the house. The Johnson’s should attempt to sell their old home now, instead of holding on to the house until the market rebounds.
Step up the job search. To help ease the family’s financial burden, it’s important for Joanne to secure some type of work. But until she finds a job, she might consider becoming a freelance consultant to bring in some immediate extra cash.
Cut back on activities for the kids. Extracurricular activities total almost $600 a month. The Johnsons must re-evaluate this line item and see which activities they can cut back or eliminate altogether.
Acquire more insurance. Malcolm’s life insurance policy is adequate at $1.2 million. But Joanne hasn’t had coverage since she left her job. She needs a term policy worth about $750,000 to cover the cost of at least one of the homes should something happen to her. Pierre Dunagan, president of The Dunagan Group in Chicago, suggests Joanne use the $2,000 in contest winnings to buy the life insurance policy, which lessens the financial burden on Malcolm in the event of her death.
Make an estate plan. At some point, the couple needs to formulate an estate plan beyond just wills. Were Malcolm to pass away, the estate would be a little more than $1 million. Estate taxes kick in at $3.5 million, so as the couple’s net worth continues to grow they should look to trusts and other vehicles to protect their assets.
Increase investments in equity market. At their age they need to be aggressive investors. Too much of their money (in the 529 plans and retirement accounts) is tied up in bonds–30% to 40%. They need less of their money in fixed-income vehicles and more of it in equity investments. The Johnsons could also use a hedge against inflation, which can be accomplished by putting 10% of their portfolio into a precious metal mutual fund and an energy mutual fund, says Dunagan. He suggests putting 25% each into small-cap, mid-cap and large-cap mutual funds and 15% in international equity funds.
Pay down the HELOC. The couple is not carrying a lot of consumer debt because they pay off their credit cards every month. But they need to tackle the interest-only home equity line of credit they used for their primary residence by contributing more than the minimum amount due.