Mikia Potter has a lofty goal — to retire at age 45. The 26-year-old also wants to eventually leave the world of corporate America and open her own business. Potter holds a bachelor’s degree in electrical engineering from Florida A & M University and is working on her master’s at Emory University in Atlanta. She is two years away from completing an M.B.A. and is wisely using her company’s education benefits to pay for her professional degree. “I wanted to enhance and acquire business skills since I hope to run a [Subway] franchise one day,” says Potter, an engineer with an aeronautics corporation.
Potter currently makes $63,000 a year. She also has a second income — the $3,876 she earns per year from real estate holdings. “I own a one-family home in Pensacola, Florida. It belonged to my grandparents,” says Potter, who took out a $40,000 home loan to buy the property.
Not common for single black women her age, Potter owns a second piece of real estate — her primary residence in Mableton, Georgia. She owes $114,000 on the home that she purchased in April 2003. “Since I am in such a high taxable-income level, I needed the tax benefit, plus I wanted to build equity,” explains Potter. She moved from Woodbridge, Virginia, to the Atlanta metro area because the real estate was cheaper.
The young professional has also made significant investments in her retirement account. She has a 401(k) portfolio valued at $25,000, in which she’s placing a solid 12% of her income, or $7,560 a year, and is investing that money in mid-cap mutual funds. In addition, she has about $10,000 combined in savings and checking accounts. Her revolving debt is minimal — a $3,250 credit card balance. And the car note on her 2000 Honda Civic is paid off.
While she is still relatively new to the labor market, Potter possesses a strong work ethic and a high level of focus. She understands the four ways wealth is created in America: private business ownership, real estate, capital markets investing, and achieving a senior level position in a substantial corporation. “I want to get to a point where I have multiple streams of income and where I don’t have to work a 9 to 5 job, so that I can live off of cash flow from the assets I acquire,” she says. “That is my ultimate goal.”
Potter has achieved a net worth of almost $60,000, which is excellent for a person her age, says David Hinson, principal of Wealth Management Network Inc. in New York (www.wmnllc.com).
He adds that the largest risk she faces at this time is losing focus. “She is on track to achieve her goals, but far too often, when young professionals achieve a small measure of success early, they begin to loose discipline in executing their wealth-creation plan.”To help her execute a wealth strategy, BLACK ENTERPRISE teamed Potter with Hinson, who says it is well within Potter’s power to achieve financial independence by the age of 45. The following are his recommendations, based upon a detailed 2004 household budget, other quantitative data, and one-on-one conversations:
Work At Her Company For Another Six Years. Potter should stay with the company until age 32. This six-year period will allow her to build solid cash reserves, experience, and relationships. Assuming current income growth and non-retirement savings, her target income should be $89,366 with non-retirement savings of approximately $77,626 by year six. Hinson projects that Potter could then use these savings to acquire assets, like an existing business or real estate property, that could be worth from $258,000 to $776,000 in value.
Purchase One Investment Property Every Two Years. This way, by retirement age, Potter will have accumulated approximately 10 investment properties. Assuming a steady cash flow that is consistent
with her existing investment property, Potter could accumulate $520,000 worth of real estate value and an annual net cash flow of $38,000 (40% of her desired after-tax income need). Note: this analysis does not take into consideration tax benefits, or any increase in property rental rates.Manage Cash Better. Hinson says that although access to cash in an emergency is important, Potter has more than she really needs. She should reduce her checking account balance to $3,000 and invest her remaining cash assets. If she consistently puts this money away in a diversified mutual fund account from now until retirement and achieves 8% return, she will have accumulated approximately $327,000. She can then convert this money into a laddered portfolio of municipal bonds yielding about 5%. That could provide an estimated after-tax income of approximately $18,000, or 19% of what she would need to live on annually.
Obtain Home Equity Lines Of Credit On All Properties. While Potter has minimal equity in her homes, she could still obtain approximately $6,000 in home equity lines from banks. These lines will provide capital to purchase the next investment property, or serve as a small secondary cash flow source in the unlikely event of income interruption.
Establish An IRA. At her income level, she can make a pre-tax contribution of $3,000 to an IRA. Wealth can be built much faster in an IRA than in a traditional investment program because of its tax-deferred nature.
Aggressively Build Relationships With Entrepreneurs. She should consider budgeting $3,000 annually for relationship development. This includes joining local clubs such as the Cherokee Town & Country Club and the Association of Emroy Alumni. Potter should attend the annual gala events of charities or nonprofit boards that senior executives of her company support. Making a 10-year gift to her undergraduate or graduate school and participating in upscale alumni activities are also advisable.
Do Not Hurry To Purchase A Subway Franchise. Potter is contemplating purchasing a Subway franchise. Hinson says that this type of business may not maximize Potter’s high level of technical skill and personal interests. “She needs to figure out what her best options are so that she launches a business that fits her skill set. [It should be] something that she will fundamentally enjoy, and [it should be] the best economic opportunity at the time.” Potter should develop her entrepreneurial options as she gets her M.B.A., talk with advisers, and then write a business plan on the most viable one.
The Advice
Financial Snapshot: Mikia Potter
|
HOUSEHOLD INCOME |
|
| Gross Income | $66,876 |
|
ASSETS |
|
| Checking | $4,500 |
| Savings | 5,500 |
| Brokerage | 1,800 |
| 401(k) Retirement Plan | 25,000 |
| Market Value of Primary Home | 120,000 |
| Market Value of Investment Property |
47,000 |
| Car | 8,775* |
| Total | $212,575 |
|
LIABILITIES |
|
| Mortgage — Residence | $114,000 |
| Mortgage — Investment Property | 36,500 |
| Credit Card Debt | 3,250 |
| Total | $153,750 |
| NET WORTH | $58,825 |
| *According to Kelley Blue Book | |