For the past few years, Tisca Dorsey has been doing the right thing—becoming a well-informed and educated investor. In 1999, Dorsey started schooling herself about money management. Now looking to grow her assets, she has been researching various mutual funds and stocks.
Dorsey knows she needs to begin investing because she has already, a purchased a home in Lorton, Virginia, and has managed to save well over six months worth of living expenses, to the tune of $17,000 in cash reserves. The 34-year-old procurement technician at Computer Science Corp. has a gross annual salary just over $65,000, and her take-home pay is about $3,600 a month. Her monthly living expenses add up to about $1,600, leaving her a $2,000 surplus each month.
“I reached my goal of being able to pay all of my bills with one paycheck and getting rid of credit card debt,” says Dorsey, who had a total of six credit cards at one time. “But once I basically achieved that, I wasn’t sure what to do with the surplus of money I had.”
Overwhelmed by the many different sources of investment information, Dorsey hasn’t been quite sure where or with whom to invest her discretionary income. Deciding how to choose the right stock, mutual fund, or even a money market account is also a challenge. Like many green investors, she is frustrated because of her lack of familiarity with investing, so she has pretty much sat on her money, which includes about $4,000 in stocks, $10,000 in an IRA (money rolled over from a 401(k) with a previous employer), and $1,500 in her current company’s stock fund account. She also has another $2,500 in a general savings account.
As far as her liabilities are concerned, Dorsey owes about $124,000 on a condominium she purchased for $100,000 three and a half years ago (it is currently valued at $200,000, partly due to new construction in her area). Last April, she refinanced (from a rate of 7.875% to 5.875%) and took cash out to pay off the car note on a 1999 Honda Civic. But to her dismay, the car was totaled in an accident five months after she eliminated the debt. Dorsey then financed $17,000 toward the purchase of a 2000 Acura TL. She also owes about $22,000 in student loan debt and $2,800 in credit card debt.
While she is anxious to start investing, Dorsey is finding that investment information simple enough for her
to grasp is difficult to come by. Another challenge she faces is surrounding herself with savvy investors from whom she can learn. “I don’t have friends who are trying to do the same thing or have done it,” she says. “That would help.”Dorsey has longed to talk with a financial adviser about her options. To help her navigate the maze of investment information, BLACK ENTERPRISE had her consult with Walt L. Clark, president of Clark Capital Financial (www.clarkcapital.net) in Columbia, Maryland. The following are his recommendations:
Consolidate and pay off debt. Dorsey has 10 different student loans totaling over $20,000, with interest rates ranging from 3.54% to 8%, and a $17,000 car note. Since she has accumulated over $70,000 in equity in her home, Clark suggests she open a home equity line of credit to consolidate her debt. She should be able to get a home equity rate in the low to mid 4% range. Since the interest is tax deductible, not only will she be able to write off the interest payments, but she will also lower her monthly payment and simplify her debt obligations. “It has been my experience [that] if consumers are able to focus on one or two bills instead of multiple bills, they will be able to reduce their debt obligations sooner,”notes Clark.
Dorsey also has $2,800 in credit card debt at 13.99%. Clark advises she eliminate the credit card debt by using the $2,000 Financial Fitness contest winnings and taking the rest from her checking account. After simplifying her debt situation and investing her existing assets, she can then begin to focus on her childhood dream of becoming a criminal or family lawyer. She should be careful not to incur additional loans for law school until she sees success from her financial plan.
Invest for retirement and the future. At age 34, Dorsey has over 25 to 30 years before retirement; therefore, she should be investing her discretionary assets in growth investments. In the next couple of months, she expects to receive about $4,000 in a settlement from her car accident last September. Since she has a good salary, a significant monthly surplus, and thousands on hand in checking and savings accounts, Dorsey should use most of the proceeds to open an investment account and invest in small- and mid-cap mutual funds and individual stocks. She should establish an automatic investment account with a mutual fund family and draw money monthly from her checking account to invest in several growth funds.
Maximize 401(k) contributions. Another firm recently bought out Dorsey’s company. Unfortunately, she failed to meet the deadline to set aside pre-tax contributions to her 401(k). She won’t be eligible again until October. When the time comes, Dorsey should put the maximum contribution into her 401(k). This is another way to build wealth without concentrating on the process. She should invest the proceeds in growth funds through her plan. This strategy will invest pre-tax dollars and build wealth over time while reducing her taxable income.
Continue investment education. One way Dorsey can narrow down her search for the best mutual funds is to use the BE mutual fund overview and top mutual fund listing (see “Caught in a Storm,” this issue) as a guide. The Investment Company Institute (www.ici.org/funds/) offers a wealth of investor information, and WorldWideLearn (www.worldwide learn.com/investment-education.htm), a directory of online education, lists a host of online financial education resources (many of them free) that investors can tap in to. Also, BE’s Wealth Building Kit (available for download at blackenterprise.com/wbkform.asp or by calling 877-WEALTHY) explains investing in simple terms and lists many books and Websites as additional resources.
THE ADVICE
Financial Snapshot: Tisca Dorsey
| HOUSEHOLD INCOME | |
| Gross Income | $65,700 |
| ASSETS | Â |
| Checking | $17,000 |
| Savings | 2,500 |
| Stocks | 4,000 |
| Rollover IRA | 10,000 |
| Company Stock Fund | 1,500 |
| Value of Home | 200,000 |
| Value of Car* | 15,500 |
| Total | $250,500 |
| LIABILITIES | |
| Mortgage | $124,000 |
| Car Loan | 16,200 |
| Student Loans | 22,000 |
| Credit Card Debt | 2,800 |
| Total | $165,000 |
| NET WORTH | $85,500 |
*ACCORDING TO KELLEY BLUE BOOK.