Profile : Single Income Under $30,000, Debt-Ridden : Trading Security for Comfort
The Subject
* Name: Tammy Raiton, 27
* Occupation: Teacher
* Assets: 1987 Nissan Sentra valued at $2,000; $300 in a bank savings account; $635 in a state teachers retirement account; $600 in a checking account; antiques and lithographs valued at $500. Total: $4,035
* Liabilities: Student loans totaling almost $20,000; $1,800 owed on credit cards; $1,050 owed on other charge accounts; $6,000 owed on a personal loan. Total: $28,850
* Financial goals: Pay off bills, travel, buy a home in five years, save for retirement.
Call it the clash of the present with the future.
On the one hand, Tammy Raiton, 27, is striving for a comfortable lifestyle: a well-furnished home, a few antiques, stylish clothes and, most of all, travel--to Hawaii, to Europe, to Mexico.
On the other hand, the Cal State Fullerton history graduate wants to own a home in five years, pay off loans and credit card debt, and begin saving for retirement. Her struggle is one that almost every graduate faces just after college and one that can be difficult.
After landing a $26,000-a-year job as a teacher at Whittier Union High School earlier this year, Raiton chose the present over the future. Now that is catching up with her, devouring her take-home pay of $2,028 a month.
Rent for her apartment in Fullerton is $930 a month. She makes no car payments (a gift from her parents) but is wrestling with more than $2,800 in credit-card and other consumer debt. And she has found that being a history buff is pricey: A trip last summer to Washington--”history heaven”--cost $5,000.
To meet her financial obligations, Raiton has started cutbacks and has been forced to give up her hobby of collecting lithographs costing as much as several hundred dollars each.
“I’ve put the art auctions aside,” Raiton said. “I’d like to buy nicer clothes and eat something other than Top Ramen. I want to have enough money to do what I want to do.”
As for the future, the well is dry. Raiton has almost nothing set aside.
“I have friends who want everything paid off immediately,” she said. “Not me. I’ll take the risk. I’m making the money; why not use it?”
That philosophy could soon change. Raiton met recently with Santa Ana certified financial planner Barbara Steveson in an effort to strike a balance between now and later.
“Sometimes it’s very difficult to be looking at the future,” Steveson told her. “It’s so far away. Sometimes it’s a choice between what you have now and what you have later. It’s give and take.”
First, Steveson asked Raiton to map out specific goals: for the next year, five years down the line, even into her twilight years.
For Raiton, that means paying off debt, preferably in the next two to four years. That’s a heavy task. In addition to her credit card balances, she owes her mother $6,000 for a personal loan used to pay off some high-interest-rate debts. Raiton wants to settle these debts as soon as possible. But she has resigned herself to first paying off nearly $20,000 in student loans, at $257 a month, in the 10-year time frame required by her lender.
As a schoolteacher, she works just 10 months out of the year, so she must set up a savings account to cover living expenses during the summer. She also needs to save money if she is to travel during that time. Finally, she wants to put aside enough money for a down payment on a house, as well as for retirement.
Can she do it all?
She can, Steveson said, and maybe even should.
One tactic people sometimes try is to pay off all credit-card debt at once, at the expense of buying clothes, taking trips or purchasing household items on credit. But such an austerity program has pitfalls.
“For the most part, that doesn’t work,” Steveson said. “Oftentimes, a year later, other debts are still there, and you don’t have any savings. For one thing to work, you have to have all of it work.”
While it might appear wise to pay off all credit card debt and avoid hefty interest rates, she said, it would be at the expense of saving for a home or retirement, so time would be lost in building assets through savings and investments.
“You’ve got to have at least something to show for it, or it is not any fun,” Steveson said.
She made these recommendations, tailored to Raiton’s situation:
First, get a roommate. Raiton lives in a two-bedroom apartment and could benefit from finding someone to share the rent.
Next, keep a record of all expenses. During the meeting, Steveson found that about $90 a month of Raiton’s income was unaccounted for.
“That can be many things,” Steveson said. “It’s hard to keep track of it. For example, you might drink a Coke every day at work. That’s $1 there.”
Records--such as receipts, pay stubs and old airline tickets--also can be useful for tax purposes, Steveson said. Raiton had hoped to take a few of her students to Europe next summer; there could be deduction possibilities there.
Next, earmark $120 a month to get rid of all credit-card debt within two years, saving costly interest expenses that Raiton would face if she made only the minimum monthly payment. Another $130 a month could go to repaying her mother within four years.
For her summer living expenses, Raiton might put about $380 a month into a savings account to cover the $3,800 in bills for two months. Another option would be having her employer pay her over 12 months, rather than 10, making accounting easier.
Then there’s the house fund. Steveson recommended placing $100 a month into a municipal bond or other government security mutual fund.
“It’s something that is safe, stable and has a higher yield than a money-market or savings account,” she said.
By investing in a fund with check-writing privileges, Raiton could accomplish two things. She would have about $6,500 after five years for the down payment and, in case of emergencies in the meantime, would have the account to fall back on.
“It’s wise to have $3,000 to $5,000 for that,” Steveson said.
Another $100 a month could go toward retirement savings, preferably a tax-sheltered annuity. Because of the tax advantages, Raiton actually would be paying in just $66 a month. And she could borrow as much as half of the total in five years to help with a down payment on a house.
Steveson said that Raiton might want to go to a tax-sheltered annuity because there are not many limitations on how much can be put in and be deducted at certain income levels. Such annuities are available to public-sector employees, such as teachers, and those at nonprofit institutions, she said. Other annuities, carried by those in the private sector, often don’t carry the same tax advantages.
Robert J. Aldridge, a certified financial planner in Laguna Hills, echoed some of the tax-sheltered annuity’s benefits. He noted, though, that annuity funds are often limited to investment in insurance company securities. Investments in an individual retirement account, by contrast, can be placed in everything from mutual funds to Treasury bonds.
“They do have that diversity,” Aldridge said. “You have got more investment choices.”
Finally, the travel. Spending $5,000 again this year may be a bit too steep. But after two or three years of thrift, debt will have been reduced or eliminated, Steveson said, leaving more money for trips.
“This is wonderful,” Raiton said. “It’s doable.”
Another possibility for Raiton would be to get a summer job to raise travel money. And by shopping for bargain rates, she might even make that European trip next year after all.
“I’ve already been there,” she said. “And there aren’t many things left for me to buy.”
Advisers to Tammy Raiton Name: Barbara Steveson, 54 Title: Certified financial planner Company: Barth Financial Services, Santa Ana Background: Planner with Waddell & Reed from 1985 to 1990. Taught high school physical education in Long Beach from 1960 to 1963. Bachelor’s degree in education from the University of Colorado in Boulder. Received certified financial planner designation in 1991 from the College for Financial Planning in Denver. Member of the Institute of Certified Financial Planners, International Society of Retirement Planners, Women in Management, the Greater Long Beach Chamber of Commerce Women’s Council and the American Heart Assn. Name: Robert J. Aldridge, 47 Title: Certified financial planner Company: Aldridge & Co., Laguna Hills Background: Has worked as a financial planner since 1967. Bachelor’s degree in political science from Cal State Long Beach; master’s degree in financial services from American College in Pennsylvania. Financial planner certification in 1981.
Researched by TED JOHNSON / For The Times
