Money Make-Overs : Trying to Break Free of Debt
Putting personal finances in order is a common New Year’s resolution. To help our readers stand by their plans in 1994, the Times Orange County Edition sought volunteers to meet with financial experts, also volunteers, who drew up plans to help the individuals or couples set budget goals. Today: Autumn and Mike Wilson, who had a combined credit card debt of $24,000 when they met, are now beginning to set aside a cushion in savings. And Judy Miller’s monthly income is only $44 more than her expenses. She invested in real estate when the market was hot, now the rents on her properties have fallen. With 87% of her assets tied up in rentals, she’s cash poor, real estate rich. First in a series. *
Autumn and Mike Wilson are a success story for the debt-happy decade of the 1980s.
When they met three years ago, they had $24,000 in credit card debt between them. This February, they will pay off the last of that amount.
“We were behind,” said Autumn. “Now we’re even and moving forward.”
They take brown bag lunches to work every day. They buy clothes on sale, wait for movies to come to the video stores and clip coupons for groceries, restaurants and almost everything else.
They saved $600 this year alone with coupons, including two-for-ones used for rare dinners out.
Mike, 43, teaches high school government and economics in the Anaheim Union High School District and works four nights a week teaching English as a second language. He also teaches summer school. Autumn, 36, is a meeting planner with California Leisure Consultants in Long Beach.
Their goal is to learn how to live differently--maybe have more fun--while staying within a budget.
For Mike, especially, the thought of having extra money and anxiety about future debt weigh heavily. His father earned a tidy sum as a lawyer, but his spending left the family destitute when he died, and Mike doesn’t want to fall into the same trap. Autumn understands but figures they could loosen up a little even as they save for their retirement and for any emergencies that may pop up.
“My goal in life is balance,” said Mike. “I don’t want to be a miser, saving everything for the future. I want to be comfortable saying, ‘Autumn, let’s go to dinner,’ and blow $60 knowing we’re within our budget.”
Maureen Tsu, a certified financial planner with Professional Financial Advisors Inc., said the Wilsons have overcome a major hurdle to future security: They have changed their old spending habits that sunk them into debt in the first place.
The Wilsons’ strategy now, Tsu said, should be to take the money they formerly used to pay credit card bills and budget it for needed home repairs and furnishings.
Also, she said, they should shift $20,000, part of an inheritance from Mike’s mother, from risky stock holdings to savings accounts and other safer, more readily available investments. The stock is risky because it was purchased with money borrowed from a brokerage.
The couple’s assets total more than $200,000 and include their home, tax-sheltered annuities, gold coins and other investments. This year, the couple earned $78,000, including interest and gains of $6,000 from the margin account.
Their liabilities are a $148,000 mortgage debt, $1,200 remaining to pay on their credit cards and $5,900 in loans and $30,000 they borrowed to pay for stock.
The Wilsons whittled their credit card debt with the help of a consumer credit counselor. They had been paying about $900 each month for more than two years to pull down that debt, and now are paying somewhat less. Recently, they applied for credit cards with low interest rates of 8% and plan to use them sparingly for such special items as airline tickets.
Tsu said that too many people who have run up high credit card bills have wiped out the debts by declaring personal bankruptcy, only to fall into debt again within months.
“They repeat the same behavior,” she said. “What many people don’t realize is that the debt is paid, but not by the individual. They are dumping it off on society.”
The Wilsons are “more astute than most,” Tsu said, probably because they have been through difficult times.
Their payment of their credit card debt, their high income and their willingness to buy mortgage insurance helped them to qualify for a loan on a home, which they purchased in July.
The home bit into some expected savings because the monthly mortgage payment is $400 more than their rent was. Still, they’ll pick up $300 a month after their credit cards are paid off in February and they will save $200 more each month after June when they complete payments on appliances they bought on a Sears, Roebuck & Co. credit account.
Tsu counseled them to spend the savings for additions to their sparsely furnished home. The couple has little more than a refrigerator, stove and couch. Tsu believes that when people feel deprived of a basic need, such as furniture, they can be tempted to dip into their savings and splurge.
In 18 months to two years, after the home is fully furnished, the Wilsons should begin putting the $300 to $500 a month into an emergency cash fund until it reaches a level with which they feel comfortable, Tsu said.
She also advised a safer investment portfolio. Currently, the Wilsons have a margin account, which involves money borrowed from a brokerage to be invested in corporate stocks. Typically, a customer puts a minimum of 30% down and the broker lends the rest.
If the value of the investment dips lower than the purchase price, the broker could require the Wilsons to make up the difference. That is known as a margin call, and the Wilsons don’t have the cash to cover the $30,000 they owe.
“This is very, very risky,” Tsu said. “I advise people to build from the foundation up: cash reserve, retirement fund and liquid assets,” such as mutual funds, bonds and stocks that aren’t purchased on margin accounts.
For retirement, the Wilsons are setting aside about $720 each month, which is near the minimum of 10% of income that Tsu recommends for a couple with at least 20 more earning years ahead.
The process of looking squarely at their finances helped clear up some differences between the couple, Mike said. Their financial picture was “not as bleak as I thought it was nor as good as Autumn thought it was.”
PROFILE Double income of $78,000; no savings THE SUBJECTS Name: Autumn Lee Wilson, 36, and Mike Wilson, 43 Occupation: Saleswoman; teacher Assets: Home valued at $165,000; automobiles valued at $5,000; stocks valued at $18,000; tax-sheltered annuities valued at $11,000; teachers retirement vested plan valued at $8,660; gold coins valued at $1,000; personal property valued at $10,000. Total: $218,660. Liabilities: $148,000 owed on a home mortgage; $1,200 owed on credit card accounts; two loans from pension plan totaling $5,900; unpaid but owed amounts of $18,000 on stock purchases. Total: $173,100. Financial goals: Save $10,000 within a year and establish an adequate retirement fund.
The Experts
ADVISER TO WILSONS
* Name: Maureen Tsu, 44
* Title: Certified financial planner
* Company: Professional Financial Advisors Inc., San Juan Capistrano
* Background: Bachelor of science degree from UCLA; master’s degree in business administration from USC; certificate of financial planning from the College for Financial Planning in Denver; licensed by the International Board of Standards and Practices for Certified Financial Planners Inc.; board member and past chairwoman of the Orange County Society of the Institute of Certified Financial Planners; financial planner since 1981, specializing in retirement and asset allocation
