Couple Wonder Where Cash Flows : Finance: Despite a dual salary of $90,000, O.C. pair say they live paycheck to paycheck. Advisers show them how to put money to better use.
In many ways, Ed Johnston and Pat Rollyson live the typical middle-class Orange County lifestyle.
He is an aerospace worker, and she is a nurse. They own a home in Anaheim, a 12-foot fishing boat, an aging motor home, a new motorcycle and two 10-year-old cars.
Their household includes Rollyson’s teen-age children Robert, 17, and Dawn, 16, as well as Johnston’s 26-year-old daughter, Kori, who is attending a private flight attendant training school in Los Angeles.
Their annual salaries total $90,000, which looks impressive on paper, but in fact the couple say they are living from paycheck to paycheck.
“We look at the pay stubs,” Johnston said, “and then what happens is we say, ‘My God! We made $90,000 last year! Where did it go?’ ”
Johnston and Rollyson keep up with day-to-day expenses, but they never have enough left over to start an emergency fund, add to their retirement savings or even take a nice vacation.
They confess that a big part of their problem is lack of discipline. To find solutions, they met with Irvine financial planner Victoria Felton-Collins, who drew up a makeover plan for them. Pat Szekel, a tax accountant in Orange, also reviewed the couple’s finances.
Felton-Collins’ proposal would help Johnston and Rollyson exceed their modest goal of staying even in 1995. It isn’t that the money isn’t there, she said, it’s that they don’t keep track of it or put it to its best use.
“Don’t wait around for a magic answer,” Felton-Collins advises. “You have to have discipline to change your situation.”
When the couple actually listed their monthly expenses, they could see where the money goes: $1,560 for their house payment, taxes and insurance; a $225 payment and insurance on the motorcycle, which Johnston rides to work, and about $120 a month for car insurance that covers two teen-age drivers.
An additional $520 goes for utilities, cable television and phone bills, including hefty long-distance charges because most of the couple’s relatives and many of their friends live out of state. That pushes their total monthly expenses to $2,425--not counting groceries.
The supermarket claims a big chunk of the couple’s cash. Rollyson said she is a disciplined shopper: “I go and spend $400, and we have two weeks’ worth of groceries in the house.”
Johnston, however, is an impulse shopper, she said: “You take the kids and go and spend $140 and come back with junk.”
He concedes that “I really wish I knew where it all went. . . . It just seems to go for general stuff.”
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The couple can verify that their money does, indeed, slip away. At the end of November, for example, they had less than $1,000 in their joint checking account and $300 in savings.
After meeting with the couple, financial planner Felton-Collins found one area that both were overlooking: Johnston uses the Internal Revenue Service as a savings bank. He likes the idea of getting a big refund every year--he says it averages $8,000--so he has far more money withheld than is required.
Felton-Collins advised Johnston to rethink his approach. “Don’t continue letting Uncle Sam use your money interest-free,” she said.
The $500 to $650 that is withheld each month in excess of Johnston’s actual tax liability would go a long way toward building an emergency, retirement or vacation fund, she said, if it were invested in a mutual fund or used to buy a six-month or one-year certificate of deposit at a bank.
She also encouraged the couple to install a simple financial planning program on their home computer and to use it to keep track of their expenses.
Because they have a joint checking account and both write checks to pay bills, Johnston and Rollyson often don’t know the actual balance in the account. Felton-Collins suggests that the major bill-paying chores be delegated to one of them and that incidental checks be entered religiously into the computer.
Tax accountant Szekel agreed. “They don’t even have to have a budget,” he said. “Just keeping track of expenses by category is a big step.”
“Sometimes calling up your expenses at the end of the month or year and seeing what you are really spending your money on will be enough to shock you into changing your spending habits,” he said.
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Both experts also encouraged the couple to put aside as much as they can for the future.
“Retirement plans let you save current tax dollars and allow your money to grow tax-deferred,” Felton-Collins said, because the benefits aren’t taxable until they are paid out, and when a person retires he or she usually moves to a lower tax bracket.
The hospital where Rollyson works has no retirement plan now but is starting one soon. The experts urged her to sign up as soon as she can and contribute the maximum amount possible. Johnston already does that with his retirement program, they said, and should continue doing so.
Felton-Collins also recommended that the couple review their auto and homeowner insurance policies with the aim of reducing premium payments by increasing the deductibles. Even savings of $20 a month would add up over time. Also, she suggested that the couple consider replacing costly mortgage life insurance with regular term life insurance, which often costs far less for the same amount of coverage.
Johnston said he and Rollyson definitely plan to set up a budget and keep track of expenses. “That makes real sense,” he said. “We can look at it and find out what we are doing.”
He said they will consider Felton-Collins’ other suggestions, and he liked the idea of replacing the mortgage insurance with less costly term life policies, but he didn’t see much benefit in raising his auto and homeowner deductibles.
“If it only saves $20 a month,” he said, “we’d just spend that on junk.”
He was leery too about changing his tax withholding. “I may be giving the government an interest-free loan now,” he said, “but I get it back every year, and I can make plans to use it.”
“I had money in mutual funds once,” Johnston said, “and you can lose money there. And if I put it into a savings account every month, I’d just spend it. I work in aerospace, and we have a saying that expenses expand to use up the money that’s available.”
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Tax accountant Szekel said the couple must follow whatever course seems comfortable. “I figure that people know themselves and their habits best, so I let them decide what to do,” he said. “If he gets that $8,000 refund in a lump sum and uses it for major purchases, that’s better than getting it in monthly installments and spending it on everyday expenses.”
If Johnston does decide to invest the money, Szekel said, he can understand the wariness about mutual funds.
“They are popular, but they do have some risk--as we are seeing right now in the municipal bond funds,” which have been shaken by Orange County’s loss of more than $2 billion from its investment pool.
Overall, Szekel said, Johnston and Rollyson “seem to have excellent debt-to-earnings ratios. . . . It really boils down to a matter of saving it or spending it, and that’s a decision only they can make.”
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The Experts
Victoria Felton-Collins, 52, is a partner in the Irvine financial planning firm of Keller, Coad & Collins. She has a doctorate in psychology and taught a graduate seminar in psychology before launching a career as an independent financial planner in the mid-1980s.
Felton-Collins is the author of several financial advice books, including “Couples and Money” and “Divorce and Money,” and has been on a number of TV and radio programs to discuss financial planning.
Her company now has more than $140 million under management for various business and individual clients.
She is a member of the International Assn. for Financial Planners, the Institute of Certified Financial Planners and the Registry of Financial Planning Practitioners.
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Pat Szekel, 43, is a certified public accountant and partner at Wiegel, Szekel & Walker in Orange. Before joining the firm in 1981, Szekel worked for Coopers & Lybrand, one of the nation’s largest accounting groups. He specializes in tax and financial planning.
Money Makeover
Names: Ed Johnston, 55, and Pat Rollyson, 45.
Occupations: He is a failure analyst technician for TRW Corp.’s space and electronics group in Manhattan Beach. She is a pediatric intensive care nurse at Long Beach Community Hospital.
Annual household income: $90,000.
Assets: An Anaheim house valued at $160,000; a 1994 Honda Goldwing motorcycle valued at $10,000; Johnston’s vested interest in his company retirement plan, valued at $117,000. They also own a 1985 Ford Crown Victoria, a 1984 Chevrolet Chevette, a 12-foot fishing boat and a motor home, all of which have minimal resale value. Total: About $290,000.
Liabilities: $160,000 owed on a home mortgage, $9,000 owed on the motorcycle. Total: $169,000.
Financial goals: To stay even in 1995.
