The Road to Independence : For Single Parent and Children, Time to Face a Few Financial Facts

Phyllis Alles learned an important lesson when she and her husband ended their 22-year marriage: Don’t depend on someone else for financial support.

“I just thought he’d always be there and that I’d have his income,” said Alles, who was a full-time mom for most of the marriage. “Never did I think that I’d have to support myself. That’s been a real rude awakening for me.”

Now, a year after the divorce became final, Alles, 42, is trying to prepare herself for the day when the financial ties are severed. Her alimony and child support payments will begin to taper off in June and terminate completely in six years.

“It concerns me because I wonder how I’m going to make it,” Alles said. “I’m stressing about the $275 I’m going to lose in June. I feel like it’s definitely going to hurt.”

Since their separation in 1993, Alles has been receiving monthly payments of $1,320 from her ex-husband. That’s provided a financial cushion to bolster her $24,000 annual income as an entry-level manager at a West Covina Lucky supermarket. Knowing that these payments are temporary, she wants to get her feet on the ground financially and to build a nest egg for retirement. But saving money hasn’t been easy.

All three of her children--ages 23, 18 and 15--live at home, and currently none helps pay bills or buy groceries, Alles says. As a result, saving has been a piecemeal process, and Alles has occasionally been forced to dip into that money for emergency repairs to her 1986 Oldsmobile Cutlass or to pay off credit card bills.

From her weekly paychecks, Alles puts aside $105 a month into a regular savings account, $135 a month into the Janus Worldwide Mutual Fund, $10 a week into stock in American Stores (the parent company of Lucky) and $10 a week into a “certificate builder” with her company’s credit union. To date, she has accumulated about $500 in the savings account, $1,300 in the Janus fund, $960 in company stock and $550 in the certificate builder program, which will be rolled over into a CD when it reaches $1,000. Her checking account balance normally hovers around $200.

But Alles’ bills continually seem to drain her savings.

She has a $1,061 monthly mortgage payment on the Chino home where she and her family have lived for the last 11 years. She owes about $2,500 on credit cards--on which she pays only $87 a month--and $1,000 in lawyer’s fees. She also pays about $385 a month in utility and telephone bills. In addition, she pays $250 a semester to study at Chaffey Community College in Rancho Cucamonga, where she is pursuing a bachelor’s degree in business administration. And because she orders take-out dinners a few nights a week, she spends about $240 a month on “entertainment.”

On the whole, it’s a somewhat unsatisfying way to live--and not one that’s helping her accomplish her long-term goals.

“I just feel like I’m spinning my wheels and I’m not getting anywhere,” Alles said, voicing a sense of despair.

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What she’s really doing is investing in too many places and not increasing her savings enough, said Judith Martindale, a fee-only certified financial planner based in San Luis Obispo.

Martindale, who specializes in advising middle-income families, said Alles is doing a good job of trying to save, given her salary and her expenses. She is putting away a little more than 10% of her salary. The problem is she’s not retaining that 10%--she keeps dipping into her savings. She needs to make a few changes to ensure her own security and to end the sense of resignation she feels about her finances, the planner said.

First and most important, Alles needs to get her elder son, Jim, to start paying rent or to contribute to the household bills in some way. Her 18-year-old, Tony, should also start contributing once he graduates from high school in June and begins full-time work. Tony now works part time to pay for his car and auto insurance.

“If Jim gave you $300 a month for living in the house, then you could put that in an IRA,” Martindale told Alles.

Admittedly, it’s difficult to tell your kids they need to start pitching in. But Martindale says Alles should realize that by doing this, she will be teaching her children something early in their lives that she had to learn later and the hard way: financial self-reliance. It is particularly important to address these issues with Jim, Martindale noted, because he serves as a role model for his younger siblings.

Still, Alles said it will be hard to ask her elder son for money because he’s financially strapped. Although he works full time, he never seems to get ahead.

“Their dad has even told me that I have to tighten up” on the kids, Alles acknowledged. “Deep down, I think that’s what has to be done, but I don’t know what to do. [Jim] just can’t seem to get on his feet financially.”

If Alles can’t handle forcing her children to contribute to the family budget, she will have to tighten the purse strings in other ways--perhaps by eliminating her takeout budget. Martindale encouraged Alles to track her expenses for one month and then to “squeeze and substitute,” choosing one discretionary area each month, such as food or clothing, and trying to spend 10% less.

“If you focus on one thing, that’s more doable than looking at the entire budget,” Martindale told her.

Alles has considered selling her home and buying a cheaper one to cut her expenses. She has a 30-year mortgage and has refinanced twice, most recently last year. But Martindale discouraged that idea, at least for now. Under current law, Alles would have to pay capital gains taxes on the home’s appreciation. However, lawmakers are considering eliminating most capital gains taxes on sales of a primary residence. That change might make such a move sensible for Alles, especially after fewer children live at home.

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Instead, to help Alles get out of debt, especially the heavy credit card debt, Martindale suggested that she take the $1,050 in her two savings accounts to pay down the $2,500 in credit card debt. The $105 per month she’s been adding to the regular savings account should instead go to paying off the credit card debt and lawyer’s fees.

Doing that will put her on a fast track to eliminating her personal debt, and when she’s free of debt payments, it’ll be easier for her to save. Once the debts are paid off, Alles should continue to budget in those monthly “payments,” but they should go into a savings account or mutual fund.

What if she faces a costly emergency after she’s drained her savings? She uses the credit cards to handle it, Martindale suggested.

Meanwhile, if Alles determines that she needs a new car, she might consider a home equity loan to finance it. Alles has about $45,000 of equity in the house that could be tapped for a major purchases or in an emergency.

Alles shouldn’t have too much difficulty repaying such a loan after she’s eliminated her other debts. Besides, Martindale said, the interest paid on an equity line of credit is tax-deductible.

In reviewing Alles’ stock and mutual fund investments, Martindale said she doesn’t encourage people to invest too heavily in their company’s stock--that’s too many eggs in one basket. People who do so become doubly vulnerable should a company go under--they lose not only their jobs but also a big chunk of their savings. However, Alles gets the American Stores shares at a 15% discount and cannot sell them as long as she’s an employee, so Martindale didn’t press the point.

Her mutual fund investment is fine for now, but once her children are on their own, Alles can look at diversifying her portfolio and accelerating her savings.

Alles may have a tax deduction in her school expenses, Martindale said, if her course of study is required by her employer or is necessary for improving her skills in her current job. If she can establish that that’s the case, she can deduct her tuition and registration fees, supplies and even transportation to and from school.

Tax considerations aside, Alles’ education will certainly help in her job and her career with American Stores, for whom she plans to work until she retires.

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Better yet, the company has a good retirement plan, and if Alles works until age 70--which she expects to do--she should have enough in pension payments and Social Security to be able to retire without much worry, Martindale said. Besides the pension from American Stores, Alles will receive $440 each month from her ex-husband’s pension plan when he retires. That may be more than 20 years away, though, since he is now 43.

“I’m thrilled that you’re in this [retirement] program with American Stores and working on your degree,” Martindale told Alles. “I think that’s putting you on a good retirement track.”

Still, to resolve her current paycheck-to-paycheck problem and secure her financial future, Alles really must practice tough love with her children by having them contribute to the household, according to the planner.

It’s tough, Martindale said, but in the end it pays off--for both mom and children.

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This Week’s Make-Over

* Investor: Phyllis Alles

* Age: 42

* Occupation: Supermarket entry-level manager

* Income: $24,000 in annual salary, plus child and spousal support payments of $1,320 a month. Support payments will be reduced beginning in June and terminate in six years.

* Financial goal: To become prepared to live comfortably without alimony and child support payments and to save for retirement.

Current Situation

* Stock: $960 in American Stores

* Mutual funds: $1,300 in Janus Worldwide

* Cash:

$200 in checking account

$550 in “certificate builder” account

$500 in credit union savings account

* Debt: $2,500 on credit cards, $1,000 in attorney’s fees

Recommendations

* Retirement: Stay with current employer’s retirement plan. Pensions from that and ex-husband’s plan should provide solid underpinning for her later years.

* Debt and savings: Drain cash savings to pay down credit card balances and put $105 that had been set aside each month for savings toward paying off debts instead. Continue investing in the mutual fund. Once the debts are paid off, reestablish an emergency savings account of at least $3,000.

* Other: Have older children contribute toward paying household expenses to reduce the burden on her and allow her to save more money.

* Long term: Once children are on their own and savings are well along, review investment portfolio.

Meet the Planner

Judith Martindale is a certified financial planner in San Luis Obispo and co-author of “52 Simple Ways to Manage Your Money” and “A Woman’s Guide to Retirement Planning.” She received a master’s in education from the University of Cincinnati. She is also a registered investment advisor.