And They Lived Within Their Means Happily Ever After
Vicky Schwartz and Ted Anderson felt an immediate connection when they met serendipitously in 1993 on a bus heading into the snowy Sierra Nevada mountains.
“I was husband hunting and went on an expensive ski trip to Squaw Valley,” said Vicky, 40, a psychologist for the Los Angeles Unified School District for the last 14 years. “I thought I would meet a rich doctor or attorney, but I ended up with the bus driver.”
Five years later, the now-married couple’s romance still has its storybook quality, but reality is very much in evidence in regard to their finances. As they are rearing two sons, now 3 and 2, the Westchester couple are struggling to pay off debt, build adequate retirement savings and keep their bank account in the black.
Both feel it’s time to take action, but Vicky’s conservative habits and constant anxieties about money clash with the freewheeling style of Ted, 33, who favors the idea of risky investments and admittedly has never balanced a checkbook.
“I just go to the ATM, look up my balance and if I have the money, I say, ‘Cool,’ ” said Ted, who is now teaching special education for the same district on an emergency credential. “I know I’m irresponsible with finances. I tend to think if you have it now, you should spend it. And if you don’t, you should put it on a credit card.”
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Though Ted and Vicky earn about $96,000 a year, they often end each month with less than $1 in the bank.
“We’re worth a lot of money, but we have no money,” Vicky said, voicing their frustration. “I don’t understand because we don’t have a luxurious lifestyle or go out a lot.”
And they’ve got goals: Ted, who’s been teaching at Jefferson High School since last year, expects to earn his permanent credentials in December of next year. Within a few years, the family plans to move to San Diego, Ted’s hometown.
Ginita Wall, a fee-only certified financial planner based in San Diego, told the pair they’re feeling pinched because they’ve recently made expensive life choices, such as having children and Ted’s returning to school. They now spend $300 a week for a nanny and $825 a month for Ted’s studies at National University.
“I know $300 a week for a nanny may seem like a lot,” Wall said, seeking to reassure the couple somewhat, “but child care is expensive, so you don’t have a choice. And Ted’s schooling may be costly, but that decision should be thought of as an investment in your future.”
So, Wall said, rather than dwell on the cost of things that, after all, are crucial to the couple’s well-being, Vicky and Ted should concentrate on things they can do--such as ridding themselves of high-interest debt and achieving better returns on their retirement savings. And, not least, adopting budgeting practices they can both live with.
That may not be easy, given the difference in their styles, but the couple say they’re more than willing to make the effort.
When the pair met, Vicky had little reason to worry about money. She had a solid career and a master’s degree, owned a condominium and had a $150,000 inheritance from her parents in the bank. Her parents, who grew up during the Depression, had instilled in her a sense of responsibility, even anxiety, toward money.
Ted, by contrast, is the happy-go-lucky sort. He had no real career ambitions and was content to drift along after graduating from high school, taking on jobs as a waiter, busboy and bus driver. He too received an inheritance--$10,000, at age 25--and went on a spending spree, frittering away that money and more. In short order, he found himself with thousands of dollars in credit card debt and black marks on his credit status for a number of unpaid bills.
“I’m a person for the now,” Ted said. “And I like living large.”
Last year, he spent the $2,600 insurance payment he received for his wrecked car on a Jacuzzi. Then the family had to finance the $27,000 for the auto he ended up buying.
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Since meeting Vicky, though, Ted has gone back to school, earning a bachelor’s degree in physical education and studying for his permanent credentials. Over the same period, however, the couple also bought a new home and started a family--all of which was a drain on Vicky’s savings.
Their assets include $174,000 in equity in their four-bedroom Westchester home and $34,000 equity in the one-bedroom Culver City condo, which they rent out but are considering selling. Vicky has $4,500 in a money market account in an IRA through Wells Fargo and $23,000 in her 403(b) tax-deferred retirement savings plan with the school district.
Their liabilities include the $176,000 remaining on their house, the $81,000 on the condo, $25,000 on a new van bought last year, $4,000 in credit-card debt and $8,000 on two loans from Vicky’s 403(b). In addition, Ted has taken out $35,000 in school loans, although he can defer payments until he completes his education.
Nearly everything the couple makes goes toward paying the monthly bills, including $1,900 in mortgage payments and condo fees, $450 for a car payment, $1,000 for food and groceries and $350 for utilities, the telephone and other household necessities.
Wall commended Vicky for taking advantage of job benefits that allow funds to be withdrawn from her paycheck before taxes. In addition to having $3,000 deducted each year for her 403(b) savings, she has $5,000 a year going into an account that helps her offset child-care expenses.
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However, Wall urged Vicky to stop borrowing against and withdrawing from her 403(b).
In 1994, Vicky borrowed $10,000 to pay living expenses during her first maternity leave, and she took a $5,000 loan last year to pay credit card debts. And for each of the last four years, she’s withdrawn the maximum 10% allowed without penalty to pay property taxes.
“If you put the money back and invest it for proper growth,” Wall said, “you could earn whatever we’ve seen in the stock market--which lately has been 25% to 30% a year. It may go down,” she said, but historically over long periods, the stock market has provided high returns--10% to 12% annually.
Wall advised Vicky to steer her 403(b) funds, now in a fixed-income annuity earning returns of just 5.75% a year, to five stock funds available through her 403(b): an index fund that tracks the Standard & Poor’s 500, three large-cap funds and a small-cap fund. Wall recommended an equal distribution among the funds, so that 80% would be invested in large-cap stocks and 20% in small-cap stocks.
“Large cap is where the action has been” and where it is likely to be for the foreseeable future, Wall told the couple. And stock market risk is reduced “when you leave your money in there for 10 to 20 years,” she said, addressing Vicky’s fears.
Wall encouraged Vicky to increase the allocation to her 403(b) as soon as possible, and she also said Ted should open a 403(b) of his own and spread his contributions among the same funds.
If the couple can save steadily in the 403(b)s, Wall said, they should not have to worry about retirement. That’s because as teachers, they will get ample lifetime pensions through the State Teachers’ Retirement System. (Many planners believe that with a secure pension as an equivalent of bond investments, other retirement savings can be entirely in stocks rather than in a mixture of bonds and stocks.)
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Additionally, Wall said, Vicky should invest her individual retirement account money more aggressively by transferring it from the money market account to one of the stock funds Wells Fargo offers through the IRA.
Next, Wall turned to the matter of debts and budgeting.
Vicky and Ted would come out ahead, Wall suggested, if they took out a $20,000 home-equity line of credit and used the money to pay off the 403(b) loans and their credit-card debt. How? Three ways:
1) They’d save a lot of money in interest, Wall said, assuming they received the equity line on what are typical terms: a variable interest rate at 2 percentage points above the prime rate (now averaging 8.5%) and a 10-year repayment period. That compares with credit card interest rates of 18% and higher. 2) They’d be converting debt interest that isn’t tax-deductible into debt interest that is. 3) Returning now what Vicky borrowed from the 403(b) will have that money back earning stock-market returns that much sooner.
Both Ted and Vicky were enthusiastic about such choices. A day after Wall offered her recommendations, Vicky took steps toward acquiring the line of credit, redirecting her 403(b) to stock funds and selecting stock funds for her IRA.
When it comes to budgeting, the planner, besides suggesting several well-known, common-sense economies, urged Vicky and Ted to think of saving as something they do now so they can have something they really want later.
“You have to be committed to the idea that when you purchase something on a credit card, you have the money to pay for it,” Wall told the couple. To pay the nanny and property taxes, the planner suggested that Vicky and Ted open a separate savings account and have money from their paychecks earmarked for those purposes.
She also encouraged them to create budgets for the areas that cause them trouble, which she referred to as “spot budgeting.”
“For instance, you identified ATM withdrawals as a problem,” Wall said. “So keep an index card and a pencil with you, and every time you take out money from the ATM, write down where the money goes. Do this for up to three months so you can figure out where your money is going and where you might want to cut back.”
Then reward yourself a bit for your own good behavior. “You should set the money you save for something fun, such as vacations or dinners out,” Wall told the couple. “Sometimes that makes it easier to save.”
Looking ahead, Vicky and Ted asked whether they should sell their condo, on which they are essentially breaking even--unless some big repair is needed.
Wall encouraged them to keep the property until they move to San Diego, pointing out that by selling now, they would lose a nice tax break, and the property could very well appreciate in the meantime.
Ted and Vicky would like to have money available to help their sons through college, but they’re not committed to setting aside a special fund for that purpose.
With that in mind, Wall suggested that they buy their next home with a 15-year mortgage. That way, their home will be paid off by the time their kids are ready for college, and the couple will be able to use money that had been going for housing costs to help pay the kids’ school bills. Not only that, Wall said, but having so much of their savings in home equity would improve their sons’ chances of getting financial aid.
Once their financial situation stabilizes, Ted said, he would like to invest some savings in individual stocks. All they have now is six shares of Walt Disney Co., which they got as a gift.
Wall suggested that if Ted and Vicky want to learn about investing, they could join an investment club.
“It really helps develop your skills as an investor before you go out and risk all of your own money,” Wall said.
Overall, Vicky and Ted said they found Wall’s suggestions extremely useful.
“I’m already feeling so much more relaxed,” Vicky said. “This helped so much because I feel it’ll give us a fresh start.”
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Diane Seo is a regular contributor to The Times. To be considered for a published Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.
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This Week’s Make-Over
* Investors: Vicky Schwartz, 40, and Ted Anderson, 33
* Occupations: Vicky, psychologist; Ted, special education teacher
* Combined gross annual income: $96,000
* Financial goals: Build retirement savings, pay off debts, have more discretionary money
Current Portfolio
* Real estate: An estimated $174,000 in equity in Westchester home, with $176,000 remaining on mortgage; about $34,000 equity in Culver City condominium, on which they owe $81,000
* Retirement accounts: $23,000 in Vicky’s 403(b) plan, invested in a fixed-income annuity; $4,500 in an individual retirement account in a money market account
* Stocks: 6 shares of Walt Disney Co.
* Debts: $4,000 on bank and store credit cards, $8,000 from Vicky’s 403(b) and $35,000 in college loans; $25,000 remaining on car loan
RECOMMENDATIONS
* To save on interest and taxes, take out a home-equity line of credit to pay off credit card debt and loans taken from Vicky’s 403(b).
* The couple’s savings should be invested more aggressively. All of Vicky’s 403(b) savings should be in stock funds, with 80% in large-cap funds and 20% in small-cap funds. Her IRA should also be invested in a stock fund.
* Vicky should increase what she’s putting into 403(b) each year; Ted should open his own 403(b) as soon as possible and invest it in the same stock funds recommended for Vicky.
* Keep a close eye on spending and consider devising “spot budgets” for problem areas such as ATM withdrawals.
* Don’t sell condo until the family is ready to relocate.
* To help sons, now 3 and 2, through college, purchase next home with 15-year mortgage.
Meet the Planner
Ginita Wall is a certified public accountant and a fee-only certified financial planner based in San Diego. She has written several books on personal finance.
