Couple’s Frugal Habits Handy as Debt Looms, Family Grows

At the tender age of 23, Rick and Brandy Mendoza have already realized their dream of homeownership, no small feat in Southern California.

They carry no high-interest credit card debt. Although both work full time in accounting-related jobs, they live modestly, forgoing vacations except for camping and the occasional low-budget, Motel 6-style California ski trip. When they dine out, they can make an event of going to a fast-food restaurant. And the couple’s love for playing softball and baseball hardly breaks the bank.

Despite their fiscal prudence, the Lancaster homeowners face a raft of potential financial hazards in the short run: They are expecting their first baby in February. Rick hopes to change careers as soon as he can land work as a teacher, a promising but not particularly lucrative proposition. They lack enough short-term savings for an emergency fund. They make more than $1,500 a month in mortgage and car payments, and after the baby arrives, Rick is scheduled to begin paying $170 a month on his $14,000 college-loan debt.

As a result, the frugal couple face a moderate risk of financial trouble, said Timothy J. Wallender, a registered investment advisor and certified financial planner from Manhattan Beach who reviewed their finances for The Times.

The immediate decision is how to use the money the Mendozas have left after basic debt payments and living expenses. By early next year, after they pay off one of their car loans, which total $21,200,they will be able to direct $450 a month toward savings and debt reduction. At least some of that is needed to increase their short-term savings, now just more than $1,000. Child expenses will take up some as well. But then, as their income rises, the key would be to keep their living standard the same while reducing debt and taking full advantage of any retirement programs at work.

‘We’re Setting a Foundation’

The first debt to attack would be their $19,000 second mortgage, which carries an 11.5% interest rate. Reducing that would also be the first step toward eliminating their monthly $42.95 private mortgage insurance payments, Wallender noted.

The second mortgage, obtained after sorting through a blizzard of mail solicitations, consolidated $6,000 in debts from credit cards as well as some initial expenses for the new house--furniture, basic landscaping, a patio and patio cover.

All “this [debt] will take a significant amount of time to bring down to zero,” the planner said.

Like many other young adults, the Mendozas are trying to keep many financial balls in the air simultaneously: student loans, mortgage payments and a family.

Some parents are having children later than the Mendozas--the average age of parenthood in the U.S., now 27, has been rising for decades for a variety of reasons. But from a purely financial standpoint, there are always substantial, long-term costs associated with children and there’s never a “perfect” time to have a baby.

Wallender said that although the Mendozas might have some tight years ahead, they appear likely to keep their expenses, debts and savings in balance. “It’s going to correct itself; it will just take a little time,” Wallender said.

One reason for optimism is the couple’s attitude. “We’ve always been real responsible. I’ve always been real good with money,” Rick said. He had a remarkable role model in his mother, who was abandoned by the children’s father and emigrated with her two children from Colombia.

“When we first came to this country we were very poor,” he said. “My mother was a single parent who worked at Jack in the Box while she studied accounting. I watched my mother work very hard to support us.”

Rick earns $23,500 a year working for a mental health association, helping mentally ill clients manage their monthly expenses. He can add to that a lump-sum $3,000 health-insurance allowance that he can use for other purposes because they are insured through Brandy’s accounting job with the Antelope Valley Union High School District. She was recently promoted, bumping her salary up by about $4,000 to $33,000 annually.

Also in their favor is that Brandy and Rick are in sync when it comes to money. Neither feels deprived going without life’s extras, at least for the time being.

“Right now we’re setting a foundation,” Rick said, adding that any money left over in the checking account immediately gets transferred to savings or is used to pay down debt. They are careful with expenses--for example, they spend just $600 or so a year on clothing.

“Stability is more important than anything to me,” Brandy said. “Putting my kids through college is pretty important. And no matter what happens, we’ve taken steps like buying life insurance, so if my husband left me with a child, we’d be taken care of.”

Their rationale for buying a home was further evidence of savvy, Wallender said. Borrowing a $5,000 down payment from Brandy’s father, the Mendozas bought their home in the Lancaster neighborhood of Quartz Hill in 1997 for $105,000. The house was recently assessed at $117,000. “We looked at the numbers and saw that the mortgage payment was not much more than rent,” Rick said. The down-payment loan is now paid off, leaving them with a mortgage payment of $920 a month, including taxes and insurance.

Emergencies Before Education

The next major move may be in Rick’s career. He expects there to be strong demand for teachers and administrators and hopes to obtain an emergency credential to teach at Antelope Valley High. If hired, Rick would earn $27,400 as a first-year teacher; the district pay scale tops out at $36,992. He ultimately wants to become a principal.

In the short term, however, the Mendozas need to plan for their baby. Grateful for a hand-me-down crib and dresser, they hope baby showers will provide them with most of the required baby gear and clothes.

Assuming their schedules work out as they hope, they won’t need regular child care until next fall. In any case, they expect to also have some help from their extended families.

Although they want to save for their child’s education, Wallender feels the Mendozas first need to build an emergency fund that would cover at least two or three months of living expenses, $6,000 to $8,000. He suggests the money be saved in a money market account that pay a higher-than-average interest rate, such as the Strong Money Market Fund, now paying 5.4% annually and carrying a low entry minimum.

To start on the debt, Wallender suggests they pay extra on the second mortgage, an idea the Mendozas had already discussed. Because they are about to pay off the loan on one of their cars, Wallender said they could simply direct an identical amount--$270 per month--directly to the mortgage loan. They should also continue to review options to refinance the second mortgage at a better rate, possibly through a credit union.

The planner was impressed that the young couple had begun to participate in tax-deferred employee plans.

Although reducing debt is a priority, looking ahead, Wallender said, the couple should build an investment portfolio, mostly with index funds. In particular, he recommends beginning with Vanguard LifeStrategy Growth fund, because it invests in a combination of index funds, with an overall mix of 80% stocks and 20% bonds, and charges no load.After they accumulate $30,000, he suggests they could then consider more aggressive, long-term investments.

Rick has just started to save in a retirement plan, but for several years Brandy has saved in her CalPERS pension account through the school district. This state-run plan has a generous retirement benefit if she remains a public employee. If she leaves the CalPERS system, she most likely will have the option of transferring its cash value into another retirement plan.

Saving Is a Lifelong Habit

Although it may be too early to get specific about retirement dates and projected savings, Wallender suggested that to meet their goal of retiring with 65% of their combined income, they should not plan to retire earlier than age 65.

The couple aren’t worried about having a comfortable retirement because they are confident that their savings will grow in the future, along with their incomes.

Wallender also noted that $210,000 each in term life insurance falls short of their needs, especially with their growing family. They might see if additional insurance is available through their employers or call SelectQuote Insurance Services ([800] 253-5577), which offers 10 free price-comparison quotes.

The planner and the couple agreed that they should remain money-conscious.

“This is where most young couples miss the boat,” Wallender said. “They need to do this once a year. Every time you get a raise or change the amount you are putting away, it’s important to reassess how you are tracking to your goal.”

“I personally feel we’re doing pretty good,” Rick said. Added Brandy: “We’re average or ahead of the ballgame.”

Rhonda Hillbery is a freelance writer based in Burbank. To participate in 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. We cannot respond to all inquiries.

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This Week’s Make-Over

* Investors: The Mendozas, Rick and Brandy, both 23.

* Occupations: Rick, client account manager for a mental health association. Brandy, accounting assistant for a public school district.

* Combined gross annual income: $59,500

* Financial goals: Pay down debt and save for children’s college education and retirement.

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Current Portfolio

* Retirement accounts: Rick has $600 in Primerica-Putnam Voyager II, a tax-sheltered annuity; Brandy has a CalPERS pension account, with a cash value of $5,000.

* Cash: $1,200 in a savings account.

* Debts: Owe $105,000 at 7.5% interest on a first mortgage; $19,000 at 11.5% interest on a second mortgage (home is valued slightly below combined mortgage amount); $14,000 on student loans; $21,200 on loans for two cars.

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Recommendations

* Build an emergency fund in a money market account of two or three months of expenses, totaling $6,000 to $8,000.

* Pay down debt, aiming initially at second mortgage. When home appreciates to a sufficient loan-to-value ratio, look into eliminating private mortgage insurance.

* Update retirement goals each year. As income increases, keep increasing retirement savings. Start savings outside employee plans as well, beginning with Vanguard LifeStrategy Growth fund until balance reaches $30,000. Then diversify.

* Increase term life insurance policy of $210,000 each to cover expected costs of college, mortgage and retirement for each spouse. Call SelectQuote ([800] 253-5577) to compare 10 free price quotes.

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Meet the Planner

Timothy J. Wallender, a certified financial planner and registered investment advisor, has offices in Manhattan Beach and

La Quinta. He runs a fee-only investment advisory firm specializing in retirement plans and portfolio management.