After Tying Knot, They Tightened Purse Strings

Malcolm and Trisha Marcy first met in cyberspace three years ago, trading casual conversation via America Online.

After marrying last November, the couple arranged their desktop computers side by side in the spare bedroom of their Huntington Beach apartment. Equipped with financial software, the Marcys are now tracking their household income, expenses and taxes in an effort to reduce debt.

Saving for their wedding--which cost $6,000 for a trip to and for a tiny marriage ceremony in Maui--inspired the couple to start paying off credit card debt that had peaked at $15,000 in 1997 and is now $12,000. They also owe $24,600 in student loans and $23,700 on two automobiles.

“Once we had a goal, we started socking money away. All of a sudden, we were able to save,” said Malcolm, 32. “Once the wedding money was in the bank account, it was very hard to spend it.” The couple learned that setting and reaching goals was easier than they thought.

That exercise in saving, which spanned most of 1998, made the Marcys more conscious of every expenditure, Trisha, 30, recalled. “We started eating at home more. We didn’t go out as often. We went to matinees versus full-price movies.”

Even their choice of a wedding was a bargain: an intimate package that Trisha found on the Internet. She estimates a traditional ceremony and reception with dozens of guests would have cost $10,000 to $15,000.

“A formal wedding would have been a much more daunting goal and expense for us,” she said.

Now they’ve set their sights higher. They’re in escrow on a townhouse in Cypress and want to start saving for retirement and planning for children.

Ed Dzwonkowski, a certified financial planner in Huntington Beach who reviewed the Marcys’ finances at The Times’ request, said he was impressed by their recent discipline.

Only weeks before meeting with Dzwonkowski, Malcolm began contributing 10% of his pretax salary, or $479 a month, to his employer’s 401(k) retirement savings plan.

No Pain in Raising Deduction for 401(k)

A telecommunications systems analyst for Nextel Communications Inc. in Orange, he was surprised and pleased to find that his contribution did not dramatically lower his take-home pay. “I didn’t even know it was gone,” he said.

That’s the power of pretax payroll deductions, Dzwonkowski said. If Malcolm continues saving at that rate, and assuming the 401(k) investments generate a 10% average annual return, Malcolm would accumulate $1 million in 30 years at age 62, according to Dzwonkowski’s calculations.

That also shows the power of tax deferral on retirement savings.

Tax rules also will ease the burden of the couple’s pending $198,000 home mortgage, a loan that is possible because Malcolm is eligible for Veterans Administration-backed financing with no down payment.

Dzwonkowski acknowledged that adding a large mortgage on top of the Marcys’ other debt is risky, but he said the odds are in the couple’s favor. Debt for a home that is likely to maintain or rise in value is different than debt for consumption, he noted.

However, the mortgage makes it all the more important to eliminate the credit card and auto debt as quickly as possible. At the moment, the couple are vulnerable if one of them should lose their job or become ill, for example.

The Marcys are aware of their vulnerability. At first, Trisha panicked on learning that their monthly mortgage payment, including insurance, maintenance fees and property taxes, would total $1,890. “I said, ‘Oh my God! That’s another $800 a month we won’t have for paying off our credit cards or spending on ourselves. We’ll never go out or do anything.’ ”

But Dzwonkowski is confident of the Marcys’ ability to handle the mortgage expense, given their recent budgeting efforts. Besides, the real extra cost will be closer to $300 a month when considering the effect of tax deductions for the $18,400 in annual mortgage interest and property tax costs.

The couple qualified for the VA mortgage because of Malcolm’s service in the Air Force and his current duty in the Air National Guard.

The Guard pays him about $3,200 annually, and also makes payments on his student loans while he finishes his bachelor’s degree.

Using their new financial software, the Marcys already have figured they can eliminate their credit card debt more quickly by making higher payments on the cards charging higher interest. Their goal is to pay off all the balances by December 2000.

They use their cards now only for convenience, they say. And “any time we get extra money, we throw it against the debt,” Malcolm said.

Dzwonkowski described several ways to lower their interest costs further. Merely asking each credit card vendor to drop their interest rate might prove fruitful, he said, given the competition among lenders and the couple’s history of paying on time.

Moving card balances to new cards with lower interest rates is another strategy, Dzwonkowski said, provided transfer fees, prepayment penalties and other charges don’t wipe out any savings achieved from the lower “teaser” rates.

The Marcys also could seek a low-cost debt-consolidation loan from a credit union, he noted.

Finally, Dzwonkowski raised the possibility of moving their card debt to a home equity loan, even though the Marcys would need to borrow more than the value of their new townhouse.

The couple are researching such a loan that would charge 11% a year, compared with the 15.4% average rate they pay on their cards.

That may be a good choice, Dzwonkowski said, as long as the loan’s origination expenses don’t consume the net savings. The interest, however, would not be deductible because the loan would exceed the home’s equity.

The risk, of course, also is considerable. The Marcys could lose their townhouse if they can’t pay the home equity loan. By contrast, unsecured creditors, such as credit card companies, almost never can seize a home for nonpayment.

Another danger: Shifting card debt to a consolidation loan is so psychologically comforting, Dzwonkowski said, that some borrowers resume using cards and piling on debt.

Trisha knows that from personal experience. When she got a debt-consolidation loan in March 1995, her total card balance was $6,500. Exactly a year later, that loan, along with a rash of new card bills, had risen to $10,000. “It allowed me to dig deeper in debt.”

(She also has a tip for students: “If I had it to do over, I would have passed up those student credit cards with free gifts that lurked on my college campus.”)

Now, Trisha, a psychology graduate from Cal State Long Beach, is playing an intense numbers game to drive down debt. For example, she recently discovered she can shave one-quarter of a percentage point from her student loan’s interest rate by authorizing the lender to withdraw payments from a bank account.

Wish for a Family Helps Reshape Attitude

The new attitude toward debt in part stems from the Marcys’ plan to start a family in a few years. To prepare for the extra expense, Dzwonkowski suggested the couple try hard to limit their living expenses to Malcolm’s annual take-home pay, about $42,000. His gross income totals about $66,000 a year.

The Marcys could phase into living on one spouse’s earnings by spending only half of Trisha’s take-home pay the first year and none of it the second year, Dzwonkowski said. The rest of the money would be used to eliminate their credit card and auto debts.

Paying off the student loans, which charge lower rates, isn’t as crucial.

After the debt is gone and the Marcys wean themselves from Trisha’s pay, the couple could use her salary to build the savings they’ll need for a child--to buy furniture, clothing, food, toys and, eventually, a college education. That also could give Trisha, who enjoys her $33,000-a-year job as an administrative assistant at Golden Specialty Foods Inc. in Norwalk, the option of staying home full or part time, Dzwonkowski said.

He recommended that the couple use a money market fund for their cash savings and first build an emergency reserve equaling three to six months of living expenses. For the Marcys, that would be $12,300 to $24,600.

He advised them to ditch their current bank checking account, which charges fees totaling $72 a year. “They’re doing the bank a favor. Shop around.”

After the Marcys pay off their car loans for a 1998 Volkswagen Jetta and a 1999 Saturn SL2, they should drive those vehicles as long as possible, Dzwonkowski said. Their goal should be to buy all future cars with cash, he said. “Make payments to yourself. Otherwise, you end up on the car-loan treadmill.”

As the Marcys learn new ways to stay out of debt and save money, they become aware of past mistakes. They each accepted disbursements of retirement savings from previous employers instead of rolling that money into other retirement plans. That resulted in penalties and extra taxes. “We’ll never do that again,” Malcolm vowed.

The couple plan to apply any pay raises and bonuses toward debt and savings.

But Dzwonkowski also recommended that the Marcys reward themselves for their hard work. “If you get several thousand dollars at the end of the year, take half and save it. Spend the other half on something fun,” Dzwonkowski said.

“You have a good foundation in place. It’s OK to go on a vacation, fix the new house, buy gifts.”

*

Suzy Hagstrom 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 or to money@latimes.com. You can save a step and print or download the questionnaire at https://www.latimes.com/HOME/BUSINESS/FINPLAN/make-over.htm.

Information on choosing a financial planner is available at The Times’ Web site at https://www.latimes.com/finplan. The site offers stories, phone numbers, addresses and links to related sites.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

This Week’s Make-Over

Investors: Malcolm Marcy, 32, and Trisha Marcy, 30

Gross annual income: About $100,000

Goals: Pay off debts, save for retirement, plan for children.

*

Current portfolio:

Cash and savings: $1,425

Real estate: In escrow on a three-bedroom, two-bath townhouse in Cypress

Debts: $24,600 in student loans, $23,700 on two car loans, $12,000 in credit card bills. After escrow, will have a 30-year mortgage totaling $198,000 with no equity.

Retirement accounts: About $1,200 in Malcolm’s 401(k) and $1,800 in Trisha’s profit-sharing plan. Malcolm will be eligible for a small military pension.

Other investments: Malcolm owns 350 Nextel Communications stock options currently valued at $10,696, although he cannot exercise them until March 2003.

*

Recommendations:

Pay off credit card debt as quickly as possible, using lower-cost cards, a debt-consolidation loan or an additional home loan.

To prepare for the extra expense of having a child, live on only Malcolm’s income.

Each year, increase Malcolm’s 401(k) contribution, now 10% by 1 percentage point of his pretax salary until he reaches the 15% maximum.

Increase life insurance coverage for Malcolm to about $300,000. Get disability insurance and life coverage of about $150,000 for Trisha. Get a $1-million umbrella liability policy.

Draft a will.

Meet the Planner

Ed Dzwonkowski, a certified financial planner in Huntington Beach, charges either fees or commissions, depending on clients’ preference. Dzwonkowski is the author of “How You Can Become a Millionaire: Your Lifetime Guide for Building Wealth and Achieving Financial Independence.”