WALL STREET, CALIFORNIA : MONEY MAKE-OVER : With Added Income, Teaching Pair Can Save and Take a Little Recess Too

This back-to-school season holds special significance for the Davis family of San Diego. Ann was recently hired as a second-grade teacher at the private Christian school where her husband Dan has worked two years as a basketball coach and physical education teacher. What’s more, their two sons, Tyler, 9, and Decker, 7, are students there.

Ann’s full-time job, her first since their marriage in 1989, will boost their household gross income by nearly $23,000 a year.

The couple, who have met their expenses with Dan’s $34,500 salary, are now trying to figure out how to use the second income to meet their two main goals: saving for retirement and paying for their children’s college educations.

Wages at the school may be modest compared with those at other institutions, but the Davises receive free tuition and child care for their sons. Also, Ann, 40, and Dan, 44, can’t place a dollar value on other benefits they prize more highly: more time near their children and religious instruction emphasizing Christianity.

Although Ann has earned some extra money by leading exercise classes at local health clubs, she and Dan have postponed buying a new car and have put retirement savings on hold to make ends meet. While many double-income families are bloated with debt and credit card bills, the Davises are lean. The family’s only debts are Ann’s student loan and their mortgage.

The Davises never have been big spenders. Ann considers renting videos a splurge, and Dan still drives the 1973 Volkswagen Beetle he bought when he was a college sophomore. Their pastimes of hiking, fishing, sports activities and going to the beach involve little expense. They spend most vacations at a family-owned cabin in Washington.

Their biggest weakness, the Davises say, is not having a household budget. Ann has never tracked where the money goes, and she dreads paying bills and balancing the checkbook. A desire to invest her new paycheck wisely rather than squander it prompted the Davises to volunteer for a Money Make-Over.

Peggy F. Eddy, a certified financial planner in San Diego who reviewed the Davises’ finances at The Times’ request, praised the couple for their thriftiness and simple lifestyle.

“Give yourselves credit for really managing well!” Eddy said. “Knowing you managed on one income alone, I’m sure you can meet your goals. The extra income from Ann is going to get you into another level of financial fitness.”

A Household Budget Is Elementary

To reach their long-term goals of saving for retirement and the boys’ college educations, the Davises should first fulfill their short-term goal of creating a household budget. Extra income flowing into a household that has no set financial plan heightens the temptation to spend, Eddy said.

Eddy assigned homework to the Davises, challenging them to record every expenditure during the remainder of 1999. She suggested using a financial software program, such as Quicken, for posting cash receipts and balancing the checkbook. She also recommended that the couple schedule their bill-paying two or three times a month. “I don’t think people should pay bills as they come in,” Eddy said, noting that’s an inefficient and sometimes distressing method. “People don’t like paying bills. It’s very emotional.”

Eddy suggested recruiting the boys to help track expenses. Not only are children adept at using computers, she said, but they also could benefit from learning about personal finance. That could be a first step toward involving Tyler and Decker in planning for college.

In evaluating the Davises’ regular monthly expenses, Eddy found almost no areas of excess. However, she noticed they pay nearly $1,700 a year for life insurance--a whole-life policy covering Dan for $135,000 and a universal policy covering Ann for $70,000. “That’s exorbitant!” Eddy declared.

Whole-life insurance might make sense for high-income families who have exhausted other tax-deferred savings options, but for the Davises, term life insurance is a better choice because it offers more coverage at a lower premium. A standard 15-year term policy would cover them until their children were likely to be financially independent. For example, a $250,000 term policy for Dan and a $100,000 term policy for Ann would total about $700 a year. Eddy cautioned the Davises not to cancel their existing coverage until they have replacement policies physically in hand.

Besides lowering their insurance bill, the switch would result in a small windfall: Dan’s policy alone has a cash value exceeding $11,000.

That money, or what’s left of it after taxes, could be applied toward buying a new car--probably a sport-utility vehicle that would replace his beloved, but cramped and aging, VW.

In assigning additional homework to the Davises, Eddy asked them to concentrate on increasing their cash savings to at least $5,500. That would build a small cushion for emergencies such as illness or auto repairs.

Eddy encouraged the couple to spend $350 of Ann’s first paycheck on something fun--going out on the town or arranging a romantic weekend getaway. “Celebrate Ann’s new job and the family’s new second income,” Eddy said. “You deserve to reward yourselves for your hard work and having managed so well on one income.”

Plan for Retirement, Then College Savings

Ann’s second paycheck should go toward hiring a lawyer to draft a will and related documents. Eddy suggested the parents seek their children’s opinions in selecting a guardian for them if both parents were to die or become incapacitated.

The Davises emphasize that they are primarily concerned about their children’s needs and want to pay for Tyler’s and Decker’s college educations. However, Eddy said they should be careful not to shortchange their own retirement.

Attending a private Christian college costs about $15,000 a year per child, putting the total for both boys at $120,000 in today’s dollars. Assuming an average annual inflation rate of 6% for higher education, the total amount needed will exceed $200,000 by the time Tyler enters college in 2009.

Eddy calculated that to cover all of their sons’ college expenses, the Davises would have to set aside $835 a month starting next year and gradually increase that in subsequent years. Because Eddy thought that was too high given the family budget and the need to save for retirement, she suggested a $700 figure instead.

Even that commitment may be too much. Eddy proposed other ways to pay for college and reduce expenses: loans, work-study programs or attending community college.

“I firmly believe that children should participate in helping underwrite their college expenses,” said Eddy, who took that approach with her two sons, who held summer jobs and worked part-time through school.

Even if the Davises are determined to pay most of their children’s college costs, their best saving strategy may be to maximize their own retirement accounts first. Because of tax savings and tax deferral, they would have far larger retirement accounts in 10 years than they would in regular accounts earmarked for college.

When college is closer, the parents can review their options. They might use regular income or a home equity loan, or they might be able to tap a portion of the retirement funds. The future is difficult to predict, but the key point is to maintain flexibility, Eddy said.

Regardless of how the couple save, the money should remain under their names so they control how the funds are used and because of the rules regarding college financial aid. In general, before children can obtain significant amounts of aid, they are expected to use most of any funds in their names.

About $6,500 in U.S. Savings Bonds, equity mutual funds and Walt Disney Co. stock is invested under Tyler’s and Decker’s names. Eddy suggested that these funds be spent before college, on items such as summer camp, sports programs, books and dental bills.

Ann and Dan should research scholarships but not count on a repeat of their own experience. A basketball scholarship paid Dan’s undergraduate education at the University of New Mexico, and tennis scholarships covered part of Ann’s stint at Washington State University.

They shouldn’t emphasize such aid. “That puts too much pressure on the children,” Eddy said.

Eddy encouraged the Davises to use Ann’s job to increase retirement savings. They have a head start: A higher-paying job several years ago enabled Dan to squirrel away money in tax-deferred retirement plans, now totaling about $67,000. Assuming that annual returns average 8%, that nest egg would grow to $326,000 in 20 years.

Moonlighting for a ‘Fun Fund’

Eddy would like to see the Davises accumulate more. She suggested Dan resume such saving in January by contributing $3,000 a year to the school’s retirement plan, a tax-sheltered annuity that offers stocks as an investment choice. Ann should begin contributing $1,000 a year starting next fall. The plan would match their savings up to 3% of their income, so they should save at least that much in it.

Ann plans to continue moonlighting as an exercise instructor at health clubs because she enjoys sports and interacting with people. Those earnings, which now total about $4,000 a year, could be used for family outings, Eddy said. “Right now, they have nothing built into their budget for entertainment. They should have a ‘fun fund’ for things like going to Sea World or renting a sailboat. They deserve it.”

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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.

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This Week’s Make-Over

* Investors: Ann Davis, 40, and Dan Davis, 44

* Projected gross annual income: About $61,000

* Goals: Learn how to best use second income. Buy a new car. Save for children’s college education. Prepare for retirement.

Current Portfolio

* Cash and savings: About $3,000

* Real estate: Their San Diego home, valued at about $275,000. They also own a share of a cabin in Washington state.

* Debts: Home mortgage of $190,000 and Ann’s $20,000 student loan

* Retirement accounts: Dan has accumulated about $54,400 in the Teachers Insurance & Annuity Assn.-College Retirement Equities Fund (TIAA-CREF) and $12,800 in an individual retirement account invested in two Putnam equity mutual funds.

* Other investments: About $6,500, under their children’s names, invested in U.S. Savings Bonds, Putnam mutual funds and Walt Disney Co. stock.

Recommendations

* Track expenses.

* Replace whole-life and universal insurance policies with lower-cost term insurance.

* Apply $11,300 cash value of the old life policies toward buying a badly needed new car. But consult an accountant about changing withholding amounts and insurance proceeds so there are no tax surprises.

* Do something fun with part of Ann’s first paycheck. Apply Ann’s second paycheck toward drafting a will and related documents.

* Increase cash savings to a minimum of $5,500.

* Resume contributing to retirement savings plans.

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Meet the Planner

Peggy F. Eddy is a fee-only certified financial planner in San Diego. Eddy founded the Family Business Institute at the University of San Diego and the San Diego chapter of the National Assn. of Women Business Owners.