Couple Need to Find Common Ground Before Buying a Home
The problem has been around as long as love and money: How do two people with very different mind-sets share a single household and work out common financial goals?
In the case of new parents Karen Axelton, 37, and her husband, Scott Dibble, 35, agreeing on a common goal was simple enough: They want to buy a house on their annual income of $66,000.
But before the Long Beach couple attempt to buy a house, they need to plug the leaks in their budget and work through their rather significant financial differences, says financial planner Ronnie Kahn.
Dibble, a musician and songwriter who is the product of a well-to-do family, has few concerns about money. “It’ll always be there when you need it,” he says, “as long as you put out the effort for it to be there.”
Axelton, on the other hand, grew up in a family that counted every penny. “My parents gave us as good as they could, and sacrificed so we could have things, but money was definitely an issue,” she says. “Just thinking about money stresses me out. I could be making millions and it would never be enough to make me feel secure.”
Together, says Kahn, “we have a dangerous mix of magical thinking by Scott that ‘It will all work out,’ and fearful thinking about scarcity by Karen that will tend to make her avoid doing anything to make a mistake.”
To bring their divergent views into balance, he says, Dibble and Axelton should set realistic goals, and then work out a plan for achieving them.
The first step is to do some soul-searching. Do they want more children? What are their dream jobs? How do they want to be remembered?
These are the real “issues of the heart” that make financial planning worthwhile, Kahn said. “People come to me all the time and say ‘I made all this money but I screwed up because I followed other people’s obligations and ideas and I didn’t do what I wanted to do.’
“We need to make this a journey that we cherish. If not, the days will just whiz by.”
Next, Kahn recommends that Dibble and Axelton write a “money autobiography” to share information about how they as children and their families dealt with money and how they feel about money today.
“This is so helpful for couples to see where their partners’ reactions come from,” he said. “You don’t want to wait for a crisis to talk about these things.”
Couples who work out their financial differences early, while things are going relatively well, avoid potentially disastrous problems down the road, Kahn said. For example, in his book, “For Keeps: Marriages That Last a Lifetime,” author Finnegan Alford-Cooper surveyed couples whose marriages had lasted 50 years or longer and found they attributed their longevity to mutual decision-making on money, goal setting and savings.
Axelton and Dibble already face a few potential conflicts. She loves her job as a magazine editor in Irvine, but the commute from Long Beach is a killer--two hours round-trip every day. She’d like to live closer to work, but they both like living in Long Beach, especially since it’s near Dibble’s parents, who provide back-up child care. And while Axelton says she’d like to buy a house and then trade up in five years, Dibble says he’d like to buy a house and stay there indefinitely.
With a purchase of this magnitude, Kahn said, “you have to make sure you’re on the same page before you proceed.” And they need to look carefully at their reasons for buying. They started thinking about buying a house after the arrival of their new baby, Jefferson, made their already small Long Beach apartment seem even smaller. When they went looking for a larger apartment, they discovered the rents started at about $1,400 a month.
But Kahn says they need a bigger picture. “There are property taxes, home maintenance, lawn maintenance, how far you commute,” he notes. “If you barely have time to do all the things you have to do now, you need to add in all those determinations before you make a decision.”
Axelton and Dibble shouldn’t act out of panic either. Existing home prices jumped 17% in California over the past year to $252,000, “but I don’t think we’re going to see increases like that every year,” Kahn said. “It’s like trying to guess about what will happen to interest rates. You just never know. You don’t want to make a decision like this when you feel rushed.”
Instead, if Axelton and Dibble decide they want to buy a house, their biggest focus should be on how to raise the down payment, Kahn said. Most of the houses in their area start around $230,000. A 10% down payment on a $230,000 house--$23,000--would give them a 30-year mortgage of about $1,480 a month. They likely qualify for a monthly mortgage of about $1,400, he said, $575 more than they pay in rent now. Putting 20% down on the same house would reduce the monthly payment to $1,320, but the down payment would be a whopping $46,000.
They have $5,000 remaining from funds saved for Karen’s maternity leave. If they can put off buying for a few years, they can build their down payment from there, Kahn said. If they decide to move more quickly, there are other options, but they need to look carefully at the effect on their budget.
For instance, they could borrow from Axelton’s 401(k), but it would reduce the growth in her retirement fund. They could also try to arrange a second mortgage with the seller, to reduce the amount they needed to borrow from a bank. Or they could ask their parents for a loan.
“Sometimes people say, ‘Oh my God, I feel so terrible borrowing money from my parents,’ but it can be a joyful thing to put somebody in their first house,” Kahn said. “If your parents want to help you, don’t count that out.”
The good news is that Dibble and Axelton have a history of setting--and reaching--their goals. After their marriage and Paris honeymoon in 1994, they put together a strict budget to pay off the resulting $14,000 in credit card debt. More recently, there was the $5,000 they saved up to make sure they’d have enough money while Axelton was on maternity leave.
The problem is they have a hard time maintaining financial discipline. “It’s a classic binge or crackdown with us,” Dibble said. “We’re really good and then we fall off and everything goes by the wayside.”
“Just like dieting,” adds Axelton.
So before the couple purchase a house, they need to carefully track their spending and set up a budget they can maintain, Kahn said.
Axelton is putting $300 a month into her 401(k), and wishes she could save $1,000 a month. But right now, they’re living paycheck to paycheck, mostly on the $3,500 Karen takes home from her job as a magazine editor. Scott’s R&B; band, OO-Soul (pronounced “double-o soul”), is becoming more popular, but his income fluctuates from $500 to $1,000 a month.
One place to look for savings is in the one-fourth of their spending that could be classified as discretionary expenses. For instance, Karen estimates they’re spending at least $100 a month on baby paraphernalia--clothes, toys, whatever--on top of another $100 a month for diapers and formula. Then there’s $400 a month for eating out and nightclubs, $166 for gifts, $280 for “personal spending,” and another $150 that just sort of vanishes every month.
That’s not counting the $100-plus they pay on their credit card every month, trying to pull the balance below $4,500. Their credit card debt returned after they took a last-fling-before-parenthood vacation in March 1999. They put $1,500 on the card then, with the good intention of paying it off when they got home. Instead, the balance kept creeping higher.
“It looks like you’re leaking money, and with spending leaks, the devil is in the details,” Kahn said.
Before they build a budget, they need to scrutinize their spending for a couple of months, especially their cash spending.
“Carry a check register and actually note the $4 in cash you spent for this and $3 for that. You can lose a lot of money on cash spending,” Kahn said. “This may not ring true now, but $4 a day adds up to hundreds of dollars in a year [$1,460]. If you took that same money and invested it at a decent rate of return, it could make a huge difference over time.”
Once they’ve charted their spending, Axelton and Dibble will be able to set priorities, such as saving for a down payment or building the investment fund that Dibble would like to start. Kahn recommends that they pay off their credit card as soon as possible, and still find room to save at least $25 to $50 a month. Over time, they should try to get as close to saving 10% of their income--including Karen’s 401(k) money--as they can.
As new parents, they also face some new expenses. Scott cares for their son during the day, so they have minimal child-care costs now. But that could change if he decides to get a job during the day, or if his musical career takes off. And Kahn recommends that Axelton purchase $567,000 in term life insurance over 20 years, which should cost them $25 to $45 a month.
The key, said Kahn, is for Axelton and Dibble to find common ground for mapping their financial future, particularly as it pertains to their attitudes about money and spending. And they can start by reevaluating their financial approach to child rearing.
“Twenty years from now Jefferson won’t be thinking about all the things you purchased for him,” Kahn said. “He’ll be thinking of the wonderful times you had together with him as a couple.”
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Jeanette Marantos is a regular contributor to The Times.
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(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
This Week’s Make-Over
Investors: Karen Axelton, 37, and Scott Dibble, 35
Combined annual income: $66,000
Goal: Control their spending so they can buy a house.
Current Portfolio
Retirement accounts: $43,000 in Axelton’s 401(k)
Cash and savings accounts: About $5,000 for emergencies in a passbook savings account; $2,548 in a savings account to pay taxes
Other assets: 1992 Honda Civic
Debt: $11,000 on a 1998 Ford Explorer; $4,500 on their credit card
Recommendations
Set individual goals and write out a “money autobiography” to help resolve their different approaches to money.
Keep track of every expense--especially cash spending--in a check register for a couple of months.
Draw up a spending plan that pays off their credit card debt as soon as possible and still saves money for a down payment or future investments.
Save at least $25 to $50 a month, and increase it to as close to 10% of their income (including 401(k) contribution) as possible.
Develop a plan for coming up with $23,000 to $46,000 for a down payment, either by saving or borrowing from Axelton’s 401(k) or from their parents.
Buy $567,000 worth of term life insurance for Axelton.
Meet the Planner
Ronnie A. Kahn, is a certified financial planner and head of Accumulation Strategies, a Woodland Hills investment advisory firm.
