Applying Tithing Principles to Saving
Joe and Pat Peterson are middle-age Christians with neglected savings, unchecked spending and an unshakable commitment to tithe 10% of the $15,000 Joe earns every month.
During 1999, the Petersons tithed $18,750 to their Foursquare evangelical church in Santa Monica, the Lighthouse. And they’re paying $1,050 a month to cover tuition for their five children at the church’s school.
It’s all in the Bible, Joe Peterson says, in Malachi 3:10: “ ‘Bring the whole tithe into the storehouse, that there may be food in my house. Test me in this,’ says the Lord Almighty, ‘and see if I will not throw open the floodgates of heaven and pour out so much blessing that you will not have room enough for it.’ ”
The Petersons say they have been blessed since they began tithing about 13 years ago. Joe’s consulting business, managing architectural projects, is thriving; their income has risen; and the value of their Mar Vista home has increased from $420,000 to $625,000 over the past six years.
But while the Petersons have been religious about tithing, they haven’t put a nickel into retirement or college savings in a decade. Their oldest child is 16. They have no household budget. They spend everything Joe earns, and last year they took out a second mortgage to pay off $25,000 in credit card debt and $50,000 in back taxes.
They weren’t even sure how much Joe was earning until they got their end-of-the-year tithing record from the church.
Joe is conscious that his own retirement might be short because his grandfather died from a heart attack at 55 and his father died at 63 after having his first heart attack at 44. Joe works six days a week and dreams about retiring in 10 years, when he’s 55, but he realizes that may be more wishful thinking than reality because he and Pat, 43, have only about $240,000 in Individual Retirement Accounts, which were funded during the 1980s. Their only other retirement money is a likely inheritance of $300,000 when Pat’s 82-year-old mother dies.
Given their situation, it’s time, says financial planner Timothy J. Wallender, to consider another part of the Bible: The Parable of the Talents in Matthew 25:14-30, where the master gives his three servants money before he goes on a trip. When he returns, the master casts out the servant who buried his money, and praises the servants who took theirs and invested it, doubling the funds.
The Petersons have already shown great discipline in their tithing, Wallender said. Now they need to apply the same principles to saving for retirement and college. “They need an automatic investment plan, where they don’t even touch the money; it just goes into savings every month.”
Wallender said the Petersons’ immediate problem is tracking and controlling their spending. Joe does his own billing and admits he gets so busy he’s often late in sending out invoices. And until recently, Joe, who has an MBA along with his architecture degree, wanted to handle all the family’s investment decisions. But, busy with work, he didn’t have time to focus on personal finances.
Money, Pat said, has become a major stress in their life. For instance, they had long arguments about how to pay off their $75,000 debt last year. She wanted to dip into the IRAs, but “I finally made her see that it was like eating your seed corn,” Joe said. He convinced her it was better to refinance the house.
Investing and saving is another sore point. Pat noted that Joe had $100,000 in his IRA when he left an architectural firm to start his own business, “and in that 10 years it’s just grown to whatever he says it is now.”
Joe interrupted. “Translated,’ he said, “that means I was a pinhead who didn’t do much with my money for seven or eight years because I didn’t want to take advice from anybody. But with age comes wisdom, and I’m more open to advice.”
It’s a painful lesson because the market has been unusually strong this past decade. If, for instance, Joe had simply invested his $100,000 in Vanguard’s 500 Index fund (ticker symbol: VFINX), his money would have grown an average 18% a year, giving him about $523,000 today.
Pat is in charge of paying the household bills every month--10% to the church, $1,050 in tuition, $3,344 for their mortgage, $2,000 for taxes, $400 for health insurance, $427 for the lease on Joe’s new Ford Expedition and $100 a month--sometimes more--to help support Joe’s mom. But after listing those fixed expenses of about $8,800 a month, they’re a little cloudy about how the other $6,000 is spent.
With five kids, we “need money all the time for something,” Pat said. “So if I need to go out and buy all new spring clothes for the kids, I just do it. And if Joe needs computer equipment, for instance, he just buys it over the Internet and charges it. Basically, when we have a need, we just get it.”
They pay off their credit cards every month now, but they have no guidelines on how much to spend. They estimated they take out at least $700 in ATM cash withdrawals each month, but again, they don’t track it, “and it’s probably quite a bit more than that,” Pat said.
“Truthfully, we’re lucky to set aside $2,000 for taxes because there’s nothing left over,” Pat said.
But something has to be left over if they are going to save, Wallender noted, so the Petersons must either make more money or reduce their spending. Joe expects his own income to increase, and he’s gently lobbying Pat to take a part-time job after their youngest child, 2-year-old Elizabeth, starts school. But Pat is worried about juggling even part-time work with the needs of five children, and Wallender believes that no matter how their income changes, the Petersons need to know where their money is going.
“We’ve got a huge reality gap here,” Wallender said. “They have to prioritize and track their spending.”
Wallender recommends that the Petersons use a credit card that categorizes spending in the monthly statement, such as American Express, Discover or a premium Visa or Mastercard. Budgeting software also can make it easy to track expenses. The best-known program, Quicken, now allows users to coordinate credit card statements with their budgeting software by making regular Internet downloads.
Then the couple needs to set priorities. “I would suggest a two-hour session every month, at a minimum,” he said, “where you can both sit down and say, ‘OK, here’s what we spent, here’s what came in, and what are the lessons we’ve learned.’ ”
Joe and Pat liked the idea. “This is where Pat makes the movement from Soccer Mom to Quicken Mom,” Joe said, but they had doubts about finding time. “We don’t sit down for two hours to do anything,” Joe said, “so once a month, that’s a real goal there.”
“It’s worth getting a baby-sitter for those two hours,” Wallender said.
How much do they need to allow for savings? Wallender recommends they put at least $1,000 in a tax-deferred retirement account every month, and $1,326 a month into college savings plans with the aim of contributing about $25,000 toward the education of each of their five children.
Combined with the value of their house, other assets and the inheritance, saving $1,000 a month will provide the Petersons with an estimated $1.4 million in 10 years, $2.7 million in 20 years. After inflation, however, neither figure is high enough to produce their goal of an income equivalent to $100,000 today.
Assuming an average 4% inflation rate, a 7% average annual return, Wallender estimated they would need $3.2 million in 10 years (for $138,000 in inflation-adjusted income) or $3.7 million in 20 years ($200,000). These income figures would be supplemented by a modest Social Security payment to reach their goal.
Of course, with more income, more savings or unusually high investment returns, the higher figures may be in reach. On the other hand, the couple may be overestimating their income needs in retirement. Their living costs should fall dramatically once their children are adults, and they also will have the option of moving to a smaller house or condominium.
For the college savings plans, Wallender recommends they set up accounts in tax-advantaged education savings plans. These contributions grow free of state and federal taxes, and then are taxed at the student’s income tax rate when withdrawn and used at any accredited institution in the United States.
California’s plan is called ScholarShare, but Wallender prefers the UNIQUE College Investing Plan offered by New Hampshire and other states because it is managed by Fidelity Investments and has greater investment flexibility. Any U.S. citizen can invest in any state’s plan.
(ScholarShare’s Web site is https://www.scholarshare.com or call (877) SAV4EDU. For information on plans nationwide, go to https://www.collegesavings.org, a site operated by the National Assn. of State Treasurers.)
Wallender said the $1,326 should be divided into payments of $786 a month for Rachel, who is 16; $258 for Kurt, 12; $135 for Luke, 8; $82 for Nate, 4; and $65 for Elizabeth, 2.
Wallender also suggests that the Petersons consolidate their IRAs with a low-cost fund group such as Vanguard, because of its low fees, and then reallocate and diversify their portfolio.
Joe’s current IRA is invested mostly in technology stocks and a money market fund. His portfolio did very well in 1999, jumping 54% with stocks such as Apple, AOL, Compaq, Intel, LSI Logic, 3Com, Peerless Systems, Motorola, Mattson Technology, Micron Technology and PRI Automation. But Wallender noted that a stock portfolio takes time to manage, and a portfolio heavy in one sector is risky. Joe had categorized himself as a conservative investor who was “risk adverse.”
“My basic nature is extremely risk adverse,” Joe said, “but I do believe the new economy is high-tech. I love high-tech stuff, and I guess what I’ve been looking for is technology-type things to invest in, with as limited volatility as possible.”
Wallender thinks there are safer ways to invest in high-tech and still diversify. He recommended that Joe put at least half of his money into five broad bond and stock index funds and the remaining money into 10 technology stocks. One option is to invest in a fund-like security that invests in the largest technology stocks, the Nasdaq 100 trust, (ticker symbol: QQQ) and a similar trust of 20 Internet stocks (ticker symbol: HHH). Both trade like stocks.
Finally, Wallender said, Joe needs to increase his life insurance from $500,000 to at least $1.5 million and buy disability insurance, because he is the family’s sole supporter. Otherwise, the family’s standard of living would drop dramatically if something happened to him.
The Petersons liked the suggestions, purchased Quicken and have begun saving receipts. “Even though I wrote down groceries for $129, I need to save the receipts so we can break down the costs for cleaning or convenience foods,” Pat said, “But it’s hard to get into that mentality. I dug through the trash the other day to find a receipt.”
It helps to have a good road map for setting those goals, Joe said. “Some Christians might read this and wonder why we’re going to a secular source for advice, but the Bible says there’s wisdom in a multitude of counselors. And it’s not our money, anyway, it’s God’s money, and we’re just the steward of it, and we have to do a better job of being good stewards.”
Jeanette Marantos 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/makeoverform
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This Week’s Make-Over
* Investors: Joe Peterson, 45, and Pat Peterson, 43
* Annual income: $180,000
* Goal: Start saving for retirement and college
* Assets: About $250,000 in home equity, $240,000 in individual retirement accounts and $10,000 in a money market fund
Recommendations
* Track spending and analyze it monthly.
* Set up automatic investment plan for retirement and college funds.
* Consolidate IRAs in a single account and diversify
portfolio. A small portion can be in technology stocks and the rest divided as follows: Corporate bonds, 30%; S&P; 500 index fund, 30%; Small-cap stock funds, 15%; international stock funds, 25%.
* Triple life insurance to at least $1.5 million, buy disability insurance, set up a comprehensive estate plan to avoid estate taxes.
Meet the Planner
Timothy J. Wallender, a certified financial planner and registered investment advisor, has offices in Manhattan Beach and La Quinta, and operates on a fee-only basis.
