Couple Prove to Be a Quick Study in Financial Matters

Michael and Monica Navia got a crash course in financial management. It taught them that you can’t always get what you want--at least not right away.

The Fountain Valley educators said their primary goal was to let Monica stay home to raise their children, Meagan, 2, and Nathan, 4 months. But they also wanted to pay some debts, become more financially independent, earn advanced degrees and save for retirement and the kids’ college educations.

But the catch is that they’re spending both incomes now without putting much money away for their long-term goals. Worse still, they earn a substantial amount--more than $110,000 between them--but they’re not sure where all the money goes.

“We’re barely making it” after paying monthly bills, said Michael, a 31-year-old assistant principal of Hoover Middle School in Lakewood.

The mortgage, car loan and child-care payments alone total nearly $3,000 a month. But other mysterious expenses manage to gobble up the rest of the Navias’ paychecks. Frustrated, Michael turned to his wife: “Honey, do you have any idea?”

Monica, a 32-year-old first-grade teacher at Juarez Elementary School in Cerritos, shrugged.

“I haven’t paid attention to our finances,” she said. “I just sit back and let Michael take care of everything.”

Ruth Sully, a certified financial planner in Huntington Beach, said there’s only one way to deal with situations like these: homework.

Sully, a former schoolteacher, handed out assignments. The Navias got budgeting work sheets to study, forms to track expenses and a book--”A Woman’s Guide to Investing,” by Virginia B. Morris and Kenneth M. Morris--for Monica to read. Sully also recommended that Michael and Monica each carry small notebooks to jot down everything they buy.

“They need to keep track, dollar by dollar, of what they spend in a month or over several months,” Sully said. “Knowing where the money is going can help them decide what is important and what they can do without.”

The Navias have substantial short-term debts, including a $9,000 car loan, $24,000 in student loans and $5,000 on credit cards. They also have a $220,000 mortgage on a home that they estimate is worth $350,000.

But that didn’t completely explain their lack of cash. They don’t live extravagantly, rarely going out to eat. The couple are sure that every penny goes toward essentials.

After several weeks of recording their daily expenses, they began to get an inkling of the problem.

“What shocked me is how much the kids cost,” Michael said.

The cost of things like diapers, baby food and tiny togs that last only a few months can catch young parents unaware.

“Before, I thought I could stay at home by just cutting down on a few things,” Monica said.

Sully’s work sheets also illustrated how some costs, such as electricity, increase when one parent stays home, while others, such as food, clothing and transportation, decrease.

“I tell people over and over that budgeting is a process that goes on for a lifetime,” she said, while passing out some extra reading, including work sheets on improving cash flow and mapping a financial plan.

The crash course helped the Navias decide they still need Monica’s full-time teaching salary.

By postponing that goal, they can focus on other objectives, Sully said.

They need to pay off credit card debt and their car loan, increase their cash reserve for emergencies and keep saving for retirement. Sully encouraged the Navias to shop around for a home equity line of credit to establish a source of emergency funds other than their parents.

The Navias’ parents helped pay for the couple’s college expenses, wedding and the down payment on their home. And Michael’s parents have given the kids’ college savings a boost with $2,000 in savings bonds.

Because the Navias have just $3,000 in cash savings, Michael fears they’d be forced to seek his parents’ help again in an emergency. While he believes his parents would gladly pitch in, the idea makes him uncomfortable.

“It almost feels wrong when we have our own kids,” he said.

The Navias also want to earn graduate degrees in education--a doctorate for Michael and a master’s for Monica--which would create additional expenses. But, in time, those costs likely would be offset by higher salaries. Michael’s ultimate dream is to become a college professor.

Yet, with so many aspirations, Michael and Monica need to begin establishing priorities, Sully said. That will allow them to at least get the things that are most important. For now, their goals are clearly bigger than their wallets.

Sully recommended that they first pay down their debts. They also should continue to track their expenses, with an eye toward living on one income when they can afford it. They probably can defer setting money aside for the kids’ college bills, partly because they already have a head start there, thanks to Michael’s parents.

In the meantime, the couple must get their retirement portfolio in better shape, Sully said.

Although Michael was aware that their 403(b) retirement savings plans were generating annual returns below 5%, he had failed to study the investment choices. Part of his plan was invested in a money market fund and Monica’s was locked in a fixed annuity.

Sully advised the Navias to get lists of their 403(b) investment options. They should switch their retirement savings to growth stock mutual funds.

When they complete their homework, the Navias will be in much better shape, Sully concluded. Although they have a long way to go, they’re starting the process at a relatively young age, which gives them a much better chance of getting all the things they need and want over time.

“Most people fail to implement a solid strategy and only realize too late the short distance they traveled and how little they have accomplished,” she said. “Achieving financial success is a step-by-step process.”

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This Week’s Make-Over

* Investors: Michael Navia, 31; Monica Navia, 32

* Gross annual income: $110,500

* Goals: Live on one income so Monica can stay home with their two children. Increase returns on their retirement accounts. Michael would like to earn a doctorate and Monica a master’s degree. Save for children’s college education.

*

Current Portfolio

* Cash and savings accounts: $3,000 in a Strong money-market fund

* Real estate: About $130,000 equity in home valued at $350,000

* Retirement accounts: Michael has $7,200 in a 403(b) retirement savings plan invested in a money-market fund and stock mutual funds. Monica has $6,500 in a 403(b) plan invested in a fixed annuity. They also expect pensions from the California State Teachers’ Retirement System.

* Other investments: $350 in a tax-managed growth mutual fund, $2,000 in U.S. savings bonds

* Debt: $220,000 mortgage, $9,000 loan for 1998 Honda Accord, $24,000 in student loans, $5,000 on credit cards

*

Recommendations

* Establish cash reserve of at least $9,000, or three months of living expenses.

* Establish an equity line of credit on the house for a safety net.

* Track expenses with an eye toward living on Michael’s income and eliminating credit-card debt.

* Switch Michael’s 403(b) investment from a money-market fund to a growth stock mutual fund for a higher return.

* Convert Monica’s 403(b) investment from a fixed annuity to a growth stock mutual fund or a variable annuity.

* Ask Michael’s parents to contribute to a mutual fund rather than savings bonds if they continue to contribute to the children’s college accounts.

* Later, consider establishing educational individual retirement accounts for the children.

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Meet the Planner

Ruth Sully is a certified financial planner and branch manager of Associated Financial Planners/IFG Network Securities Inc. in Huntington Beach. The former elementary schoolteacher charges fees or commissions depending on the situation. She has been a financial planner for 18 years. Sully conducts personal-finance seminars throughout Orange and Los Angeles counties on a variety of topics, ranging from retirement to “Budgeting for Baby.”