Single Mom Learns Art of Financing Dreams

Virginia Funkhouser wants to own a home. Not a dream house, just a home to call her own.

But there are many roadblocks--including upcoming college expenses and sparse retirement savings--to overcome before Funkhouser can leave the $615-a-month, two-bedroom apartment in Valley Village she shares with her 17-year-old daughter, Tess, and a cat named Riley.

Funkhouser, 41, earns $33,000 a year as a reference assistant in special collections and visual resources at the Getty Museum. She also gets a $4,800 annual stipend from her great-uncle’s trust and $100 a month in child support.

This hasn’t been sufficient to finance Funkhouser’s dream of homeownership. But her lifestyle is still much improved from a decade ago. In 1992, Funkhouser had to declare bankruptcy after an emotionally devastating divorce from her high school sweetheart left her $15,000 in debt and living on little more than $15,000 a year.

Although debt-free now, she still doesn’t have much savings--just $6,500 in the bank and $4,479 in a workplace retirement account.

“I just figure I’m going to work until the day I die,” she said.

Adding to her financial burden: Funkhouser bought a $7,500 used car for her daughter last year--along with the requisite insurance and a $2,000 computer. She also hopes to take her daughter to Italy this summer to celebrate her high school graduation and 18th birthday.

“For 18 years, I’ve had a child to raise. I want to get Tess on her way so she can earn a living. Once she’s on her college track I’ll have a little more to myself.”

Figuring out how to pay for Tess’ college education is Funkhouser’s first priority. With little money saved and no time to spare, she needs to take an activist approach, said Peg Downey, a fee-only certified financial planner based in Silver Spring, Md.

“The biggest thing I’d like to encourage you to do is to think outside the box,” Downey told Funkhouser.

Mother and daughter have already discussed educational expectations and financial realities, including the fact that child support payments will stop when Tess turns 18 in June and no further financial help is expected from her father.

One potential source of help: a $10,000 zero-coupon bond in Tess’ name--a gift from Funkhouser’s great-uncle. It will mature in 2003 and Funkhouser would like to hold on to it until then, even though colleges will take the current value of the bond, $8,800, into account when calculating Tess’ eligibility for financial aid.

Once the bond matures, the proceeds should be enough to finance Tess’ last two years of school. But until then, Funkhouser and her daughter will need to find other ways to pay for college.

For starters, Tess should be prepared to work at least part of the time she’s in school. She’ll start looking for a retail job near home soon--a step in the right direction, although she still may need to win a scholarship or take out a student loan to make ends meet.

The important thing now is for Funkhouser and her daughter to seek financial aid. There are plenty of Web sites that offer valuable information, and the federal government also provides guidance on finding scholarships and applying for student loans (see box above).

Downey also urged Funkhouser to contact directly the financial aid offices of the schools to which her daughter is applying.

“Don’t be afraid to tell them your situation, because if you just fill out a form, they’re responding to the form,” she said.

If all else fails, Tess should consider attending junior college for two years--a relatively inexpensive way to get her basic course credits.

Once Funkhouser has made some decisions regarding the short-term problem of paying for Tess’ college education, she can tackle her long-term dilemma: Should saving for retirement take precedence over becoming a first-time home buyer? She needs to keep in mind that the two goals are not mutually incompatible. Equity in a home can be used later to supplement retirement savings.

From her salary and stipend, Funkhouser nets $2,000 a month after taxes and retirement savings. Household, commuting, grocery and Tess-related expenditures total $1,400 a month or more. On average, she has about $400 left over that she could put aside toward a down payment on a home--although that’s somewhat misleading because that money is often tapped to pay for non-monthly expenses such as car insurance premiums.

Funkhouser’s income allows her to qualify for first-time home buyer programs aimed at low- and moderate-income consumers, Downey said. Buyers using these programs can receive financing at below-market interest rates even without making a down payment.

The planner recommended that Funkhouser check out first-time home buyer programs such as the one offered by her bank, Bank of America, or other institutions such as Wells Fargo, Washington Mutual and Sanwa. She could also check out programs sponsored by the city of Los Angeles and L.A. County. Some of these programs allow a two-person family earning as much as $62,000 to apply for help, with the only restriction being that the home be in participating cities or areas.

Funkhouser was concerned that her bankruptcy record would affect her ability to qualify for a loan, even though that stain on her credit record will be erased within a year.

Not to worry, the planner assured her. “These programs don’t look back that far,” she said. “They make allowances for past credit problems. You’ve paid your bills since then so you look pretty good to a lender. If they have these programs, they’re trying to implement them.”

As for Funkhouser’s retirement savings, she could get close to maximizing her contributions under the 403(b) plan offered by her employer by making a few changes, Downey said. Funkhouser contributes $150 monthly and has almost $4,500 saved between two Fidelity funds. Her employer recently began matching dollar for dollar up to 4% of her salary.

First, Funkhouser should think about changing or even dropping her $200,000 variable life insurance policy. She bought the policy to benefit her daughter in case of her death and as a backup retirement savings strategy.

Downey said Funkhouser can do better. Variable life insurance policies combine life insurance with retirement savings, but are notorious for their high prices and commissions.

Funkhouser is paying $1,650 a year for this policy, but a straightforward 10-year term life policy would cost her only $200 to $300 a year and protect her daughter. She could then take the approximately $1,300 difference and funnel it into her retirement savings.

Downey recommended that Funkhouser contact her agent and find out whether she can keep the policy in place by paying for the cost of insurance alone. If she can’t--or the cost of the insurance coverage is too high compared with other available coverage--she should simply cash in the policy and buy the cheaper insurance policy, the planner said.

Besides putting more money into her 403(b) account, Downey suggested that Funkhouser consider starting a Roth IRA. She can deposit up to $2,000 a year in a Roth, invest the money in a no-load, growth-oriented mutual fund such as the Vanguard 500 Index fund and withdraw it during retirement tax-free.

Downey suggested some minor repositioning in Funkhouser’s 403(b) plan, a tax-deferred retirement savings plan available to employees of nonprofit organizations such as the Getty. She should continue contributing half her retirement savings to the Fidelity Blue-Chip fund, the planner said, but transfer a portion from Fidelity Low-Price Stock to Fidelity OTC to broaden her exposure to mid-size stocks.

Another way to save money is to change her tax withholding status. Downey determined that Funkhouser, by claiming the wrong number of exemptions, is allowing the IRS to take an extra $200 out of her paycheck each month. That money could go into her retirement savings immediately, rather than when she gets her tax refund check each year.

The overall impact is clear. “We’re talking about you saving 20%,” Downey said. “On your income, that’s phenomenal.”

Now what about that trip to Italy? That, too, could be within reach, but once again, Funkhouser needs to be creative, Downey said. For instance, Funkhouser could use her job to find a way to help fund the excursion, such as putting together a museum tour.

“What you have is energy, intelligence and education,” Downey said. “You have a lot more of that than cash. You want to use all your resources.”

For Funkhouser, this message had ramifications beyond her portfolio.

“I always imagine everything is etched in stone, that these are the rules and you follow the rules. That you don’t question. I’m learning that yes, you do.”

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Phuong-Cac Nguyen is a regular contributor to The Times.

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(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

This Week’s Make-Over

* Investor: Virginia Funkhouser, 41, reference assistant at the Getty Museum

* Gross annual income: $39,000

* Goals: To get her daughter Tess, 17, ready for college, save for retirement and eventually buy a home.

Current Portfolio

* Cash: $6,500, with $5,700 in a money market account, $400 in a savings account and the rest in checking

* Debt: None

* Retirement savings: $4,479 in a 403(b) retirement plan at work: $2,131 in Fidelity Blue Chip Growth fund and $2,348 in Fidelity Low-Priced Stock fund

Recommendations

* Consider term life insurance instead of variable life and put premium savings in 403(b) plan.

* Change tax withholding status.

* Begin researching first-time home buyer programs.

* Reposition 403(b) funds to broaden stock exposure.

* Think more flexibly about finances and don’t be afraid to ask for help.

About the Planner

Peg Downey is a fee-only certified financial planner based in Silver Spring, Md.

Where to Go for Help

Information on financial aid for college:

* www.finaid.org: Links to state, federal and local sources of aid.

* www.fastweb.com: An electronic research tool that helps find private scholarships, grants and aid from more than 500,000 sources.

* www.collegeboard.org: Financial aid and advice, and a calculator for computing college costs.

* 1-800-4-FED-AID: Department of Education hotline answers questions about a range of college financing issues.

Information on first-time home buyer programs:

* www.cityofla.org/lahd: Site for Los Angeles Housing Department

* www.lacdc.org/programs/homebuyer/index .htm: Provides info on housing assistance programs offered by the Los Angeles County Community Development Commission.

Source: Times research