Adopting a New Attitude About Money

Kathy Ruff never thought much about money.

The permit coordinator for the city of Santa Monica wasn’t rich, but she earned enough to pay her bills and take a few trips to see the Eiffel Tower, Versailles, German castles and the Irish countryside. Money wasn’t an issue.

Then she became a foster parent.

“I always wanted to have kids. I knew I’d do it by myself if I had to. Then my friend, who became a foster parent, told me where to call to get info and it went from there,” said Ruff, 44.

Sooner than she expected, Thomas, now 3, entered her life. As she made the decision to formally adopt him, she decided to take in another foster child--this time an infant girl--whom she now wants to adopt.

Life changed almost overnight. Gone is the small rent-controlled Santa Monica apartment near the beach. She traded it in for a larger--and significantly more expensive--apartment suitable for children in Mar Vista. Travel now consists of visits to her mom’s house in Silver Lake with the kids. Money is something Ruff thinks about all too often.

“I now have two young children and I’m single,” she said. “I’m concerned about my savings account. I don’t have life insurance. I don’t have a will. I want to buy a house and I need to know more about how to save money for college for the kids.”

Ruff’s finances are tight but not impossible, said Scott Leonard, a fee-only certified financial planner based in El Segundo. She grosses $41,000 annually from her job and receives supplements from the state for the care of the children--$600 a month for her foster daughter and $393 for her adopted son. (Monthly stipends are reduced when a foster parent formally adopts a child.)

Ruff also has $20,000 in a savings account for emergencies and $50,000 set aside in her 457 retirement account, a tax-deferred savings plan for state, county and municipal employees. She has no debt.

Her first priority must be getting her will in order, Leonard said.

“If something happened right now, Thomas would be back in the courts,” he said. “That would be emotionally devastating.” (Under California law, Ruff cannot control what happens to her foster daughter until she adopts her.)

She needs to name a guardian for the children and buy life insurance to make sure they would have both emotional and financial support if Ruff were to die suddenly.

Leonard recommended that Ruff investigate a 20-year level-term policy with a death benefit of at least $275,000. He usually suggests a higher amount, but both children will retain their monthly stipends from the state until they turn 18, which can help satisfy their financial needs. Moreover, if Ruff were to die, the life insurance money would be distributed in a lump sum and the proceeds could be invested to keep pace with inflation.

Ruff asked whether she should buy insurance products that combine savings for retirement with the death benefit, but Leonard said those policies cost too much.

Term life insurance, which provides a benefit when you die, could cost Ruff $300 to $500 annually; whole life, which builds up an investment account within the policy, could cost 10 times as much. Because Ruff’s budget is tight, it’s not necessary to debate the relative merits of the products. Ruff simply must buy what she can afford, which is term.

Besides, Ruff wants to save every dollar possible to buy a house.

“I want the children to grow up with a yard,” Ruff said. “There’s also an insecurity with renting. If I had to move, how would I find something near my work given how rents are increasing on the Westside?”

Yet finding an affordable home in West Los Angeles is not going to be easy. The most Ruff could pay for a house is $250,000, which probably would cost her $1,600 a month for principal, interest, taxes and insurance. And, that’s if she’s able to come up with a 20% down payment. Although a quarter of a million dollars is a fortune in most parts of the country, home prices near Ruff’s Santa Monica workplace commonly sell for twice that.

Leonard recommended that Ruff consider townhouses and condominiums. They usually don’t have yards, but they cost significantly less than houses.

The planner also advised that Ruff look into first-time home buyer programs sponsored by city and county governments as well as financial institutions. Specifics of these plans vary, but Ruff probably would qualify based on her income. Some programs allow for down payments as low as 3%, reduced interest on the loan or tax credits. The catch: Most put a cap on the price of the home, a potential problem in high-priced areas.

Ruff also needs to save money for a down payment. Leonard suggested she begin by redirecting the $325 she contributes each month to her 457 account. That money should go into taxable savings, which can be tapped to buy a house, he said.

Ruff found that advice shocking; she had been “trained” to put as much as possible into tax-deferred savings plans. Leonard admitted it’s not advice that he gives often, but it’s appropriate for Ruff for several reasons.

First, she has little fat in her budget, and it’s unclear where the money to purchase a home would come from if not from there. Second, Ruff is covered under the California Public Employees’ Retirement System. If, for example, she retires at 62, she will be eligible to to draw 73% of her last year’s pay based on the plan’s rules and the amount of time Ruff would have put into the plan. In addition, she will receive a small Social Security benefit from jobs she held before taking the city job.

When she buys a house, she can use the $975 a month that she now pays in rent, plus the $325 she’s diverting from the 457 plan to help make her monthly mortgage payments. Buying a home also will lower her income taxes a bit, making the house easier to afford.

If Ruff finds herself with additional disposable income down the road, she can start saving for retirement again, Leonard added. But, for now, near-term goals are more pressing.

Leonard also had a few minor financial suggestions:

* Ruff should change the asset mix in her 457 plan from high-risk stock and more secure bond funds by taking the option that allows the fund manager to design a moderate-risk portfolio for her. The firm handles the asset allocation and necessary periodic rebalancing and adjustments. This is perfect for Ruff, who acknowledged she does not follow the account closely.

* Ruff should move her emergency savings from her bank to a discount brokerage account, where she can receive higher interest rates. Leonard also suggested investing at least half of her emergency funds in a bond fund such as Payden & Rygel Global F/I fund, a mutual fund specializing in short-term, high-quality bonds from around the globe.

* Ruff shouldn’t be afraid to ask for help when available. For example, many preschools--like colleges and universities--offer financial aid, often with a goal of increasing diversity.

Meanwhile, she can relax about the college savings for now. If her finances don’t change, her kids probably will qualify for financial aid for college students.

Ruff pronounced herself financially reinvigorated.

“I felt so lost. I had no idea what to do,” she said. “Now I’m ready to get going.”

Helaine Olen is a regular contributor to The Times.

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(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

This Week’s Make-Over

* Subject: Kathy Ruff, 44

* Occupation: Permit coordinator of Santa Monica

* Gross annual income: $53,000

* Goals: To ensure the financial well-being of her young children and to buy a home

*

Portfolio

* Bank savings: $20,000

* Deferred compensation account: $50,000 (divided between stock and bond funds)

*

Recommendations

* Move bank savings to discount brokerage money-market account to obtain higher interest rates.

* Investigate first-time home-buyer programs.

* Write will and name guardian for the children.

* Buy life insurance.

* Cease contributions to deferred compensation plan.

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Meet the Planner

Scott Leonard is a fee-only financial advisor with Leonard Capital Management in El Segundo.