Young Couple Need to Take Baby Steps Financially

Brendan and Catherine Hodge went from carefree college kids to adults with big responsibilities in a hurry.

After graduating from a small Ohio liberal arts college last spring and moving across the country to Canoga Park, the couple married in June. They are expecting their first child in two months.

Some new concerns have arrived with the dramatic changes. They want to stretch an already tight budget to allow the mother-to-be to quit her job and stay home with their child. The couple wonder whether they should begin saving for their child’s college education and building their own retirement accounts. In addition, they want to start setting aside money to move from a small apartment into a home of their own.

“It’s going to take some very careful decisions to stay afloat and get ready for our first baby,” said Brendan Hodge, who grew up in the San Fernando Valley. He noted that this child is likely to be the first of several.

“We both want to have a large family. We’re hoping for four to six children.”

The Hodges, both 23, are in the kind of financial condition that’s not uncommon for young people starting careers. They owe $45,800 in college, car and credit card debt. With just a few hundred dollars in the bank and $2,600 in stocks and mutual funds, the Hodges have a negative net worth of nearly $43,000.

That deficit doesn’t figure to shrink in a hurry. Brendan Hodge’s salary at a small cosmetics company recently jumped to $40,000 from $28,000 after he was promoted to business manager. But the raise amounts only to what his wife now makes working part time in a bookstore and as a stage manager for local theater companies--and she intends to leave those positions next month.

“Our mothers were both home for most of our childhoods, and we’d like the same for our children,” said Catherine Hodge, who grew up in Cincinnati. “And we were both home-schooled, and we’d like to do that for our children too.”

Given the couple’s circumstances, they need a financial reality check, said Manhattan Beach-based financial planner Preston Caves.

“You have a typical problem for young people,” he said. “You have a lot of goals, but you don’t have the resources to meet them.”

Currently, their income is fully stretched. Rent, utilities, groceries, car insurance and car and college loan payments usually consume their paychecks. Thinking about retirement, college funds and a house nest egg is laudable, but those goals must be put on hold while they tackle more immediate needs, Caves said.

“You have to build a financial foundation,” he told the couple. “You need to cover your risks and get into a positive cash flow before you can start thinking about the other things.”

In particular, the Hodges should concentrate on paying down some of their debt, beginning with the high-interest-rate items first. These include a $1,500 credit card bill at 15% and a $7,800 car loan at 11.25%.

Trying to tuck away retirement or other savings that might grow at 5% or 7% while carrying balances on debts with more than double that interest rate is folly, Caves pointed out.

Caves suggested that the Hodges cash out of a few stocks worth $800 that Brendan Hodge accumulated in college to make an immediate dent in the credit card bill.

And as the family soon will be relying solely on one income, Caves is concerned that the father-to-be doesn’t have life or disability insurance. Neither is offered through his 15-employee company, and the couple haven’t investigated those policies on their own.

The problem, of course, is where to find the money to pay down debt or buy insurance. Their budget already is pretty lean--meals out are extremely rare, they don’t take vacations, and they have no expensive hobbies.

But after reviewing their expenses, Caves identified a couple of areas that could free up some cash. An $80 monthly cell phone contract could easily be cut in half. And their $250 monthly car insurance could be reduced by raising their $250 deductible or shopping for more economical coverage.

“The way it is now, your cars are better insured than you two are,” he told them. “With a child coming, you need to insure Brendan’s life and his earning power.”

Given Brendan Hodge’s youth and good health, the savings from those items might be enough to cover bare-bones term life insurance and disability insurance policies.

But trimming car insurance and cell phone costs only nibbles at their financial problem. The Hodges need to think about bigger moves, Caves said.

“You’re very conscientious about not spending too much money, but Los Angeles is an expensive place to live,” he said. The couple, however, plan to stay in the L.A. area. Brendan Hodge is close to his family, and proximity is all the more important now with his father going through some medical problems.

Another possibility is that Catherine Hodge reconsider her plan to quit work when their baby arrives. Caves wondered whether she could continue at the bookstore evenings or weekends while her husband is at home with the baby.

“You may not get to see each other quite as much, but at least you could pay down some debt and get some savings in place,” Caves said. Her income could provide a small financial cushion that would help cover the additional expenses a child brings.

As another option, the couple might consider selling one of their cars to eliminate a $200 monthly car payment and the expenses associated with operating a vehicle.

The bottom line is that the Hodges really have only two choices: earn more or spend less.

“If you can’t get over the hump and get into a positive cash flow situation, you end up living month to month and you can’t even start thinking about longer-term financial goals,” Caves said. “Saving for a home isn’t feasible right now. You just need to work through this and get some momentum.”

Catherine Hodge acknowledged that quitting work might not be the best move. She has earned money as a proofreader before and said she might explore whether returning to that line of work from home is possible.

And she’s not too worried about delaying the couple’s longer-term goals, such as chipping into retirement savings.

“We’re young and we’ve got time on our side for that kind of thing,” she said.

Her husband acknowledged that the next couple of years could be lean, but he remains optimistic about their financial future. He expects his earning power to grow, providing the cash to pay off debts and begin saving money.

“I think my career prospects are pretty darn good for someone my age,” he said. “I’m on a management track. We’ve just got to figure our path for the next couple of years.”

Graham Witherall is a regular contributor to The Times.

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This Week’s Make-Over

* Subjects: Brendan and Catherine Hodge, both 23

* Occupations: Brendan Hodge, business manager for a cosmetics firm; Catherine Hodge, part-time bookstore employee and theater stage manager

* Income: $40,000

* Goals: Get out of debt; begin saving for a house, retirement and child’s college tuition

Current Portfolio

* Retirement accounts: $1,800 in a Roth IRA, invested in an S&P; 500 index fund

* Other investments: $800 in stocks--Apple Computer Inc., Cisco Systems Inc. and SpaceDev Inc.

* Other savings: $400 in a passbook account

* Debts: $30,000 in student loans; $1,500 in credit card debt; $14,300 in car loans

Recommendations

* Reconsider plan to have Catherine Hodge stop working.

* Pay down high-interest debts.

* Get disability insurance and at least $250,000 in term life insurance.

* Prepare a will to specify wishes for child’s care.

Meet the Planner

Preston Caves is a fee-only certified financial planner and chartered financial analyst. His firm, Caves & Associates in Manhattan Beach, specializes in investment management for retirement plans and large private portfolios.