Couple’s grand plans fraught with peril
Michael Abedor and Maria Magallanes are a couple reaching for a bright, secure future.
He recently started a business in a field he described as “almost recession-proof.” Meanwhile, she’s planning to quit work to get a master’s degree. The West Los Angeles couple are thinking about buying a bigger home and aspire to save enough money to eventually send their two children — now 4 and 11/2 — to college.
When the economy was booming, their hopes may not have seemed unreasonable, even as they racked up thousands of dollars in credit card debt to get Michael’s new business off the ground.
But in a sluggish economy, dreams without careful financial planning can end in disaster.
Alfred McIntosh, a certified financial planner in West Los Angeles who reviewed the couple’s finances, feared it could all go wrong.
“This ship is going down unless they do something,” McIntosh said.
Michael, 40, a former media supervisor in the entertainment business, has been laid off twice. He started his home-based venture as an independent sports ticket broker several months ago.
The couple rely on Maria’s salary as an instructional consultant.
There is the mortgage to pay, household expenses and preschool tuition. And then there is the elephant in the room — credit card debt that has reached $50,000 with no clear plan to pay it off.
“We are making ends meet,” said Maria, 39, sitting in the family’s living room where a Thomas the Train table and toys are stowed behind the sofa. “But there is no wiggle room.”
Maria makes about $78,000 a year. The couple have amassed $128,000 in retirement accounts and $40,000 in a savings account and have an additional $30,000 saved for their children’s college expenses.
Aside from the credit card debt, the couple have a $313,000 mortgage with a 30-year fixed interest rate of 4.875%. The value of the home is about $715,000, giving them about $402,000 in equity.
Michael, who comes from a family of entrepreneurs and furniture salesmen, brims with confidence about his ticket-selling business.
“I really love what I’m doing,” said Michael, who is constantly texting responses to customers contacting him to buy tickets to see local teams such as the Dodgers and the Kings, as well as other teams around the country.
But it’s risky. The business, which entails buying season tickets and then reselling them piecemeal, takes a lot of upfront capital — thus the credit card debt.
What makes it more perilous is that Michael doesn’t have a clear idea of his venture’s finances.
“I’m in the transition of separating the business finances from our personal finances,” he said.
“I haven’t kept track of quarterly figures let alone monthly. Sadly, I’m just juggling too many things and I haven’t done the best job.”
McIntosh said Michael can’t put together a realistic plan for the business until he has a clear idea of its cash inflow and outflow.
The planner suggested he take several steps:
Hire a bookkeeper to help organize the financials and predict expenses; set up the business as an S corporation, a single-member limited liability company or just a plain LLC; look into refinancing the business’ existing debt under the corporate structure; and try to get a business loan for operating cash, instead of using credit cards.
Michael should also consult with a ticket broker to make sure he understands the business to the point where he can make realistic revenue projections.
Maria’s belief that the couple were making ends meet turned out to be optimistic, at best. Examining the family’s spending patterns, McIntosh determined that their monthly expenses amount to $6,350. That’s about $1,840 more than Maria’s after-tax income.
And if Michael keeps accumulating debt things will only get worse, McIntosh said.
“They might be able to get by two or three years pulling from savings and living in debt, but pretty soon it will all blow up,” he said.
McIntosh also worries that starting the business has derailed the couple’s saving for retirement. Currently, Maria puts just $130 a month into her 401(k) account.
McIntosh estimates that for the family to send Maria back to school full time — a move she feels is necessary to increase her earning power — and to pay off their debt, Michael’s business will have to earn at least $115,000 annually.
The planner also said the venture’s income should grow by about 4% each year to fund the couple’s retirement and pay for healthcare and disability insurance if Maria isn’t working.
“I don’t want to rain on anyone’s dreams because I believe all things are possible,” McIntosh said. “But, boy, does he need to deliver.”
In the meantime, the family must trim expenses. McIntosh said the couple should slash grocery bills, which now run high at $800 a month. He said they also should put off vacations and other substantial expenditures.
To save for retirement, Maria should contribute at least the maximum amount to her 401(k) that her company will match, which is 6% of her income.
Meanwhile, McIntosh wants the couple to diversify their retirement holdings, adding more international and emerging market stocks.
All of the advice was a lot for Maria and Michael to take in.
“He really asked us hard questions that we didn’t want to think about,” Maria said. “It feels very grown-up to consider it all.”
She still wants to go to school, though. And Michael still wants to pursue his business. He acknowledged he needs to get his finances together. To start, he is setting up a separate bank account for the venture and also has scheduled meetings with nonprofit counseling services that help start-ups.
“It’s make-or-break time,” he said.
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