Mission: Money Control June, 2001 These families bared their budget woes and got free advice from our experts. Their solutions can work for you, too...especially in tough times. By Shira J. Boss Good Housekeeping Falling short BECKY AND AARON GEORGE Fenton, Michigan: Parents of three children, ages one, four, and seven Occupation: Becky, 30, is a social worker; Aaron, 31, works as a prison guard Combined income: $75,000 Goal: Stop living paycheck to paycheck Becky George worked part-time and then took an extended maternity leave after having her third child, and the family built up about $8,000 in credit card debt. Now that she has returned to work, the budget still feels tight, and Becky and Aaron aren't sure why. The Georges have student loans, a mortgage, and a monthly payment on a new van. They are paying off the credit card debt as well as $2,500 for new furniture. She works days and he works nights, so child-care costs are minimized. Still, Becky says, "I see a lot of our money being piddled away and I'd like to find out where it's going.” The adviser says: "Becky and Aaron need to do some planning so they can react to needs as they come up," says Sharon Rich, a financial planner in Belmont, Massachusetts. In other words, they need to make a budget. Put it in writing Rich started by asking the couple to write down everything they spend money on. Once they did, she found some obvious "flexible" expenses-the $100 per month they spend on spring water and vitamins, for example, and the roughly $200 per month they spend on gifts, photos, and parties. Balance the budget Rich stressed that the Georges should make decisions about where to cut together. "It's cutting back, not cutting out," she adds. "If you cut out everything, you start to think, Hmm, why am I working?" Rich says if the Georges decide to budget $1,200 per year for gifts, they need to plan how much that means per gift. If they spend more on one, they should go back to the budget and figure out where to cut back to make up the difference. The same principle applies to their charitable contributions, which average about $100 per month. As a social worker, Becky often buys groceries and other necessities for her low-income clients. "I can see you've got this soul where you want to be taking care of everyone," Rich told Becky. "But you have to take care of your family and yourself first." That means deciding on a reasonable amount to give away each month and sticking to it. Stay on target With the cuts to spring water, vitamins, and entertainment expenses, the Georges estimate they will save $3,600 in one year. Rich recommended that the couple track their expenditures with a computer program such as Quicken or Microsoft Money. She also pointed out that they are paying off their debts quickly and will soon notice the increase in cash flow from Becky's income. Deeply in debt ELIZABETH AND MICHAEL SANTIAGO Ossining, New York: Parents of a one-year-old Occupation: Elizabeth, 35, is a graphic designer; Michael 31, is a department head at The Home Depot Combined income: $87,000 Goal: Get out of credit card debt After getting married and buying a house, the Santiagos pursued costly medical treatments for fertility problems-and started running up their credit cards. Today, they are thrilled to have a baby girl but are struggling to pay down credit card debt of more than $30,000. With a mortgage payment of $1,700 every month and two car payments totaling $485, plus the costs of a baby, their monthly take-home income is falling short of their expenses by nearly $400 per month. They're failing to pay off their debt and adding to it. "We're robbing Peter to pay Paul," Elizabeth laments. "It's a bad cycle, and it's just getting worse and worse." The adviser says: Patti Houlihan, a financial planner in Oakton, Virginia, recommends a two-part strategy: cut spending to balance their budget, then lower the interest rate on their debt. Reduce spending Houlihan says the Santiagos should immediately cut monthly lawn-care service and water delivery, for a total savings of $170 per month. Beyond that, Houlihan notes that the couple received a $5,000 tax refund last year, which means they have been loaning the government money interest-free while they pay up to 24 percent on credit cards. What they need to do, Houlihan says, is to request new W4 forms from their employer and increase the number of deductions they are taking. This, she figures, will give them an additional $400 or more per month, which they can use to pay off their debt. Bring down the interest rate To tackle the $30,000 monkey on their back, Houlihan says the couple should ask one set of parents for a loan they would pay back with interest. "If the parents have any money in CDs or a money market account, the highest interest they're earning is six percent," Houlihan explains. "Elizabeth and Michael can offer them eight percent, and both couples do better." For this type of arrangement, Houlihan always suggests that a formal agreement be signed by both parties, along with a repayment schedule that she tells the borrowers to take as seriously as any other loan. Use their home equity Another strategy is to replace the high-interest credit card debt with a home equity loan, lowering the interest rate to 8 or 9 percent. Houlihan stresses that borrowing against the equity in their house is the smartest move the Santiagos could make if they can't borrow all of the $30,000 from parents. "It's tax-efficient and it's cost-efficient," Houlihan says. On the credit cards, their monthly payments are $750, which only covers the interest payment and does nothing toward eliminating the debt. With a lower-interest loan, their monthly payments would drop to about $625, enabling them to pay off the entire balance in five years. Plus, they would be getting a tax rebate from the government. "The end cost would only be about 6.5 percent interest because payments on home equity loans are tax deductible," Houlihan explains. Dump the plastic Houlihan made Elizabeth and Michael promise to cut up all but one credit card, which they must pay off each month. "It may be a struggle day-to-day," Houlihan says, "but things will improve. Then they will have some discretionary money-and be able to get a baby-sitter once in a while and go out to dinner and enjoy it." No savings CYNTHIA HOLLER Pilot Mountain, North Carolina: Mother of two daughters, ages seven and 13 Occupation: Cynthia, 35, is a project assistant for a heating and cooling contractor Income: $32, 000 Goal: Save for her daughters' college education and her own retirement Cynthia Holler is raising her daughters on her own after a divorce, with only small and sporadic child support contributions from her ex-husband. She recently bought a house, has been contributing the max- imum 15 percent to her retirement plan (with the exception of one six-month hiatus), and doesn't own a credit card or have any other debts except a student loan. Cynthia is not frittering away much money on eating out, and clothing for her kids comes mostly as gifts from their grandparents. She considers the $200 she spends on health insurance every month a must. How to start saving? The adviser says: "She's not in debt, which is great, and she realizes the importance of health insurance," says Vickie Hampton, associate professor of family financial planning at Texas Tech University in Lubbock. But saving for college, Hampton says, might have to wait a year or two, because a higher priority is making the family more financially secure now. "You do what you can for the kids, but they will be able to go to college, with student loans and so forth," she says. Build a safety net The family has no savings stored for emergencies or unexpected costs. Therefore, Hampton says, the first priority is to put aside $25-the only give she found in Holler's budget-every month in a savings account (the bank can transfer it there automatically from Cynthia's checking account). Cynthia should transfer her savings to a money market account or a money market mutual fund, which earns in the neighborhood of 4 to 6 percent interest annually, once the money reaches $2,000 or the specified minimum. Hampton advises against putting the money into stocks, because they don't guarantee a specific return. And Cynthia needs to be able to get to the cash quickly if something unexpected happens. That means avoiding a certificate of deposit (CD), which charges a penalty when money is taken out before maturity. If the family needs the money, it will be there. If not, it can serve as a nest egg for the girls' college education. Give it some time Saving will get easier next year when Cynthia!s older daughter no longer needs after-school care, Hampton notes, adding that Cynthia should also consider raises at work as future savings. When Cynthia can afford it, Hampton recommends that she put between $50 and $100 per month into a Section 529 college savings plan-a relatively safe, state-- sponsored program that lets money grow tax-deferred until it is used for college. Under this type of plan, assuming an 8 percent interest rate (rates vary by state and plan, and are also subject to market conditions), a $100 per month contribution will grow to $7,347 in five years-and $18,295 in ten. Keep the 401 (k) As for her own retirement, the $400 contribution Cynthia makes to her 401 (k) plan each month should amount to around $271,000 if she retires at 55. That would provide an income of about $23,000 for 30 years, Hampton says, which is nearly adequate considerring Cynthia's spending patterns. Hampton recommends keeping half the money in her 401 (k) in bond funds for safety. When her budget has more give, Hampton recommends that she save more money, outside the 401 (k).