Get With The Plan: April 14, 2013

41413Garth, 46, and Dolly, 41, earn a good living, but they can’t seem to get ahead. In addition to lots of loans, they’re spending extra these days because Dolly has gone back to college. But all the debt is weighing on the couple, and they know they need help.

“We need help with spending management, keeping track of finances, setting and adhering to budget,” Garth says.

The couple has two children bound for college in a few short years. The kids are 15 and 12, but the couple hasn’t earmarked any funds for tuition bills.

The Star-Ledger asked Michael Gibney, a certified financial planner with Highland Financial in Riverdale, to help Garth and Dolly get a handle on their spending and debt.
Gibney says this couple’s problem is simple: They’re spending more than they’re earning.

“This is never a good plan and rarely ends successfully,” he says. “By my calculations, they are earning, net of taxes, approximately $150,000 a year, or $12,500 a month. Their expenses are approximately $14,000 or $15,000 a month.”

Granted, there are a few temporary expenses such as Dolly’s tuition, but this is still a current expense.

While the couple have a fairly good amount of equity in their home, they do not have much in savings, especially savings earmarked for retirement. On the positive side, they are young and have time to correct these shortcomings.

Gibney says there are three issues to address immediately: building up an emergency cash reserve, decreasing or restructuring debt, and obtaining life insurance.

For emergency cash reserves, Dolly and Garth should have three to six months’ expenses, or $33,000 to $66,000 — assuming $11,000 in monthly expenses, which does not include tuition.

“The three to six months depends on your job security,” he says. “If they are both secure in their current employment, they should feel comfortable with three months.”

But they should shoot higher if there’s any question about job security.

Debt is a big problem for this couple, and they need to get it under control.

“Outside of the mortgage, often referred to as ‘good debt,’ they have $116,000 in ‘bad,’ or unsecured debt.”

Because the couple has equity in their home, they may consider a cash-out refinance, Gibney says.

“Although we do not normally advocate this as an option, it may help get their debt under control,” he says. “They may benefit in the long run by refinancing because rates are currently lower than their existing mortgage.”

The couple’s current mortgage — not including property taxes and insurance — is approximately $1,997 per month. They owe $400,000 at 4.375 percent interest for 29 years — they refinanced in April 2012.

Gibney says if they’re able to get a 3.5 percent mortgage, and they increase the mortgage by $50,000 — the cash-out portion — they may be able keep the monthly payment fairly close to what it is currently.

The downside of refinancing would be that it extends the term back to 30 years.

“Since they refinanced only a year ago, this is negligible,” Gibney says, so borrowing at such low rates means it may be worth pursuing.

Alternatively, Gibney suggests they may be able to restructure the family loan.

“Uncertainty with this particular liability will only add to the stress that often accompanies family debt,” he says.

Credit card debt is worth discussing. The couple was able to get a zero percent credit card, but that runs out in September.

“While having a zero percent rate is appealing, they should be aware that they may be negatively affecting their credit score by continuing to transfer credit card balances by opening new credit lines,” he says. “Your credit score, of course, will affect your ability to refinance your mortgage.”

Life insurance is another problem.

Gibney says in their situation, because they are young, life insurance will serve as income replacement should one of them die.

“Considering the debt burden, it is imperative they seek life insurance as soon as possible to prevent a financial disaster should the unforeseen happen,” he says.

Gibney recommends they look at term insurance.

Once debt is addressed, the couple can turn to building retirement savings.

The best way to do this, he says, is to create a retirement account for each of them that they can fund on a regular basis.

Garth, who is self-employed, can set up a SEP IRA, an Individual 401(k), or at least a traditional IRA.

The couple should consider rolling over the former employers’ 401(k) plans to IRAs. This will open up their investment options, and the IRA will be better suited to creating a well-diversified portfolio of low-cost investment options.

The couple says they are moderate risk investors, which Gibney says is typically a portfolio of 60 to 70 percent equities and the rest in fixed income.

“They should explore the benefits and implications of a slightly more aggressive portfolio because they are young, the investments are inherently long-term and they need growth,” he says. “A well-diversified portfolio, by its nature, may be more-risk averse than a portfolio you can build within an old 401(k) plan due to their limitation on investment options.”

Right now, there is no money set aside for funding college, and two adolescents, time is not on their side.

Now is the time for Garth and Dolly to familiarize themselves with alternatives, such as loans and financial aid options.

“They should visit the FAFSA website ( to better understand the application process and the possibility of obtaining financial aid,” he says. “The process can be daunting, so the better prepared they are, the better it will be for their children.”