Get With The Plan: July 5, 2009

7509Harry and Daisy are just getting started in their financial lives together.

The couple, both 31, want to be financially secure.

“Our main goal is to reduce our debt in order to create a stable financial environment for the future,” Daisy said. “We plan to start a family in the near future and would like to begin saving for future endeavors and responsibilities, mainly a newborn and related expenses.”

Harry and Daisy, whose names have been changed, have set aside $31,513 in a deferred compensation plan, $5,963 in mutual funds, $3,815 in a brokerage account, $17,500 in certificates of deposit, $27,081 in savings and $3,500 in checking.

They’re each expecting government pensions when they retire, so they’re hoping that benefit will help with retirement cash flow.

The Star-Ledger asked James Ciprich, a certified financial planner with RegentAtlantic Capital in Morristown, to help the couple review their immediate and long-term plans.

“Housing costs — principal, interest, taxes and insurance — fall below 24 percent of their total monthly income,” he said. “But there is a high debt-to-equity ratio on their home.”

Their home loans total $435,500, and their home is worth $457,000. That means they have less than 5 percent equity in their home.

The couple want to eliminate debt, and Ciprich agrees that should be a priority. Their intentions are evidenced in the couple’s $1,000 per-month payments on the home-equity debt.

“Payments on the home-equity loan are aggressive and should eliminate that debt within two years,” Ciprich said, adding they have more opportunities to get rid of debt because of their cash flow. “They have the capacity to eliminate credit card debt within six months.”

If they’re really debt-averse, Ciprich says they could switch to a 15-year mortgage to have the debt paid down more quickly, which would save them interest charges in the long term.

Harry’s and Daisy’s total incomes are sufficient to cover their modest spending, assuming their budget is accurate.

If the numbers are right, they should have enough money to cover the cost of future day-care expenses and a college savings plan for at least one child, Ciprich says.

He ran several scenarios for the couple so they could see their outlook under different circumstances.

The first scenario looked at their current income and spending (not counting debt service), which would allow them to pay off their debts rather quickly and retire at age 60 with an extremely high probability of success.

The second scenario added the big-ticket items associated with children: an added cost of day care for $1,000 per month until the child is age 10, plus college savings expenses.

For this assumption, Ciprich calculated an annual savings requirement of $6,714 over 21 years for a college education costing $25,000 a year in today’s dollars (with a 6 percent rate of return and a 5 percent tuition rate of inflation.)

“They still came out stellar,” Ciprich said.

If they do start a family, it’s important to create a new budget, which would include new areas where they’ll be spending — diapers, day care, college savings, pediatrician visits — and areas where they may spend less, such as dinners out, vacations and rounds of golf.

The next scenario was essentially the same, but upped their spending to $95,000 per year.

“Essentially, they could have a child, cover college savings and day-care costs and still be able to increase their spending by close to 70 percent,” he said.

The final scenario looked at how they would fare if Daisy stops working to stay home with a baby, eliminating her income and pension entirely, to be conservative.

Ciprich said they could still comfortably increase their spending to $71,000, assuming Harry continues to maintain his income and his pension benefits provide for the majority of their income needs.

Under any scenario, the missing element of their financial plan is life insurance, Ciprich said. If Harry and Daisy both continue to work, they will be dependent on each other’s income to maintain their home and provide for their future family.