Get With The Plan: May 2, 2010

5210Fresh out of the depths of $30,000 in credit card debt, Pat, 32, and Monisha, 35, want a fresh financial start. Now with only a mortgage, car loan and college loan, the couple want to do things right.

“It’s almost like we’ve been operating in emergency mode, and now that we’re done, we don’t know how to live normally,” Monisha said. “Right now, our immediate concern is what’s next.”

Pat and Monisha, whose names have been changed, have saved $89,000 in 401(k) plans, $375 in an IRA, $600 in savings, $400 in a money market and $100 in checking.

The Star-Ledger asked Michael Gibney, a certified financial planner with Highland Financial Advisors in Riverdale, to help the couple plan their new financial life.

“They are to be congratulated in addressing their very high credit card balance,” Gibney said. “They should use the discipline used in paying down their credit cards by now addressing their savings.”

Now that the credit cards are under control, the couple need to build an emergency fund. Having cash available for necessary yet unplanned big-ticket items will reduce the chances they’ll again build up their debt.

Gibney commends both Pat and Monisha for contributing to their employer-sponsored retirement plans. He says they should at the very least contribute so they receive their full employer matches to the accounts.

“By not making a contribution up to the match, they may be leaving money on the table,” Gibney said.

They should take a closer look at their asset allocation in the plans, though. First, they should each take a risk assessment test so they can have a better idea of their tolerance for market swings. This will help them position their assets to earn a rate of return that will suit both their long-term investment needs and their stomachs.

Monisha’s retirement plan, for example, has a relatively high percentage in both stability of principal funds and an asset allocation fund.

“The asset allocation fund is redundant and probably has some overlap so this could be allocated to another specific asset class,” he said. “There is too high a percentage allocated to the stability of principal fund in a retirement account for someone so young.”

The couple’s cash accounts are with two different banks, their car loan is with a credit union and their mortgage is with yet another financial institution. Gibney said he’s an advocate of consolidating all of a family’s banking at one institution, whether it is a bank or a credit union.

“You may benefit from lower rates on your mortgage and/or home-equity lines of credit, as well as more favorable rates on savings if you are considered a ‘good customer,’ ” he said. “Plus, it just makes life easier.”

On the insurance front, Pat and Monisha both have universal life policies, which Gibney said can be very expensive. They’re paying $1,200 a year for two $100,000 policies.

“Given their ages, they can buy the equivalent amount of term insurance for approximately $170 each per year, or increase their coverage to $250,000 for $250 each per year,” he said.

The money they save can be directed to their retirement plans, emergency fund or debt, Gibney said, noting those quotes are preliminary and assume Pat and Monisha are both healthy, not overweight, nonsmokers and have a history of good family health.

Gibney noted that while they each also have term policies through their employers, those policies are not usually portable should either leave their jobs anytime soon. Further, as they get older, buying new coverage would probably mean higher premiums.

Now that their credit cards are paid off, Gibney said they should see if they’re candidates to refinance their mortgage to a lower rate, if the loan-to-value ratio allows. (They should check housing prices in their area to see if their estimate of their home’s value is accurate.)

Gibney said the window on low rate refinance opportunities is closing fast, but rates are still in the low 5 percent range. Even though the couple had high credit card debt, they say they were never late on a payment, so they’ve maintained excellent credit scores.

If they are able to lower their current 6.299 percent rate by 1 percent, Gibney said, they could reduce their monthly mortgage cost by $150 a month or $1,800 a year. That would give them even more money to direct to their retirement plans, emergency funds or other debt.

If they can refinance and loan-to-value ratios allow, Gibney said they should consider paying off Monisha’s college loan with the refinance. The college loan interest rate is 6.375 percent and she is paying $166 a month.

“Yes, she is extending the term from the current time left of about five or so years to 30 years, but if the money saved is redirected to an investment earning a few percent more, this will be offset,” Gibney said. “The potential money saved, assuming a 5.25 percent mortgage, is $286 a month, or $3,437.28 a year.”