Get With The Plan: September 15, 2013

91513Bess, 25, and Jeremy 24, have been married less than a year. They now have some big family changes coming.

Bess is pregnant with their first child, who is due in January. And now the young couple are also trying to help Bess’ mother, who was widowed about a year ago.

“My mom doesn’t have a lot of money. She moved into our two-bedroom apartment at the beginning of the summer, and now we need a bigger place,” Bess says. “We would love to buy a house, but we’re not sure what we can afford.”

Bess’ mom has offered the couple $20,000 toward a new home, and she’d move in with them, paying rent of $500 per month. While Bess would love to stay at home with the baby, she doesn’t think they can afford it, so her mother would help with babysitting.

The couple, whose names have changed, have saved $5,200 in an IRA, $24,200 in a money market, $3,000 in savings and $300 in checking. The couple say they save what they can to the money market, which is still flush with cash from their wedding presents.

The Star-Ledger asked Margaret O’Meara, a certified financial planner with O’Meara Financial Group in Red Bank, to help Bess and Jeremy financially prepare for their growing family.

“As their main goal at this point in time is to purchase a new home, it appears that they will be able to achieve this goal without changing their lifestyle dramatically,” O’Meara says.

She says when trying to decide how much home a family can afford to buy, a rule of thumb is that the purchase price should be approximately three times a family’s overall salary.

For Bess and Jeremy, who earn $80,000 per year together, O’Meara recommendations they buy a home in the $200,000 range.

“Generally, a 20 percent down payment would be best as it would lower some other fees charged by the mortgage company. However, there are programs that they may be able to get that would allow them to put down less money and keep the fees low,” O’Meara says.

For a $200,000 home, a 20 percent down payment is $40,000.

Before looking at how much they have available for a down payment, O’Meara says it’s important to consider another use for cash: an emergency fund. She recommends Bess and Jeremy keep approximately $16,000, or six months of expenses, in an account that is liquid and easily accessible for any money emergencies that may arise.

That will help the couple stay free of credit card debt.

To make sure they don’t sink all of their emergency reserves into a down payment, O’Meara says they may need to save a while longer to afford the down payment.

That, of course, depends on the kind of mortgage they consider, the price of the home and whatever buyer programs they may qualify for.

With the $20,000 from Bess’ mother and the couple’s savings of $27,000, they have $47,000 to work with.

“If they can get good terms and put a down payment of $31,000 or less, they can purchase the home now — $47,000 minus the $16,000 needed for the emergency fund,” she says. “Otherwise, if they want to put down 20 percent on a $200,000 house, they will need to wait until they have saved an additional $9,000.”

O’Meara says the couple should have a goal to keep all home-related expenses to $1,500 or less per month. This would include their mortgage payment, taxes, homeowner’s insurance and any other fees that would be charged on an ongoing basis.

“With Bess’ mother’s help, this would allow the new expenses for owning a home to be consistent with what they are paying now,” she says. “However, other expenses need to be taken into consideration when owning a home, such as cutting the grass, higher utility bills and more.”

O’Meara says they should start talking to some banks to get quotes on mortgages, including working with local banks that O’Meara says can sometimes have more flexible offerings than the big guys.

They should get pre-approved for the loan before they start house-shopping, she says.

The couple are in good shape because they seem to do a great job of living within their means, O’Meara says.

In reviewing the couple’s expenses and their salaries, they appear to have at least $20,000 extra per year that can be saved, though when the baby comes this will probably change, O’Meara says.

“With this extra money, two IRAs can be set up each for Bess and Jeremy,” she says.

O’Meara says these should be funded each year with $5,000, so the total annual retirement savings would be $10,000 per year in IRAs. Another advantage to this savings strategy is that they should be eligible to deduct their contributions on their tax returns.

Bess has a 401(k) plan at work, which is another way she could go.

“If the company matches the employee’s contributions, I would strongly recommend investing in the company 401(k) and not the IRAs,” she says.

This would also lower the couple’s taxable income because the 401(k) contributions are pre-tax.

With the birth of a new child, the couple should review their life insurance coverage. Right now only Bess has coverage, and it’s only equal to one year of salary, or $45,000.

O’Meara says a 25-year term insurance policy with $500,000 for each of them should be affordable, and would give them a good benefit should one of them die.

She also recommends they check with their employers to see if they have long-term disability coverage.

They also should have a will, especially when the baby comes, to name a legal guardian for the child.

“Unfortunately, at this point in time, Bess will need to continue working,” O’Meara says. “As her mom will help with expenses and baby-sitting, this will help a lot and reduce the financial burden of day care expenses.”