Who: Heather and Nate, both 24, married since May 2004
Where They Live: They own a four-bedroom home in Northern Kentucky
Current Savings Goal: "Savings? What's savings?" says Heather. "We put a lot of money into our 401(k)s, but we don't have a savings account to rely on if there's an emergency. Our short-term financial goal is to make it through this year without too much stress about money. Our long-term financial goal is to be comfortable with our lives. We enjoy taking vacations, we want to be able to put our kids through college, and we would like to retire at 55 with enough money to get us through the rest of our years comfortably."
Financial Facts:
Together, Heather and Nate have a net income of $4,700 per month. Plus, Nate receives annual bonuses of $15,000 to $20,000 per year. Last year, they received a federal tax refund of $1,500.
- Fixed Expenses: $3,700 per month includes a first and second mortgage payment, two car loans ($750), school loans ($55), credit card payments ($180), plus utilities, child-care expenses, insurance, and medical costs.
- Retirement Plan: $233 (combined) gets automatically deducted from their paychecks every month.
- Discretionary Income: Their discretionary income of $2,880 per month (and, really, much of this comes at bonus time) goes to food, dining out, pet care, entertainment, etc.
- Splurges: When they want to splurge on things like new clothes and vacations, or want to put any money into savings, they look to the money received as bonuses. "When Nate receives quarterly bonuses, we don't splurge on anything until we know the money doesn't need to be used for any other household expenses," says Heather.
Why Their Budget Needs a Makeover:
"We've never lived on a budget, and we don't have any savings," says Heather. "We recently bought our first house and are expecting our first child. I'll be paid 60 percent of my salary for the first six to eight weeks of maternity leave -- and I plan to be out of work for at least three months after that. So we need to factor that into our financial situation. I'm going to be taking two months off work (without pay) after the baby is born, and then I'll have a 60-percent schedule at work for another two months.
"During the time I won't be getting any of my salary, Nate will receive two quarterly bonuses, which should cover what my salary would be, but I'm afraid it may not be enough to live our normal lifestyle (we usually have my salary and his bonuses). I don't think the word budget is in my husband's vocabulary. He just thinks there will always be some type of money supply at his fingertips, whether it's cash, debit, credit, or a loan. He doesn't pay the bills (it's my responsibility); therefore, he does not understand how much we're really spending each month."
Getting Help
Diana Simpson, MBA, CFP, a managing partner at Fee-Only Planning Professionals in Birmingham, AL, analyzed Heather and Nate's spending habits and helped them establish a monthly budget so that they'll have enough money to take care of their new family.
Simpson Says: Heather and Nate are in a classic American financial situation: They have used the strategy of "buy now, pay later" in their attempt to achieve the American dream. Fortunately, they have the income necessary to pay their bills and even to possibly save a little more. But it's clear that if they had chosen a somewhat less-expensive lifestyle, they wouldn't feel so crunched.
The Goal: To get to a point where this duo can live comfortably on less than what they earn. This may involve some sacrifices but will allow them room in their budget to save for household emergencies (three to six months' worth), plus their baby's future needs.
The Plan
Based on their current annual income of $72,000, Simpson's guidelines indicate that Nate and Heather should be spending a total of $2,100 per month on housing, automobiles, and other debt -- but they're currently spending $3,148 per month. Here's how they can make that extra money appear:
Reduce Credit Card Debt: Combine credit card debt with high percentage rates and put it on one low-rate or no-rate card. They currently have relatively high interest rates -- 12.5 percent, 19 percent, and 25 percent (eek!).
- Before: $180/month
- After: $120/month
- Savings: $60/month
Reduce Auto Expenses: Trade in Heather's car for a less expensive model -- say, a $14,000 car.
- Before: $400/month
- After: $275/month
- Savings: $125/month
Reduce Discretionary Spending: Chances are they're spending more than the $2,880 they think they are. Their goal should be to spend no more than $1,400 a month, which is $350 each week or $47 a day for fun extras. It'll be easier to achieve if they pay in cash and forget they have credit cards.
- Before: $2,800+/month
- After: $1,400/month
- Savings: $1,400/month (could be higher or lower depending on their willpower)
Increase Their Cash Flow: Both have claimed "Married and 0" on their W-4 forms, but with a new baby, they should raise their exemptions to "Married and 1" or "Married and 2" to lower the amount being withheld from each paycheck.
- Additional income: $150-300/month
TOTAL MONEY SAVED: $1,735-1,885
Ways to Save More
Have a System for Paying Bills: And stick to it! The couple can save money by setting up their budget and payment schedules to work in tandem. If worked out correctly, Nate and Heather can have an "extra" paycheck each quarter to cover anything unexpected.
Plan for Bonuses: Nate gets a sizeable bonus each year that can be put to better use. Divide each check into thirds, with 33 percent of the money going to fun purchases, the second third to paying down debt, and the last to savings.
by Grace Jidoun
2/11/08
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