Beyond Homeownership

Military benefits gave Brian McLean, 27, and his wife, Robin, 29, a great head start to reach their primary investment goal: homeownership. But their lack of diversification has left them over-invested in real estate and barely invested in anything else.

In just four years, they have paid off all but about $6,000 on their two-bedroom condo in Hinesville, Georgia. “Growing up we always knew the importance of owning versus renting,” Brian says. “We talk about growing our net worth, and paying off our condo is a beginning for us.”

In the U.S. Army, Brian was deployed to Iraq for a year soon after he and Robin wed in 2006. “I didn’t have any bills over there so my $4,000 monthly pay and living allowance could be saved easily,” says Brian, who, after completing his military duty, returned home with $30,000. The couple used $11,000 of that for the down payment on their $54,000 condo. Over the last four years they’ve been disciplined enough to live mostly on Robin’s $37,000 salary as a customer service team leader at a water treatment company. They’ve applied Brian’s military stipends to their mortgage principal. Their mortgage and association dues come to $560 a month.

Brian now earns $27,000 as a corrections officer for the State of Georgia. The McLeans are expecting their final military lump sum payment of $6,000 this spring and plan to pay off the balance on their condo.

“We will pay it off this month and move on to bigger and better things,” says Brian, who with his wife is looking to upgrade to a single-family home for which they’ve set a budget of $125,000. They plan to rent out their condo and take out a Veterans Affairs loan that requires 3% or less for a down payment.

The McLeans have only $8,400 in savings. They also have $6,600 in student loan debt from Robin’s education at Georgia Southern University that she pays $110 toward each month. They have $7,500 in credit card debt, toward which they pay $220 each month (Brian, $150; Robin, $70). “Our financial challenges deal mostly with debt,” says Brian.

The couple’s long-term goal beyond homeownership is to save $30,000 toward their 5-year-old daughter Autumn’s college education. The State of Georgia currently offers scholarships to residents who attend school in-state, but Robin isn’t depending on one. “You had to get a 3.0 GPA when I graduated, but now the new governor has raised it to 3.7 [for a full scholarship]. So it will be harder for her,” she says.

The couple hasn’t given much

thought to retirement planning. Brian just began his job in June and contributes 1% of his salary to his 401(k). Robin has been on her job for five years and had not thought about retirement planning before speaking to the financial planner for this contest. “I could kick myself now for not contributing,” she says. Her job matches up to 5%.

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The Advice
Black Enterprise and Millicent Eubanks, associate vice president—investments at Wells Fargo Advisors in McLean, Virginia, offer this advice:

– Stop making extra payments on the mortgage. By paying off their condo now they are just shifting liquid assets (cash) to real estate assets, but not earning anything. “For those who use real estate as a primary means of building wealth, if something happens, the real estate isn’t liquid,” cautions Eubanks. The McLeans should use the $6,000 they’ve earmarked for paying off the condo to eliminate their credit card debt instead. “Paying off credit cards will increase monthly cash flow, making more money available for savings to create a stronger financial position,” Eubanks explains.

– Start saving systematically. The McLeans should wait at least a year before they look to purchase a new home. In the meantime, they should build a larger cash reserve to cover a suitable

emergency fund (six months’ worth of expenses) and also a down payment. The McLeans have become accustomed to stashing lump sums of money. That will stop now that Brian is out of the military. The couple needs to discipline themselves to save from their income. “It will be important to start with an amount they can sustain,” says Eubanks. “The habit is more important than the dollar amount.” The McLeans should put the $2,000 winnings from the contest toward their cash reserve as well.

– Begin making retirement contributions immediately. Brian’s employer matches 50% of a 2% to 5% contribution; Robin’s employer offers a 5% match. “Right now, they’re leaving money on the table,” says Eubanks. “There is well over $2,000 a year available to them that they are not getting.” If they invested up to their match amounts, in 10 years at a conservative 5% rate of return, they could have more than $50,000 in their combined accounts. By retirement age, this strategy could amass more than $700,000 in their nest egg.

– Seek ongoing professional help. “The great disadvantage of the DIY [do-it-yourself] strategy is that it requires people to be very knowledgeable about the subject matter at hand,” says Eubanks. “Most very wealthy people have a team of professionals who advise

them on a range of issues related to building, protecting, and transferring wealth. It is especially important for the McLeans to establish relationships with a CPA and an attorney.” Eubanks notes that, had they been working with a certified public accountant, they might have been informed about the tax benefits of keeping a mortgage. Since they have a minor child, the McLeans should hire an attorney and draft a will and estate planning documents.  They need to have not only the basics in place (will, power of attorney, living will) but also to make decisions about who would care for their daughter if they were unable to. They can choose one person to manage the physical custody of the child and another to manage the financial assets.

– Protect your family through the use of additional life insurance. With the addition of the new home, the McLeans should be looking to have life insurance that would pay a death benefit that would pay off the mortgage, educate their daughter, and provide supplemental income to the surviving spouse. Based on their age and financial situation, term insurance probably offers the best solution. The cost associated with obtaining adequate coverage is less than $80 per month (given that they qualify as a “preferred risk”).