When it comes to finances, think of time as an ally. We need time to make our dreams come true. For our 2004 BLACK ENTERPRISE Financial Fitness Contest winners, the last year has been an interesting one filled with victories and disappointments. Armed with instructions from the financial advisers we provided, they made positive change and have grown through the experience. Here is a look at what happened to four of our winners from 2004.
Debt was a four-letter word that clouded an otherwise bright financial future for the Whittington family of Sicklerville, New Jersey. Dwayne and Hermennia took action and eliminated their $26,000 credit card bill when they refinanced their second mortgage. Unlike many who refinance and pay off debts, they haven’t run up new credit card balances. Instead, they have developed the discipline to pay off credit card bills in full each month. The only other major debt they have is the $20,000 left on their first mortgage. They plan to have that paid off within two years.
The Whittingtons are fortunate that another big concern has disappeared. They had no real savings to send eldest son Michael to college, but he won a full football scholarship to Urbana University in Ohio. Next year, their middle son Marcus, an aspiring studio engineer, will attend a one-year program at a school in New York. The cost is only $14,000—substantially lower than the typical $80,000 tab for a four-year private university. “He’ll get loans, and we’ll help pay either part or all of the loan,” says Dwayne. The Whittingtons are providing better educational opportunities for their children then they expected. And they have plenty of time to begin a college savings program for 2-year-old Malcolm.
The positive news for the Whittingtons continues. Hermennia received a $6,000 raise when she was promoted to postmaster at a new location earlier this year. Dwayne recently left his job as an investment banker so that he could pursue a more lucrative opportunity. Overall, he remains optimistic. “We have long-term plans to increase our net worth, boost our 401(k) savings, upgrade our real estate, and buy investment property,” he says. “Most importantly, after the debt consolidation, we are committed to not running up credit card debt. We’ve learned our lesson.”
THE ADVICE: Develop a secondary wealth-creation vehicle. Pursue real estate investing by buying as many as seven properties between now and retirement.
THE FOLLOW-THROUGH: The Whittingtons are eyeing real estate, but not for investment purposes just yet. Dwayne says they want to buy a bigger home by taking advantage of their property’s appreciation since their mortgage is nearly paid off. He believes they can get $250,000 for the house they bought for $150,000. They will use the proceeds of the sale to get a $400,000 to $500,000 house, being careful not to take on a huge mortgage. The investment property will have to wait, Dwayne says.
THE ADVICE: Extend retirement age from 55 to 62 and maintain an investment mix of 80% equities and 20% fixed-income.
THE FOLLOW-THROUGH: Dwayne is holding on to his dream of retiring at 55, though he concedes he might have to do something on his own, be it a business venture or real estate investing, to generate the income needed to make that dream a reality. Mina will settle for retiring at 62. The couple did adjust the percentage of equities in their portfolio and it paid off: In less than a year, Mina’s Thrift Savings Plan mushroomed from $150,000 to $240,000.
THE FOLLOW-THROUGH: Mina continues to contribute the maximum, 14% of her salary, into her 401(k). As the couple is concentrating on paying down their mortgage, Dwayne was not able to increase his contribution beyond 6%.
THE ADVICE: Refinance mortgage to extend amortization to 30 years, and consolidate debt with refinancing proceeds.
THE FOLLOW-THROUGH: The Whittingtons refinanced and obtained a rate of 6.125% on their second mortgage. They went for a 15-year instead of a 30-year. They were paying about 10%, so they stand to realize significant savings. They did eliminate their credit card debt with proceeds from the refinancing.
THE ADVICE: Finance college on the back end; seek out grants and scholarships.
THE FOLLOW-THROUGH: The couple found a scholarship for their oldest son and will help their second son payoff his loans.
THE ADVICE: Develop a corporate income enhancement strategy. Manage careers more aggressively and commit to achieving a household income of $200,000 by age 50.
THE FOLLOW-THROUGH: Mina was recently promoted and received a big raise. Dwayne has begun working on strategies that will help him increase his earning power within the next two years.
January Winners
May Winner Mikia Potter
Mikia Potter wants to retire at age 45 and she’s serious about it. She will complete her master’s in business administration this month, ahead of her original 2006 timetable, and was recently promoted one level to senior systems engineer, which boosted her salary from $63,000 to $70,000. Potter made significant strides with her 401(k), overseeing its growth from $25,000 to $49,000. She’s also saved $18,000 between her checking and savings accounts, and has an additional $16,000 in a mutual fund. She only has $1,500 in credit card debt and that’s because she just returned from a vacation in Costa Rica.
But that’s not to say that Potter, now 28, hasn’t had some challenges. The one-family home she owns in Pensacola, Florida, that belonged to her grandparents suffered some damages when hurricane Ivan blew through last year. And the insurance company didn’t honor her damage claims. Furthermore, since February, she’s been without a renter. These two things have cost her about $5,000.
While Potter had great luck purchasing a second rental property—a duplex she got for $187,000 at a 6.625% interest rate, not far from her Mableton, Georgia, home—she’s having problems because one of the two tenants is not paying.
“Between managing properties and taking accelerated classes so I can graduate early, I haven’t had time for much else. So, no, I haven’t gotten married or had any children,” says Potter, who was considering running a Subway sandwich franchise. “Once I get my real estate issues sorted out, I am going to begin to see real growth as I should clear $700 a month between the two properties. I’m going to be on the right road.”
THE ADVICE: Work at present company for another six years and build solid cash reserves, experience, and relationships.
THE FOLLOW-THROUGH: Potter was promoted and is quite comfortable where she is.
THE ADVICE: Purchase one investment property every two years. Accumulate approximately 10 investment properties by retirement age.
THE FOLLOW-THROUGH: Potter has already purchased a rental property and says this advice seems feasible. “I just have to make sure that I learn more about how to manage the properties, or get a property manager, as I’m finding out there can be many headaches,” says Potter.
THE FOLLOW-THROUGH: Potter says she needs a big cash reserve. “I had to increase my emergency cash due to the fact that I was acquiring property, the old place has been without a tenant, and I have a problem tenant in the new building,” says Potter. “I need to have back-up right now, to have access to cash, so I didn’t follow through on that recommendation.” However, Potter continues to contribute to an existing mutual fund.
THE ADVICE: Obtain a home equity line of credit on all properties.
THE FOLLOW-THROUGH: She got a HELOC on her primary
residence in March. She has a $25,000 line of credit.
THE ADVICE: Establish an IRA.
THE FOLLOW-THROUGH: “It’s on my to-do list,” says Potter.
THE ADVICE: Aggressively build relationships with entrepreneurs. Consider budgeting $3,000 annually for relationship development, including joining local clubs, and attending the alumni functions and gala events of charities or nonprofit boards that senior executives at her company support. Make a 10-year gift to her undergraduate or graduate school.
THE FOLLOW-THROUGH: Potter says she hasn’t had time to pursue these activities yet, but she is working with a mentor from Emory University who is in commercial real estate. She enjoys being in the mentoring program: “We talk about a lot of aspects of real estate, as well as career and personal development issues,” says Potter.
THE ADVICE: Do not hurry to purchase a Subway franchise because it may not maximize Potter’s personal interests and high level of technical skill.
THE FOLLOW-THROUGH: Franchise acquisition is on the back burner. “With my schedule, I didn’t have time to do a business plan for Subway and go to a two-week training program in Connecticut. It just wasn’t feasible,” says Potter.
June Winner John Young
John Young got married in March and plans to have children in the not-too-distant future. The 35-year-old is also well on his way to achieve his dream of owning five buildings in five years. He had one property and purchased two more in 2004. He used an interest-only loan with a 5.6% interest rate to buy a two-unit apartment building for $130,000 and a three-unit building for $187,000. Meanwhile, rental income from the first building Young purchased is still coming in. Together, his properties generate $7,000 in income. And when he finds a second tenant for one of the newer properties, he’ll have even more rental income. It’s not surprising that he hasn’t looked for another full-time job since getting downsized in 2003.
And if that wasn’t good enough, Young’s dj business is booming. The work he enjoys so much brought in about $3,000 last year. This year, it’s been more like $17,000, as he’s added corporate and high school functions and gigs at various clubs to his normal schedule of weekend parties and weddings.
Young’s wife, Stacey, is also a go-getter. In addition to working for the City of Chicago as a business information systems coordinator, she co-owns a Curves fitness club franchise. They are indeed a power couple in the making. “I’m busier now than when I had a full-time job,” says Young with a smile. “The changes in my life have exceeded my expectations. I’ve been very blessed.”
THE ADVICE: Continue acquiring real estate, especially buildings with four units or less.
THE FOLLOW-THROUGH: Mission accomplished.
THE ADVICE: Tackle the first
mortgage. Pay it down aggressively.THE FOLLOW-THROUGH: With the acquisition of two buildings and the $25,000 tab for his 300-guest wedding and honeymoon in St. Lucia. Young didn’t have the financial might to accelerate mortgage payments on his first property.
THE ADVICE: Purchase a primary residence within two to three years.
THE FOLLOW-THROUGH: Young recently closed on a 2,700-square-foot, four-bedroom home in Chicago for $360,000(k), at a 6.5% interest rate.
THE ADVICE: Shore up retirement savings. Though he was off to a fine start with a collective $63,000 in an IRA, 401(k), and mutual fund account, the financial adviser we paired Young with wanted him to set up a variable annuity with a mutual fund option to which he would contribute $500 a month. Young was advised to use the $2,000 contest winnings to start the account.
THE FOLLOW-THROUGH: “I had too much going on. Once we’re settled in the house, I will meet with the planner again,” says Young, who used the contest winnings toward the 5% down payment deal that he received on the three-unit building.
THE ADVICE: Protect his investments. Continue to build an emergency fund as a safety net.
THE FOLLOW-THROUGH: Young had $23,000 in his emergency fund. It is now down to $12,000 after he tapped it to purchase the two most recent buildings and do renovations.
THE ADVICE: Buy insurance for his buildings.
THE FOLLOW-THROUGH: All of Young’s properties are appropriately and sufficiently insured.
THE ADVICE: Create an estate plan.
THE FOLLOW-THROUGH: “That’s on hold for now,” says Young. “Purchasing the buildings consumed my life.” He and Stacey do have life insurance.
September Winner Arthur Vaughn
Divorce is never painless. It’s been a tough couple of years, but Arthur Vaughn is decidedly on the better side of the transition. He can see progress everywhere. He earned a master’s in business administration from Regis University in Colorado in April. He then landed a full-time job making $57,000 as a financial analyst for Diners Club—a 30% increase from his old base salary. Vaughn also scored a part time job at a collection agency, earning an extra $1,300 to $1,400 a month. The company that employs him part-time offers bonuses, a 401(k), and tuition reimbursement. In about a month, he will begin work necessary to earn the CPA designation.
Despite the setback of having to evict a tenant, which left him with sole responsibility for a hefty $2,200 mortgage for six months, Vaughn has begun saving again. His savings account is up from $1,000 to $2,500. He is contributing to the 401(k) on both his full- and part-time jobs and has a combined $12,000 in the two accounts. He lost a little ground when he had to pull $1,500 from his mutual fund to get his property ready to rent, but he used the $2,000 contest winnings to help him through that difficult time.
“In hindsight, I probably should have taken a break from school. But I was set on finishing as planned,” says Vaughn, who hasn’t been able to focus on real estate investing as he had hoped. He shares custody of his 8-year-old daughter and 5-year-old son with his former wife. He also helps care for his former wife’s 12-year-old daughter from a previous relationship.
Vaughn has been through a lot, but he has a fresh perspective and knows what’s important. “It has taken two years for things to get better. The good thing is, it’s only money, which can be recouped. My kids are healthy and happy, and that’s what matters,” he says.
THE ADVICE: Lease with the option to buy. Look for a home or townhouse that he can lease for about the same amount he was paying in rent.
THE FOLLOW-THROUGH: After Vaughn evicted the delinquent tenant, he moved into the house to save the $850 he was paying to rent an apartment each month. Around the time he found a new tenant for his home, a friend of his needed a roommate, so he moved into his friend’s home and now pays $600 monthly. He hasn’t had time to look for another property.
THE ADVICE: Create a single-member limited liability company. Vaughn’s home is listed on his tax return, under Schedule E, as rental income. He should form an L.L.C., transfer the home to the newly formed company, then have the company taxed as a sole proprietorship.
THE FOLLOW-THROUGH: Vaughn did this immediately, forming ALV & Associates. He saw considerable tax benefits, but he’s not sure exactly how much he benefited because he made some improvements to the house and had no rental income for four months. Vaughn says he learned a very important lesson: “Be careful about doing business with friends or family.”
THE ADVICE: Buy more life insurance and establish an irrevocable life insurance trust. The adviser who worked with Vaughn suggested that he get at least $750,000 in term life insurance and split the beneficiary arrangement between the three children. Since he is divorced, he was advised to set up a life insurance trust, where he could designate a guardian to oversee the insurance proceeds a
nd other assets. It was also advised that he draft a will.
THE FOLLOW-THROUGH: For an additional $5 a month, Vaughn was able to increase his employer-sponsored life insurance coverage to $500,000. “I did what I could afford to do,” he says. He drew up a will and getting the trust is on his to-do list. He needs to talk to his former wife about being a guardian for the children in his will.
THE ADVICE: Invest the $600 he was paying in alimony in a mid-cap or small-cap value mutual fund. Start the fund with the $2,000 contest winnings.
THE FOLLOW-THROUGH: Vaughn had to use the $600 and the contest winnings for living expenses. He maintains a Smith Barney aggressive growth mutual fund, which he will keep until he decides where else to invest. “Let’s just say this wasn’t the first thing on my list to figure out,” says Vaughn.
THE ADVICE: Increase liquidity to purchase rental properties. Pay down debt, particularly the $15,000 he had in credit card debt.
THE FOLLOW-THROUGH: Vaughn is relieved to have gotten his credit card debt down to $4,000. He focused on eliminating debt and increasing savings to put himself in a better position to buy rental properties in the future.
THE ADVICE: Consult with former wife about claiming both biological children on his tax return. Vaughn was claiming only one child as a dependent. Since he was earning practically twice as much as his ex-wife and is in a higher tax bracket, the adviser recommended that he take the tax savings—potentially $5,000. His former wife could use her home as a tax write-off. Plus, as head of household, she could continue to claim her daughter and get the earned income credit.
THE FOLLOW-THROUGH: “We did discuss this,” says Vaughn. “She needed the money even more than I did, so I let her claim both children.”