Ebony Smith says losing her job was a blessing in disguise. In 2008, the former investment banker was about one month into her dream job when Lehman Brothers Holdings Inc. filed for bankruptcy. Smith worked with the firm’s successor for five months. But, in January 2009, she was laid off with a severance of three months’ salary. By the summer of that year, Smith was back at work as a financial analyst with a major global consulting firm.
Smith, 30, made some tough choices to be able to pocket about $25,000 of the more than $35,000 in severance she received. She left New York where her living expenses were high (roughly $2,000 a month), and moved in for three months with her boyfriend in Pennsylvania where she paid $200 to $300 for rent. When she got her most recent job and returned to the Falls Church, Virginia, area she decided to share a townhouse with two other roommates. Smith pays $960 a month instead of the going rate of $1,300 a month for a studio apartment.
With a decent income and many of her expenses under control, Smith is ready to pursue her dream: amassing a net worth of $1 million by age 40, and semi-retiring by 55 with a net worth of $5 million.
There are two pressing financial issues standing between Smith and her goal, however. Smith owns a two-bedroom, two-bath condominium in Wheaton, Maryland, which she rents out for $1,644 a month. The condo is “no longer a good investment,†says Smith. Considering the state of the rental market she can’t charge as much as she’d like for the apartment. She’s about $300 short each month in covering the $1,924 mortgage and related expenses, such as the 8% of the monthly rent she pays to a property manager. Despite the fact that it’s losing value (she bought the apartment in 2005 for $360,000 and it was last appraised in January at about $325,000 according to real estate Website Zillow.com), annual property taxes have climbed from $1,200 to $3,000. And since it’s no longer owner occupied, Smith no longer receives certain homeowner tax benefits, or those she qualified for while in school. Ideally, when her tenant’s lease is up, she says she would like to sell.
Smith’s second biggest financial hindrance is the $135,000 in student loan debt she accumulated while getting her undergraduate degree in finance
from Howard University in 2002 and law degree from Georgetown in 2008.Smith has an entrepreneurial side that she wants to fully explore later in life when she enters semi-retirement. Eventually she would like to educate others about financial literacy and has begun conducting personal finance workshops.
THE ADVICE
Black Enterprise offers a strategy to help move Smith forward.
Sell the condo. The biggest threat Smith faces is her student loan debt of $135,000, says Aaron Smith, CEO, financial coach, and founder of A.W. Smith Financial Group in Glen Allen, Virginia. She should sell her rental property and use the proceeds to pay off the student loans. “There is an urgency to pay off the loans because it could slow her process of reaching her other goals. It also represents more than 100% of her income and it is unsecured,†he adds. If she can’t sell for a reasonable price, she should consider moving back into the condo.
Keep funding retirement accounts. Based on Smith’s current savings and an 8% rate of return, she would need to invest approximately $33,000 per year
to accomplish her financial goals. Since retirement accounts have contribution caps, we recommend that she continue to contribute to more than one type of retirement account. She currently has both a traditional 401(k) and a Roth 401(k) and two traditional IRAs. A traditional IRA is the right choice for her because, unlike a Roth IRA, it has no income restrictions (with a Roth IRA her salary would have disqualified her from contributing the maximum allowable amount). If she hasn’t already contributed the maximum $5,000 for 2009 she can do so through April 15. She should maximize her contributions for 2010 and going forward. In addition, she should streamline her accounts by downsizing to one IRA. Since the maximum contribution for 2010, no matter how many accounts one has, is $5,000, there would be no added benefit in having two accounts.Ebony should also divide her 401(k) distributions among her traditional 401(k) and her existing Roth 401(k) for a 50/50 split. She would be able to contribute a maximum yearly contribution of $16,500. This would mean contributing $8,250 to each account. What’s the appeal of the Roth 401(k)? “Tax-free income at retirement,†says the financial coach. Since contributions are capped for each retirement account, maintaining the Roth 401(k) and the Continue the healthy savings habit. Since one of her goals is to have $1 million by age 40 and $5 million by 55, to get there she has to be aggressive with her savings. Smith should continue saving 25% of her income.
Explore entrepreneurial waters. Smith’s background of law and finance is ideal for what people are looking for in terms of someone who can help them with their money, says the financial coach. “Her skills are in demand. She has a platform and a process for a successful business,†he says. She should start now to work this venture into a viable business while she is employed full time. “The days of working for corporations for 30 years and getting your pension and going off into the sunset are in the past. We must diversify our skills and opportunities, just like we must diversify our investments,†he adds. Smith is working on her certification in financial planning, but has her licenses to sell investments and should begin to do so, along with her personal finance coaching. Having a business will also allow her to use her startup costs to reduce her taxes.
This article originally appeared in the March 2010 issue of Black Enterprise magazine.