James and Beverly Parks are coming to terms with a major life change and challenge — a decrease in their monthly household income and an increase in their household debt. James, 36, is a staff sergeant in the Army’s food services division, which prepares meals for troops stationed at Fort Carson in Colorado Springs, Colorado. Beverly, 33, works at the family practice clinic at Evans U.S. Army Hospital. When the couple was stationed in Alaska from 1998 to 2001, they were receiving a living allowance of roughly $700 a month. They also earned additional income from part-time employment. James found work at a local department store and Beverly as a lab technician.
Since moving to Colorado, Beverly has had no luck finding part-time work, and James has been deployed overseas a lot — sometimes up to three months at a time. Moreover, the government has ceased their allowance. The Parkses saw their income drop from roughly $76,000 to $73,000 and their debts (not including a mortgage and car notes) rose to nearly $30,000. To make matters worse, they became indebted to the government for $8,000 because they continued to receive their monthly allowance for several months after leaving Alaska. Until the money is paid back, their wages are being garnished $856 a month. To cover household expenses and emergencies, the couple depleted half of their $13,000 in savings.
The Parkses, who have a 13-year-old son, Brandon, and a 6-year-old daughter, Jamesse, have done very little investing. At one point, they were contributing $1,000 a month to a money market account, but more recently, it’s been about $300. Beverly has $1,200 in a thrift savings plan at work. And over the last two years the couple has saved $100 a month for Brandon’s college education. They own a three-bedroom home in Augusta, Georgia, which they are renting out to a single mother of two for $605 a month. The mortgage, taxes, and maintenance costs, however, add up to $645 a month.
One thing working in the Parkses favor is that James is in line for a pension from the Army that will pay him about $1,500 per month for life under the joint and survivor payout option. This could mean some $500,000 in income for James if he retires at 40 and lives to age 76. (His wife would receive the payouts if he dies.) And if Beverly reaches her goal of becoming a registered nurse, she expects a salary hike from $29,000 to $40,000.
“I have been in the service for 17 years. I only have three years left and then I can retire,” says James, who is currently enrolled in courses at Thomas
Edison State College and eventually wants to work in sports medicine. Once Beverly finishes college, she hopes to put more money toward her children’s education and her retirement. “In the next three to five years, we are hoping that the only debt we’ll have is the mortgage on our home,” she says.THE ADVICE
The Parkses are making good money, and they have a lot of subsidies (e.g., living on base rent free). Their problem is impulsive spending and a lack of discipline in using credit, says Michael Smith, a certified financial planner and president/CEO of ProFocus Inc. in Phoenix. BLACK ENTERPRISE had the Parkses consult with Smith to help the couple realize their three-year financial plan. The following are his recommendations:
ADJUST TAX WITHHOLDING
James is not claiming any exemptions, not even himself, on his income tax returns. He should increase his personal exemptions from 0 to 3 (which would include mortgage interest and property taxes on the house in Georgia). This will give him a $1,125 tax savings. That money, Smith says, should be applied toward the couple’s debt reduction. Since James has a $350 child support obligation to a daughter from a previous relationship, the couple should continue to file separately. Doing so allows Beverly to receive a $3,900 tax income credit for filing single head of household.
ACCELERATE DEBT
PAYMENTSThe Parkses have a deferred payment plan (revolving line of credit) through the military, from which they have borrowed $10,500. They also have about $11,200 in credit card debts between them. Smith says the couple should stop using the line of credit (at 1% interest) and credit cards (averaging 9.5% interest) and accelerate their debt payments, starting with paying off the lowest balance first ($500). The Parkses final overpayment installment to the government will be May 2003. Afterwards, they should allocate that same amount of money each month toward reducing their existing debts.
REFINANCE CAR LOANS
A major expense for the Parkses is the $889 monthly car notes. James has $12,000 (at 9% interest) left to pay on his 1998 Ford Expedition and Beverly has $12,000 (at 8.75% interest) to pay off on her 1999 Maxima. Smith suggests the couple use the credit union on the military base to refinance the automobiles and amortize them over 60 months at 7%, which would reduce the payments to a total of $554 for the two vehicles.
CONSOLIDATE LIFE INSURANCE
The Parkses are currently paying $135 a month in life insurance policies: universal life, military SBLI (in the event of James’ death during duty), and mortgage insurance. Smith suggests James purchase a 20-year term policy for $500,000. This will cut his insurance payment down to about $65 a month.
CONTRIBUTE TO ROTH IRAS
With the money they save in consolidating their insurance policies, refinancing their car loans, and increasing their rental income, the couple should take the difference and contribute to Roth IRAs for the two of them. They can probably start by investing $120 between the two accounts then increase the amount as they pay down debt. Because of his government pension, James does not qualify for a traditional IRA. Beverly should also continue to contribute 3% of her salary to the hospital’s thrift savings plan. Smith suggests they split the $2,000 contest winnings between their Roth IRAs and invest in the Royce Total Return Mutual Fund (RYTRX).
START 529 COLLEGE SAVINGS PLANS
Smith suggests the Parkses put away $50 a month per child to 529 college savings plans. He recommends the plan offered by the state of Kansas since the funds can be used toward any U.S. college or university. The plan’s sponsor is American Century Mutual Funds. Smith suggests investing the money in moderate growth funds.
ADDITIONAL MEASURES
Smith says the Parkses should increase their rental income to $725, so that they are not losing money on their investment. He also suggests the Parkses take advantage of the government pretax cafeteria plan to reduce the $400 cost of daycare.