Moving Toward Financial Freedom

In this current economy, the only thing you can expect is the unexpected–that’s the overwhelming sentiment echoed by our 2007 Financial Fitness contest winners. Economic turmoil is touching lives. One winner lost her job of 33 years. Two others are feeling the impact of a lackluster stock market and are reconfiguring their investments. However, not all of the unexpected events were bad. Two winners were able to use the real estate market woes to their advantage. They fulfilled their homeownership goals at a discount–one sooner than expected. Each winner acted on at least some of the advice the planners offered. Despite sudden change and uncertainty, they are even more motivated to continue building upon the gains of last year to ensure a strong financial future.

March 2007 Winner: April &?Gabriel Raines

It’s been a good year for the Raines Family. They have finally realized their dream of homeownership. Last August they bought a three-bedroom, two-bathroom home for $138,000 in Albany, Georgia, but it wasn’t easy. When they first began house hunting, they were told that April’s history of late credit card payments and Gabriel’s lack of credit history would make them a tough sell with lenders. Consequently, they became fastidious about paying bills in full and on time. The couple’s contest winnings went toward paying down credit card debt and old medical bills.

Before and after the home purchase, the couple got serious about generating extra income. In addition to her full-time job as a business manager at a hospital, April took on work as an online adjunct professor teaching courses in medical billing and coding, which earns her anywhere from $800 to $1,000 per five-week semester. That money helped with closing costs and other expenses.

“We are proud that we have been able to provide a home for our family and that we’re building equity,” says April. Now that both of their children are in school, daycare expenses have vanished. That’s been a help, but the couple is trying to find a healthy balance between continuing to pay off debt, furnishing their home, and saving.

“We haven’t been as diligent about saving as we should have,” says April. “When we first purchased the home, we had to focus on furnishing it. We went from a two-bedroom apartment to a 1,800-square-foot house.”

The couple does not have as much discretionary

income as they would like, but they have increased their savings for retirement. “We’ve learned valuable money lessons, and we’re more conscious of where our money is going. We’re sticking to a budget–a mortgage is a 30-year commitment,” says Gabriel.

The Advice: Enhance credit scores. Gabriel should open two charge accounts and pay them on time. Use $1,000 of the contest winnings to pay medical expenses. Try to negotiate a reduced amount. Once paid, get payoff letters and send them directly to credit bureaus, requesting that they record payments and clear it from April’s report.
The Action: April and Gabriel used their contest winnings to pay down their credit card and medical bills. They improved their scores enough to qualify for a conventional mortgage. Gabriel opened one credit card and two trade lines at rates varying from 9% to 12 %. Those accounts are all reported favorably on his credit report. The Raines’ broker helped facilitate the settlement agreements and also forwarded the payoff letters to the underwriter and the three credit bureaus.

The Advice: Negotiate smartly. Ask the real estate agent to negotiate for the seller to pay the closing costs.
The Action: The couple did not negotiate on the closing costs. They didn’t feel that they needed to because they were able to get a good deal on the purchase price. The house listed for $149,900 and they paid $138,000–a savings of more than $11,000.

The Advice: Increase retirement contributions from 4% to 10%. Put the remaining $1,000 of contest winnings into their emergency fund.
The Action: They met the goal of increasing contributions to their retirement plans to 10%. April didn’t miss the extra money going into her retirement account because she was earning additional income from teaching. Because they needed to furnish their new home, they were not able to build on their emergency fund. However, they plan to do so in the future.

The Advice: Fund the children’s college education. Rather than invest $75 a month in two mutual funds, divert that money to the children’s 529 plan, doubling the savings amount from $75 to $150 each month.
The Action: They are still putting $75 into the children’s college fund because of expenses related to their home purchase; however, they are making it a priority for 2009.

May 2007 Winner: Victoria Reddic

After 33 years, Reddic’s

career with MetLife ended in October of last year. Her position as a compliance consultant was relocated to Hartford, Connecticut. Reddic, 53, did not want to leave the city where she had spent most of her life, so she opted for early retirement with severance instead.

“I decided to take my chances with job hunting in St. Louis,” says Reddic. While she thought she would quickly obtain a part-time job, work wasn’t too easy to come by. However, Reddic did find a full-time job working as an unemployment insurance consultant for Talx/Equifax in April of this year. She also started in January as a seasonal tax preparer and this summer began working with the city of Moline Acres as an alderwoman. These jobs bring in about $3,000 a month, compared with the $6,000 she was grossing at MetLife.

“I hated to leave MetLife. I had a job that I enjoyed, but moving didn’t make sense for me,” says Reddic. Another hurdle Reddic faced was funding college for her daughter, Veronica, a freshman at Northwest Missouri State University. However, things worked out and Veronica received scholarships. For the first year of school, 50% of the $17,000 tuition, room, and board will be paid for by the college and private scholarships. Reddic is paying the balance. “We don’t do loans,” says Reddic proudly. Since Reddic has not had to touch the severance she received, that gives her a cushion to help pay for college.

Although losing a job was traumatic, the upside is that there is breathing room for college expenses. “The severance turned out to be a windfall. God opened a door.” Still, Reddic has to deal with much less income; therefore, she is ever mindful of spending. “I’m determined not to touch my retirement savings before age 59 ½ because I don’t want any penalties,” says Reddic. Despite the struggle, she chooses to stay positive: “I have been blessed with new opportunities.”

The Advice: Build up retirement savings. Use the 401(k) catch-up provision that allows individuals over the age of 50 to contribute an additional $5,000 per year. Accumulate money for retirement outside of the 401(k) and Roth IRA and invest $1,500 to $2,500 a year in a separate account.
The Action: Reddic is taking advantage of the catch-up provision in her 401(k). Given her reduction in income, she did not

open any new accounts. However, once she draws her pension in January, she plans to increase savings. She says she is not overly concerned because the severance, which is in CDs and bonds until the market rebounds, covers the savings difference.

The Advice: Invest for income and minimize taxes. Buy into income-generating investments, which provide an additional income stream in the form of dividends or interest. Consider tax-free investments such as municipal bonds and municipal bond funds, which generate interest that is exempt from federal taxes, and in some cases, state taxes.
The Action: Reddic made major adjustments to her retirement savings because of the uncertainty in the stock market.   She remained enrolled in the 401(k) with her previous employer, MetLife, but decided to get out of the stock market. Reddic put that money in the company’s fixed income fund, which is guaranteed to return 5.3% a year. She took the planner’s suggestion and purchased a municipal bond fund.

The Advice: Diversify holdings. Gain additional exposure by adding real estate investment trusts (REITs) to the portfolio. Take the $2,000 contest winnings and add it to Veronica’s college savings.
The Action: Reddic followed the planner’s advice and explored real estate funds. However, she says the timing proved to be poor for this advice. “The fund I invested $2,000 in tanked. I took the loss and sold it,” says Reddic. She did put the $2,000 contest winnings into a Coverdell IRA for her daughter’s college costs and kept adding to that existing account.

October 2007 Winner: Quency Hawkins

Hawkins is a newly minted landlord. In July he purchased a single-family, three-bedroom, two-bathroom home in Raleigh, North Carolina.  The asking price was nearly $180,000, but he walked away with it for $163,000. Shortly thereafter, Hawkins began renting out the townhouse where he once lived. Because he still travels three weeks each month for his job as a senior instructor for a software and database company, he hired a property management company to help with his landlord duties.

Hawkins’ grandmother, whom he had been helping financially, had a stroke. “That caught me by surprise,” says Hawkins. She is doing well with her recovery, but the ordeal was stressful for both Hawkins and his mother, whom Hawkins says had to bear the brunt of the situation. “I pitch in as much as I can. I’ve called her doctors while I’m on the road,” he recalls.

The experience, as well as the turmoil in the stock market, taught him how sometimes there is little control over life. “I’ve learned that it takes time to build your foundation because there are all sorts of distractions,” says Hawkins, who is a little frustrated with the market. “My investments are losing money, so I haven’t made much progress, but I’m not as much in the red as some people. I just have to ride out the ebbs and flows.”

The Advice: Discuss critical issues with parents. Seek full disclosure from parents so that they can work together to ensure that everyone’s interests are protected. Explore a living trust with healthcare provisions. Designate who will take care of parents. Talk to future wife about the financial support of parents.
The Action: During the last several months Hawkins and his parents, whom he still helps out financially, have talked candidly about their future. They saw what happened when a family member died–because she didn’t put anything in writing, her money was distributed in a way that probably would not have pleased her, says Hawkins. He and his parents have vowed to learn from her mistakes. They will meet soon with an estate lawyer to talk about a will, how to protect their assets, the parameters for gifting, and other such issues. The conversations were not difficult to have at all says Hawkins, who also talked about his financial commitment to his family with his future wife, who is supportive.

The Advice: Don’t let history repeat itself. Get even more aggressive about saving and investing. Use the $2,000 contest winnings to open a Roth IRA and invest in exchange-traded funds. Put $500 a month into two no-load value funds.
The Action: The market spooked Hawkins. Consequently, he reallocated some of his investments, making them less aggressive. Instead of investing his contest winnings, he ran for the safety of a money market account with an interest rate of 3.72%. He will park it there until the end of this year and consider investing when the market is a little less volatile.

The Advice: Consider becoming a landlord. Hawkins should consider renting out his townhouse as a way to generate additional income.
The Action: Hawkins became a landlord even earlier than he had expected.