Malkia McLeod is feeling financial pressure. In the fall, the 37-year-old could be out of a job. A public affairs specialist, McLeod has been working just over a year and a half for the U.S. Census Bureau under a term appointment that is up for renewal in September. There are very few vacancies for extended terms or permanent employment in the Public Information Office, says McLeod, “but I have made a career out of PR, and that is where I would like to stay.â€
If McLeod’s position isn’t renewed, finding full-time employment will be a challenge. Given the state of the job market, on average it takes six months to a year to find work. When she does locate a new position, she may find it difficult to replace her annual salary of about $77,000.
The Baltimore resident admits that the biggest impediment to saving is her shopping habit. “I am buying everything from clothes to household items. I recently spent $130 at a Rite Aid. Who does that?â€
Her bad habit isn’t new. McLeod left college weighed down by $11,000 in debt spread across seven credit cards. But over the years, she faithfully paid down the balances using her discretionary income. “Once the spending gets out of control, I start cutting the credit cards up.†She recently cut up her last credit card which has a balance of $4,800. In spite of her splurging, she has always maintained a good credit profile; her credit score is 775.
McLeod is also hauling a heavy load of $70,000 in student loans from her three degrees: an associate degree in early childhood education from Baltimore City Community College, a bachelor’s in journalism from Norfolk State University, and a master’s in mass communications from Towson University. In 2009, McLeod received a forbearance reduction to $100 on her monthly loan payment. Her forbearance status lasts until September, at which point her payments revert to $473 per month unless she can get an extension.
In addition, she owes $17,000 on a used car she purchased in 2009. Her monthly car payment is $400. With gas prices averaging around $4 a gallon in Maryland, what’s really drained her cash was the $500 a month she paid for gas to commute to work just outside Washington, D.C. Now she’s using a public transportation subsidy offered to federal employees, which saves her around $350 a month.
As for her retirement savings, McLeod withdrew $10,000 from her 401(k) to make a down payment on a three-bedroom, single family row-home which she purchased for $130,000 in 2006. She was able to take advantage of
tax laws that allow first-time buyers to withdraw up to $10,000 from their retirement account penalty-free. But that withdrawal left her with $3,200 in her employer sponsored retirement account to which she is contributing 7% of her salary.McLeod has also been investing in individual stocks outside of her 401(k). She has purchased shares of companies including Pfizer, General Motors, and General Electric. She uses an ING ShareBuilder account, to which she contributes $30 biweekly. Her cash reserve funds are modest at about $6,000 in savings and money market accounts.
The Advice
McLeod needs to reduce expenses and increase her emergency savings. She is upside down on her car and home, and has a negative net worth. black enterprise and Walt L. Clark, president and CEO of Columbia, Maryland-based Clark Capital Private Wealth Management, created a plan to help McLeod better manage her finances.
– Eliminate credit card debt. McLeod needs to get rid of her $4,800 credit card balance. She is contributing about $400 a month toward that debt. By September she can pay down the debt using the $350 a month that she will save on gas. By eliminating this short-term debt, she can begin to add more capital to her savings.
– Kick spending habit. “She needs to find other places to spend time
such as going to a park; somewhere she won’t be tempted to spend money. When she does go to the mall she needs to not bring any credit cards and bring little cash,†says Clark. be recommends that McLeod register with Shopaholics Anonymous, which assists with recovering from compulsive spending.– Boost cash reserve. In the few months that McLeod has until she finds out if her job is renewed, she needs to get serious about saving. She has the potential to create an emergency savings of more than $10,000 by September. She must first consolidate her money market and savings accounts ($5,680). Then she must commit to putting $500 into this account each month, which is doable once she curbs her spending. Clark also suggests she put the $2,000 Financial Fitness Contest winnings into the account. If her job is renewed, McLeod should continue with this plan and save at least a year’s worth of living expenses.
– Cease stock contributions. Clark says McLeod should stop contributing money to her stock account for now. “She doesn’t have the capital to lose to invest at that level,†he says. Investing properly in individual stocks is time consuming. You need to have the time and the drive to do the necessary research to make well-informed stock selections. “The
best approach for her to invest is through exchange-traded funds [ETFs] because the expense ratios are less than mutual funds,†he explains. Once she has job security she can begin to look to sectors such as global, international, S&P 500 index, and NASDAQ 500 index ETFs. She needs to get exposure in large-cap and growth-oriented investments. “This reduces her risk,†Clark says. If her current job is secured come September, McLeod can resume contributing to investments outside her retirement funds as well as explore ways to invest inside her 401(k) account to ensure she has a diversified portfolio, Clark adds.– Seek mortgage assistance. McLeod is up-to-date on her mortgage, which is $1,166 a month, but her mortgage is underwater, which means she owes more on her home loan than the home is worth. If she beefs up her emergency fund she should have enough reserve to pay all her expenses, including the mortgage, for four months if she indeed finds herself unemployed by year-end. But should her unemployment linger and she falls behind on mortgage payments, she should seek help from groups such as the Neighborhood Assistance Corporation of America or through government programs. Another option would be to rent out one of the bedrooms to help offset costs and supplement her income.