When Jason and Carol Wooden married in October 2007, they pledged to remain faithful not only in love, but also financial matters. In order to start married life free of revolving debt they paid off $14,000 in credit card debt and $5,000 in student loan debt before tying the knot. “It took one year to clear the debt. It was a burden lifted off of our shoulders,†says Carol, an electrical engineer.
The couple is especially careful about how they manage money because they’re expecting their first child. (As of this writing, Carol is due to give birth in a few weeks.) Jason and Carol, both 30, cut back on unnecessary spending and only use credit cards if they can pay off the balance within two weeks. “I’m a pretty simple guy. I don’t buy a lot of clothes or things that I don’t need, so that helps us stay on budget,†says Jason, a high school guidance counselor. In addition, the couple holds monthly meetings to review their budget and make necessary adjustments.
Thus far, the Woodens’ plan has proved successful. Jason and Carol have stashed $28,000 in their emergency savings account, and recently opened another account for costs associated with their soon-to-arrive baby. They also own two rental properties (one of which is paid in full) and over the last two years, the couple has taken their relationship to the next level–with a profitable business partnership. In 2007, the Woodens opened JC Bartending L.L.C., a mobile bartending service that utilizes certified bartenders for weddings, private parties, and corporate events. Revenues for 2008 were $16,000.
As if a new business and a new baby weren’t enough, Jason and Carol have set an ambitious goal for themselves–they want to stop working at their 9-to-5 jobs by the time they reach 45, and pursue their bartending business. With their goal just 15 years away, they have no time to waste.
Carol, whose 401(k) lost 18% since the economic downturn, says she is not afraid of the risk that comes with investing in the stock market. Jason, however, has been a bit hesitant and just recently started investing in a money market fund. “I don’t like risk. I tend to shy away from it,†says Jason. Carol contributes $15,200 annually to her 401(k) and receives a match of 100% up to the first 4% that she contributes. Jason participates in a 403(b) plan and contributes about $200 a month. His employer does not offer a match.
“We want to invest and we want to grow multiple streams of income, so that we can retire early,†says Carol. In the meantime, the Woodens are seeking a financial plan that will help them grow and protect assets to pass on to their growing family.
The Advice
Herb White, a certified financial planner and founder of Life Certain Wealth Strategies in Denver, helped the Woodens develop a financial plan.
Delay retirement and increase contributions. Jason and Carol want to semiretire in the next 15 years. However, it would be more realistic for them to delay retirement by an additional 15 to 20 years, while increasing their contributions to their employer plans to the maximum amount. Carol’s 401(k) is comprised of 85% stocks and 15% bonds. White suggests diversifying the portfolio by also investing in domestic and international index funds or exchange traded funds because they are low-cost investment vehicles. White recommends that Jason’s 403(b) portfolio allocation should be 80% equity and 20% bonds.
Jason has a total of $11,000 in his 403(b) from his previous and current employer; still it is important for him to make every effort to contribute the maximum amount each year. It is also important for Jason to work on his fear of investing and take on a bit more risk. White suggests that Jason diversify and consider investing in stocks. The $2,000 contest winnings should be used to build up Jason’s retirement fund.
Develop an estate plan. The couple should hire an attorney to draft the appropriate trust and wills so that their wealth can be distributed appropriately in the case of divorce or when they die. It is also important for the couple to name guardians in their will in the event that both of them pass away while their child is still a minor. They should also re-title their rental properties into a trust so that they can protect those assets. White says if the properties are titled in their own personal names, they’re accessible by creditors or through litigation.
Purchase liability and long-term disability insurance. White suggests Jason and Carol purchase an umbrella liability insurance policy and additional business insurance to protect their assets in the event they are sued. “With a bartending business, the potential for a liability lawsuit exists. It would be wise to get coverage just in case someone who was drinking at one of these functions got into a car accident and then said that the company was at fault,†says White. An umbrella policy, which can be added to their homeowner’s insurance policy, would protect the couple if they’re named in a lawsuit. Premiums are anywhere from $150 to $300 per year for $1 million worth of coverage. White suggests that they obtain about $4 million to $5 million in coverage. The couple should also purchase long-term illness insurance to cover them if they experience a lengthy illness or become disabled. They should also add an additional $500,000 for each of them in life insurance.
Open a 529 savings plan. The Woodens should open a 529 savings plan so they can start saving for their child’s education. A portion of their rental income should be applied toward the plan.
This article originally appeared in the August 2009 issue of Black Enterprise Magazine.