Virna Dolmo can recall attending New York’s Lehman College in the mid-1990s and being bombarded with credit card offers. She ended up with 14 cards — mostly from department stores. It wasn’t long before she ran into trouble. “I had collection agencies calling me up constantly. I was just working part time, so I couldn’t pay them off,” says Dolmo, who contacted a debt consolidation company to get on a payment plan that proved unsuccessful. “I had to pay them $50 every month and then they would pay the credit card companies for me,” she recalls. “When I calculated how much I would pay in fees, it made more sense to pay the credit card companies directly myself.”
By the time Dolmo graduated college and entered the workforce full time in 2000, she had accumulated $8,000 in credit card debt and $10,000 in student loans. She was learning a valuable lesson about managing debt. “Instead of participating in my company’s 401(k) right away, I used my [discretionary income] to pay back my student loans and pay off my credit card debts,” explains the 34-year-old professional, who works in the collection division of telecommunications giant Verizon. “Every month, I would pay more than the minimum due.”
Dolmo was debt free by 2002. “That’s when I started becoming conservative and started saving my money. I started contributing 10% of my salary to my 401(k),” says the New York native, who earns a gross annual salary of around $56,000. She also began investing in I Bonds through a salary deduction plan at work. Moreover, she changed her spending habits. Now she buys only what she really needs and what is on sale. Every month she pays off the balances on the three credit cards she holds.
In the last four years, Dolmo has managed to amass $47,050 in a money market account earning nearly 1% interest and $13,400 worth of I Bonds earning 4% interest. Her 401(k) is valued at $33,050 with an average return of 4%. With so much cash on hand, Dolmo wants to do a better job of investing her money in the stock market.
She also wants to team up with her older sister, Dina, a schoolteacher, to buy a brownstone in another two years. The siblings have rented and shared an apartment since Dolmo started working at Verizon. By splitting monthly costs with her sibling, Dolmo keeps her living expenses to just $1,250 a month, while her take-home pay is a little more than $2,100. “Why not buy a house together,” she asks. “That way, the mortgage payments won’t be as high [as paying them individually,] and we can write [off the interest] in terms of our taxes. Whenever we go our separate ways, we can sell the house and make a profit.”
Another of Dolmo’s intermediate goals involves another family member. “My youngest brother’s son is 6. I want to set up a college savings plan for him. Once my nephew turns 18 … he will have an easier time paying for his education.”
The Advice
BLACK ENTERPRISE had Dolmo consult with Dale Bryant, portfolio manager with The Bryant Group in New York, to find ways to grow her money. Dolmo is not experienced when it comes to allocating her investments effectively, says Bryant. “She suffers from a common mistake of unseasoned investors — having too much going on. [She’s] mistaking quantity of investing with quality of investing.”
For
example, he points to the company 401(k) plan, where Dolmo has more than 10 different investments chosen by a computer. As a result, many of her investments are competing with each other by investing in the same types of stocks. Some of her other investments are also conflicting, negating their yields. Close to two thirds of her retirement plan is getting subpar returns.There is additional risk — Dolmo may have too much Verizon stock. Bryant says more than 30% of her 401(k) plan is composed of company stock (as part of the company’s match). Verizon stock has declined 6% a year since Dolmo joined her 401(k) plan. “She is getting matched with a decreasing asset in a tough market with a grim outlook,” Bryant observes. “We see a bias toward conservative investing, even though she is at an age to take on some risk.”
Bryant recommends the following financial action plan for Dolmo:
Establish a practical cash cushion. Bryant suggests Dolmo place $5,000 in an emergency fund, preferably in an interest-bearing account such as ING at 2.2% instead of the 0.8% she’s currently getting in the HSBC money market account. That leaves $42,050 to invest. It also frees up the $250 monthly contribution Dolmo was making to the money market account.
Reallocate assets. Bryant wants all of Dolmo’s assets to work in unison toward a common identifiable goal with as little maintenance as possible. He suggests she liquidate the I Bonds and stop the salary deduction plan, which frees up another $400 a month. That’s $55,450, once you add the money from the money market account, to set up a regular investment portfolio as follows: 70% in S&P 500 index funds, 20% in bonds, and 10% in REITs (real estate investment trusts).
Bryant says the investments should be placed in exchange traded funds because “that way, she is getting broad market diversification, but with much less cost and less tax liability.” He says the S&P 500 will help Dolmo benefit from equities when the market moves higher; the ETF bond funds provide a variety of long-term, medium, and short-term bonds that give Dolmo a better chance at positive returns — plus they deliver a dividend for income. The REITs give her exposure to the real estate market without the high cost of holding real estate, and they deliver a dividend, too. Dolmo should reallocate her 401(k) funds the same way, making the plan easier to manage and making it easier to capture most market moves. She should rebalance both investment portfolios twice a year.
Sell off company shares. As soon as Dolmo is able, she should sell the Verizon stock with the intention to never have more than 10% (preferably 5%) of her assets in any single company stock. This and the aforementioned adjustments will increase her weighted average expected investment return from 2.2% to 7.7%. Over 20 years, taking what she has now and investing $550 per month (of the $650 she used to put toward I Bonds and her money market account), Dolmo would have accumulated just over a million dollars as opposed to having just under $500,000 if she were to leave her money where it is.
Invest in an educational IRA. Use the $2,000 BE cash prize to start an educational IRA for her nephew. Equally important, she should encourage her entire family to contribute to his college education. Bryant suggests investing in an S&P 500 index fund
until he is three years from college then reallocating to a balanced or moderate fund. She can use the remaining $100 of the $650 freed-up monthly cash flow to contribute to the IRA and she should try to get other family members to match this amount.Start funding the home purchase. Since Dolmo and her sister just signed a two-year lease, she has 18 to 24 months to set aside money for the down payment. The two-family home Dolmo is looking for will probably cost around $400,000, and with Dolmo’s impeccable credit score (almost 800), she will need no more than 10% down, maybe even as little as 5%. Split with her sister, that’s $20,000 each. Dolmo should look to save $10,000 a year or $800 a month until her lease is up. Dolmo usually takes three to four trips per year to the Caribbean and South America; if she cuts back by just one trip, she could make up the shortfall.
Even though Dolmo already has enough cash on hand for a down payment, Bryant recommends deferring the house purchase instead of breaking her lease. The extra time will give Dolmo and her sister the opportunity to learn the home-buying process and the freedom to find a home they both like without feeling pressured. With her excellent credit sco
re, Dolmo doesn’t have to worry about fixed mortgage rates rising. “She has many options at her disposal. For example, she can always get a five-year ARM [adjustable rate mortgage] around 2%, which is long enough to take her through another cycle of rising, then decreasing, rates.” Bryant says this gives Dolmo’s investments a chance to grow.
Financial Snapshot: Virna Dolmo
|
HOUSEHOLD INCOME |
|
| Gross Income | $56,000 |
| ASSETS | |
| Checking | $1,000 |
| Money Market | 47,050 |
| I Bonds | 13,400 |
| 401(k) | 33,050 |
| Total | $94,500 |
|
LIABILITIES |
|
| Credit Card Debt | $350 |
| NET WORTH | $94,150 |