The Johnsons plan to make up the shortfall by renting their old home for about $3,200 a month. The mortgage payment is $2,612, which would net them $588. “Instead of having to take a big loss by selling our old house we can at least break even while we wait for the resale market to recover,†says Malcolm.
The Advice
Black Enterprise devised a game plan to help the Johnsons reach their goals.
Stop the bleeding. The Johnsons have a shortfall of $4,011 each month. While they plan to rent out their old house for $3,200 a month, they will still need $811 more to fill the gap. In addition, there are no quarantees they’ll be able to find a renter quickly or that they’ll be able to charge enough rent to cover the cost of carrying the house. The Johnson’s should attempt to sell their old home now, instead of holding on to the house until the market rebounds.
Step up the job search. To help ease the family’s financial burden, it’s important for Joanne to secure some type of work. But until she finds a job, she might consider becoming a freelance consultant to bring in some immediate extra cash.
Cut back on activities for the kids. Extracurricular activities total almost $600 a month. The Johnsons must re-evaluate this line item and see which activities they can cut back or eliminate altogether.
Acquire more insurance. Malcolm’s life insurance policy is adequate at $1.2 million. But Joanne hasn’t had coverage since she left her job. She needs a term policy worth about $750,000 to cover the cost of at least one of the homes should something happen to her. Pierre Dunagan, president of The Dunagan Group in Chicago, suggests Joanne use the $2,000 in contest winnings to buy the life insurance policy, which lessens the financial burden on Malcolm in the event of her death.
Make an estate plan. At some point, the couple needs to formulate an estate plan beyond just wills. Were Malcolm to pass away, the estate would be a little more than $1 million. Estate taxes kick in at $3.5 million, so as the couple’s net worth continues to grow they should look to trusts and other vehicles to protect their assets.
Increase investments in equity market. At their age they need to be aggressive investors. Too much of their money (in the 529 plans and retirement accounts) is tied up in bonds–30% to 40%. They need less of their money in fixed-income vehicles and more of it in equity investments. The Johnsons could also use a hedge against inflation, which can be accomplished by putting 10% of their portfolio into a precious metal mutual fund and an energy mutual fund, says Dunagan. He suggests putting 25% each into small-cap, mid-cap and large-cap mutual funds and 15% in international equity funds.
Pay down the HELOC. The couple is not carrying a lot of consumer debt because they pay off their credit cards every month. But they need to tackle the interest-only home equity line of credit they used for their primary residence by contributing more than the minimum amount due.