Sylvia King has always been a saver. She lives a simple lifestyle and takes great care to monitor her spending, as it contributes to her financial health. King, 35, also believes that homeownership is the cornerstone for building wealth. She owns two homes: her primary residence, a four-bedroom, three and half-bath home in Landover, Maryland, which she purchased in 2007 for $400,000; and a three-bedroom, two-bath rental property in Greensboro, North Carolina, that she purchased in 2003 for $130,000. King receives $1,050 in rent each month from her tenant.
King’s saving skills proved helpful when she was laid off from her job in June 2007. She was a project manager with Fannie Mae until the company reduced its staff by several hundred. At the time, the economy was starting to sputter, so it took her six months to find her current position as a senior associate at an accounting firm. Her household income, which includes rental property, shrank from $145,000 to $105,000. Now, her mortgage payments make up a total of $3,200 each month, consuming 65% of her income–almost double the amount financial advisers suggest one should set aside for housing.
However, King found a safe haven in her emergency fund. She has more than $30,000 in reserves and nearly $25,000 in retirement savings. King is making an extra effort to manage her money–especially given the economy and widespread job losses. “It’s nerve wracking. I thought Fannie Mae was a sure bet. I didn’t see it coming; I was totally shocked. I had planned to spend my career there. I’m just thankful I had money in reserves. It could have been worse,†says King.
Despite her cash reserve, King, a divorcee and mother of a 6-year-old daughter, Rheanna, feels vulnerable. “The job market is twice as bad as it was last year because there have been so many layoffs.†In addition to her mortgages, she has an $8,000 car loan and $12,000 in credit card debt because she lent money to a relative and a friend.
King is proud of what she has accomplished so far and doesn’t want to lose ground. She has a goal of returning to Barbados, where she grew up. Her job has a global mobility program that could pave the
way for her to eventually transfer there. After retirement, she hopes to become an entrepreneur and open a bed and breakfast in Barbados. She hopes her dream comes to fruition by the time she reaches age 50.The Advice
David Hinson, then-president of Wealth Management Network in New York City, came up with a plan to keep King afloat in tough times and beyond.
Raise the rent to maximize cash flow. Currently, the North Carolina rental has a tenant who has been paying below market rent–$1,050–for the past four years (the market rate is $1,200). The rental, which is overseen by a property manager, is in a community experiencing new business growth, increasing the demand for rentals. Hinson suggests that King begin requesting the going rate. “Sylvia believes that she can get market rent for the property, which will likely increase her net cash flow by more than 100%,†says Hinson. Although King has considered downsizing by selling her primary residence, it would be best for her to wait, not only because of the down housing market, but also because she is currently upside down on her mortgage.
Add more money to emergency fund.
King’s cash cushion could stand to be beefed up because she is a single mother of a young child. With $30,000 in reserve and lifestyle costs of $4,000 a month ($3,200 toward mortgages, car expenses run nearly $250, and homeowners and life insurance make up another $400), Sylvia has a little more than six months of financial protection in the event of an unexpected illness or second layoff. She’s frugal with her spending, but she still needs to make changes if she is going to protect her financial foundation. King should add a minimum of $6,000 so that she’ll have at least eight months worth of expenses in reserve. Although financial advisers suggest three to six months, considering the economy, and especially if you have young children, you should stretch that to six to eight months.Merge retirement accounts. “This may result in lower fees and allow her to manage her assets more efficiently,†says Hinson. He adds that King’s time horizon is nearly 30 years, so she should consider an investment portfolio that includes a healthy portion of domestic and international
equities. Despite current market woes, there has never been a 29-year period in U.S. history where the stock market underperformed the bond and cash market, says Hinson. He recommends that she begin investing 70% equities and 30% bonds and cash in 2010. As her cash flow improves she should step up her retirement savings a notch, by adding $5,000 annually into her IRA, says Hinson.Research financing for business. King should do her research now to see how she will finance her business. She should research startup costs as well as how much it will cost to operate her business each month.
The U.S. dollar and Barbados dollar should remain fairly stable at 1 USD = 2 BBD. For example, a $58,000 US savings will equal approximately 116,000 BBD–a substantial amount for a nation where the average annual income is estimated at 8,300 BBD.
If King follows the advice, retiring to Barbados to start her business is well within reach.
To receive an application for the financial fitness contest, send an e-mail to financialfitness@blackenterprise.com.
This article originally appeared in the March 2009 issue of Black Enterprise magazine.