and one income.” Clark says the key to their success so far, is their financial discipline. “They maintain very little debt and seem to be quite frugal with their expenses.”
With that in their favor, he says they should adopt the following moves until Theresa returns to work.
Consolidate mortgages. Since the Adams plan to remain in their home for the next five years, Clark says they should consolidate the first and second mortgages ($171,000 and $33,000, respectively) into an interest-only mortgage. This strategy is beneficial because, currently, most of the mortgage payment is going to interest, with little accumulating toward principal. With an interest-only mortgage, Clark calculates that they will reduce their mortgage by $170 a month. Since the couple purchased their home for $222,000, and it now has a market value of $300,000, Clark recommends that they cash out $7,000 at settlement to pay off the car loan and credit card debt. “With the savings each month, they will be able to concentrate on building their cash reserves and funding their children’s education,” he says.
Increase 401(k) contribution. Tony currently contributes 4% of his salary to his 401(k) and plans to go as high as 7%. Clark recommends he shoot for at least 10%, with a goal to reach the 15% maximum. If Tony has concerns about how the increase will affect his take-home pay, he can contact the 401(k) plan administrator and request a detailed contribution table that will show how much will be deducted from his paycheck with each percentage increase. Since his company has an incentive matching program, he would be able to further accelerate his wealth.
Rollover 401(k). Theresa wonders what she should do with the assets she obtained through her previous employer’s 401(k) plan. Clark says it’s best to roll them over into an Individual Retirement Account. It would be ideal for her to invest in a combination of growth mutual funds and quality stocks.
Buy disability insurance. With some $550,000 of life insurance coverage, Clark says the Adamses are sufficiently protected. However, since Tony is the sole income source, they should purchase a disability insurance policy to cover their expenses, about $1,600 per month, in case Tony becomes injured. And speaking of protection, though the Adams family has $5,000 in a money market account, they need to save an additional $3,000 for emergencies. The last thing they need is to find themselves turning to credit cards to bridge financial gaps.
Put the contest winnings to good use. Clark recommends investing the $2,000 contest winnings in a Uniform Gift to Minors account. This account will give the couple more flexibility — compared with a 529 Plan — in terms of choosing different investments, such as growth mutual funds, stocks, and bonds. All the contest winnings should go toward Corey’s account, then the Adamses can establish an automatic investment account for both children through any mutual fund family. “They can invest as little as $25 a month and the money will be automatically deducted from their checking account,” says Clark.
Financial Snapshot: