Nancy Nealious has been through a lot in a short time–and it’s taken a toll on both her emotions and finances. Just 26, she’s been so stressed that her hair is falling out. Her most significant loss came in August of 2006, when her 53-year-old father died in a head-on automobile accident. In the year and a half since his death, her six-figure inheritance has practically disappeared, though the shock of losing her father has barely faded.
But there is at least one piece of good news: Nealious expected to get her master’s degree in counseling from Troy University last month, with just $8,500 in student loans and no credit card debt. She was able to walk away without a mountain of debt because scholarships covered her undergraduate work at Winthrop University in Rock Hill, South Carolina in full. That good history bodes well for her, as she wants to attend medical school in the near future.
But even that excitement was tempered for the Aiken, South Carolina, resident because she was without a steady income for about six months last year. Before that she had juggled working part time as a customer service agent at a Marriott hotel and as a program coordinator for a teen pregnancy prevention program.
Though the $8,000 income was modest, every bit was essential for the student. She recently obtained a full-time job as an outreach specialist for an HIV/AIDS program. Still, she says staying positive is a challenge: “It’s just that a part of me is still grieving. I’m overwhelmed.”To add to her woes, her 2003 Kia Spectra needs repairs and she’s trying to nurse it
for as long as she can. Fortunately, she lives rent free in the house her father left to her and her older sister, who lives elsewhere. But the other thing Dad left–an inheritance of $113,000–is mostly spent. “I hardly have anything to show for it,” says Nealious heavily. “I could have been smarter. Where did it go?”She says people knew her father had the means to leave her and her sister money. And her windfall was met by friends with problems. “I gave one friend $3,000, I helped someone else with their mortgage,” says Nealious. “I wanted to help everybody.”
That generosity would prove costly as she is now living off the $30,000 left of the money she received last fall. It was a mix of insurance and funds from a retirement account and an investment account. She’s already paid $1,100 in state and federal taxes for money she received in 2006, and she expects to take another tax hit for 2007.
Nealious seemed to start off in the right direction, by seeking out a financial planner to help her figure out the right road to take with the money. She got referrals, but ultimately she made the wrong decision; she feels her planner pressured her into getting an IRA and an annuity. “I did what he advised. I’m not even sure what I bought or that he had my best interest at heart,” she says. “I’m not doing business with him anymore.”
She’s now taken a greater interest in managing her money, reading personal finance magazines and surfing financial sites such as Morningstar.com. “I wish I had started learning this stuff earlier,” Nealious laments. But she’s not going to stay stuck in regrets or remorse. She’s gearing up for medical school, eventually pursuing some kind of franchise venture, and getting on with the business of living.
Financial Snapshot: Nancy Nealious
|
ASSETS |
|
| Market Value of Home | $20,000 |
| 2003 Kia Spectra | 5,000 |
| Checking Account | 13,000 |
| Savings Account | 6,500 |
| Annuity | 11,000 |
| Roth IRA | 3,000 |
| Total | $48,500†|
|
LIABILITIES |
|
| Student Loans | $8,500 |
| Total | $8,500 |
| NET WORTH | $40,000 |
*ACCORDING TO KELLEY BLUE BOOK
†includes half the home value
The Advice
Melanie Dean, a certified financial planner and president of Dean Financial in Nashville, Tennessee, took up the challenge of analyzing Nealious’ situation. “Nancy is blessed to have received an inheritance from her father. Many aren’t this fortunate, due to their parents’ lack of planning or resources,” says Dean. However, much could have been done differently.
Salvage what’s left. Disposition of money upon inheritance requires serious consideration. Inherited assets have different tax consequences upon receipt as well as future expenditure, says Dean. Ideally, Nealious should have liquidated the proceeds from life insurance first because they are tax-free. The investment account should have been second, given a long-term tax rate versus the traditional income tax liability. She should not withdraw any money from the retirement account at all, but roll it over into a Roth IRA in her name. “Nancy will be able to generate large gains before later withdrawing the assets tax-free,” says Dean. Such a rollover was not allowed until a change in the tax law effective this year.
At this point, Dean recommends Nealious put the remaining cash from her inheritance in a money market account at her current bank. “She has low income and is single, unable to rely on anyone in case of a major expense,” says Dean. “She needs to be able to get that money as needed.” She estimates that Nealious can likely get a rate of 5.5%. (For more on how to handle an inheritance, see “Managing a Windfall,” November 2006).
Move on. What’s done is done. Nealious needs to keep moving forward. To begin investing, she should begin transferring $100 monthly into an S&P 500 index mutual fund. “This is an easy way to get a feel for the market’s ups and downs,” says Dean. The account can be opened at the local bank where she opens a money market account. “This will eliminate the need to secure a financial adviser immediately. She can take her time and find a good one later.”
Focus, focus, focus. “Nancy doesn’t have realistic goals, a plan, or a good timeline,” says Dean. The most important goal related to medical school is cash flow management. As much as Nealious would like to put the $2,000 contest winnings toward savings, Dean says she should get an affordable car, as she will need reliable transportation for school and work.
Don’t do it. What Nealious should definitely take off the drawing board is the notion of owning a business. She should revisit that desire after she’s established in her career. Staying focused will be important for Nealious. “She’s thinking far ahead, which is key to being financially successful,” says Dean. “If she takes on one major goal at a time, she’ll do well.”