Tiffany Hall reads a lot of articles about people who earn less money than she does, yet seem to be better off financially. “The individuals in those articles had accumulated assets such as homes, rental property, and investments,” explains the 31-year-old contract attorney from Lathrup, Michigan. Now Hall wants advice on how she can acquire assets, stretch her income, and manage what’s left after all her bills are paid.
Hall, who earns $70,260 a year, says she’s lucky to have relatively little debt, namely a $19,800 auto loan on her Lexus RX300 SUV (with three years left to pay). Unlike most people who spend 10 or more of their working years paying back student debt, Hall paid off $8,000 in college loans 18 months after entering the workforce. “I was able to get graduate assistance for law school, so I didn’t have a lot of undergraduate or law school debt,” says the 1996 graduate of Southern Illinois University School of Law who also has a master’s degree in public administration.
An only child from a single parent household, Hall says she owes a lot to her mother who made financial sacrifices on a teacher’s salary so Hall could go to college. “She even had to delay her retirement because she had accumulated so much debt on my behalf over the years,” says Hall. Her mother retired from the Detroit Board of Education in 2001. Looking to give something back, Hall has been living at home for the last five years, paying $400 rent and helping out around the house.
Her immediate goals are to pay off her car note, buy a house, and continue saving for early retirement. In fact, the legal advisor for the U.S. Army TACOM (Tank-automotive
and Armaments Command) has taken commendable steps toward building wealth. She has $1,000 each in her savings and checking accounts; $8,500 in a Scudder money market fund; $9,400 in an American Funds account; $3,350 in a SEP-IRA; and $10,400 in her 403(b), to which she contributes 5% of her salary (the maximum is 13% with a dollar-for-dollar matching contribution of up to 3%, and 50 cents to the dollar for the next 2%). Hall also has a little more than $1,000 in a payroll savings account at work (Federal Employee Retirement System), to which $20 is deposited every paycheck.Hall seems to have what everyone desires these days–job security. She has earned two $10,000 raises in the last two years, noting that government employees are hired at a specific grade and are paid on scale. “Since I’ve hit my target grade every year, I will get only step increases and cost of living increases,” she says. Whereas the average worker changes careers every two to three years, Hall says she loves her job and plans to stay for a while.
THE ADVICE
Hall is a conservative investor and a frugal spender. Her only real luxury is an occasional vacation. When it comes to money management, Hall is averse to debt and market losses. But she should be more concerned about her tax situation. A single, black female with no children, living at home, and making good money, Hall’s monthly expenditures are minimal. But like many people in her situation, she’s not coming out ahead financially, says Gail Perry-Mason, first vice president of financial services for Fahnestock & Co. in Grosse Pointe, Michigan.
Since Hall doesn’t own a home or have any other tax write-offs, her tax liability is extremely
high. She is in the 30% tax bracket. So, a large percentage of her income goes toward paying taxes. Instead of working for assets by paying on a home mortgage, Perry-Mason says Hall is actually working for the government twice–first as an employee and second as a taxpayer. BLACK ENTERPRISE had Perry-Mason consult with Hall to help her devise a tax-savvy plan. The following are her recommendations:ESTABLISH A BUSINESS, AND SHELTER TAXABLE INCOME
Since she has expressed an interest in working outside of her day job, Hall should get a tax ID number and set herself up as a consultant (sole proprietor or single-member limited liability corporation). This will allow her to deduct business-related expenses–supplies, travel, and entertainment for conferences–when she files her taxes. More importantly, she can take greater advantage of her SEP-IRA, which she established three years ago during a short stint as an independent contractor. Hall can shelter some of her taxable income by contributing money to that account on a regular basis. Under the current tax law she can contribute up to 20% of the first $200,000 she earns.
INCREASE STREAMS OF INCOME
“Everyone should strive to live on Fifth Avenue,” says Perry-Mason. Not the New York City strip famous for its designer shops and high-income patrons, but rather having five avenues of income outside of one’s regular 9-to-5 gig. Marketing herself as a legal consultant would mean additional income for Hall. Owning rental property, public speaking, freelance writing for law journals or trade publications, and testing consumer products are other possible income sources. Perry-Mason adds that Hall could even become a mystery shopper. The skills Hall has acquired as a contract lawyer–such as being detail-oriented–would bode well for writing evaluation reports on particular stores,
TAKE OVER MORTGAGE PAYMENTS
Once she has paid off her car note, Hall wants to buy the house she grew up in. She plans to move her mother into a condominium. The remaining balance on the three-bedroom ranch house is $89,000 at 7% interest, with 20 years and eight months left on a 30-year conventional loan. Hall’s mother has refinanced twice since first purchasing the home in 1979. More than likely, Hall will have to buy the house at market value; condos in the area start at $150,000. In the meantime, Perry-Mason says Hall should have her name placed on the deed. She could then take over the house note and taxes. This way, she’ll reduce her tax liability. Mortgage interest and taxes are deductible. She needs the tax break more than her mother, who is in a lower tax bracket, says Perry-Mason. They could actually refinance the home with an adjustable-rate mortgage as low as 4% or a fixed-rate mortgage at 6% and place Hall’s name on the new mortgage. If Hall pays the closing costs, that will be another tax write-off, in addition to a lower monthly mortgage payment.
BUILD UP ASSETS
Hall needs to continue building more assets by changing her money market account to a tax-free money market account. By doing so, she’ll earn a lower interest rate, but she can keep whatever interest she
CREATE AN ESTATE PLAN
Neither Hall nor her mother has an estate plan in terms of wills and trusts. Perry-Mason says Halls biggest asset is her job. In the event of an untimely death, the state would automatically assume her assets, not her mother or closest relative. “When you are single without children is when you need an estate plan the most,” says Perry-Mason. Most of the time, the deceased’s spouse or children are awarded the person’s possessions, savings,
and investments. Even though Hall’s mother may be the beneficiary on her life insurance policy at work and 403(b) retirement account, she is not joint owner of Hall’s money market or other bank accounts. Since Hall is an attorney, she should be able to draft a revocable living trust, which holds property–cash, securities, real estate, and other assets–that are eventually transferred to a trustee on behalf of the grantor’s beneficiaries. Hall also needs to familiarize herself with her mother’s financial affairs–how her retirement income is allocated for instance–so she isn’t in the dark in the event of an emergency situation.
Financial Snapshot: Tiffany Hall
| HOUSEHOLD INCOME | |
| Gross Income | $70,260 |
| ASSETS | |
| Bank savings | $1,000 |
| Bank checking | 1,000 |
| Money market | 8,500 |
| Mutual funds | 9,400 |
| SEP-IRA | 3,350 |
| 403(b) | 10,400 |
| Federal payroll savings | 1,000 |
| Car (book value) | 23,000 |
| Total | $57,650 |
| LIABILITIES | |
| Car note | $19,800 |
| Credit card | 500 |
| Total | $20,300 |
| Net Worth | $37,350 |