Parents With Kids

Background

Meet “Jesse and Becky” our fictional young couple. They are both 35 years old with 2 kids, ages 7 and 4. They are dealing with a Mortgage, Student Loans, Credit Cards, College Planning, 2 Car Payments, and 2 Retirement Accounts. Combined, they earn $150,000 per year.

Issues

Jesse and Becky feel like they just can’t get ahead. They want to know where people find money to save for their kids’ college education and they would like to know if they are on track to retire at age 65.

Plan

The first thing we do with any client is gather all of their information. We use powerful software to pull all of their financial accounts onto one screen. Next, we use to our state-of-the-art Financial Planning software to analyze the data. With Becky and Jesse, we would immediately notice they are spending more on an annual basis ($177,000) than they are earning ($150,000). This is known as negative cash flow. We would dig into their finances line-by-line and look for ways to improve their situation. If we see room for improvement, we will make recommendations and present them to the clients. It is up to the client to decide whether or not to implement these recommendations.

Actions

In a case like this, we might start with their mortgage. Jesse and Becky bought a $600,000 house but they did not put down 20%. Therefore, they could be subject to PMI of up to $400/month. They did not have good credit at the time so the interest rate is 5.5% on their 30-year mortgage. Their total monthly payment including PMI, taxes and insurance, is $3,800. Upon further examination, we would notice the value of their home has increased to $640,000 and the balance on the loan has decreased to $480,000. Therefore, their Loan to Value (LTV) ratio is greater than 80% and they should be able to get rid of the PMI. They can also look to refinance into a new 30-year mortgage at 4.0% since rates are lower now. Combined, this could save them about $700/month.

Next, we could look at their Student Loans. If they are on the 10-year payment plan, they might be paying about $1,600/month. We could move them to an Income Based Repayment Plan and potentially save them $500/month. This would require a more in-depth analysis.

They are currently paying an average of 25% APR on their credit card balance of $32,000. We could work to improve their credit score and then transfer the balances to a 0% APR card for 18 months. This could save them $8,000/year in interest!

Their combined monthly car payment is $1,150. This can be reduced in several ways. They could refinance at lower rates, trade-down to cheaper cars, and/or get rid of one car. In this case, we noticed they live in a golf-cart community. Becky works in town and they own a golf cart. We determined they could sell one car and refinance the other to save $700/month in loan payments. This would also serve to lower their car insurance and gas expenses.

Overall, Becky and Jesse might stand to recognize a savings of $30,800 in their first year. This is cash they can deploy to pay down credit card debt, build an Emergency Fund, Save for College, and contribute to their Retirement Accounts.