Job loss `messes up game plan'

January 07, 2007|By Janet Kidd Stewart | Janet Kidd Stewart,Tribune Media Services

Last summer, Tracey and Robert Thornton just wanted to start saving for their children's college costs and take an occasional vacation.

But their combined income of $77,000 a year wasn't keeping up with their spending as they cared for four children in Baltimore. Then, when he lost his $42,000-a-year job in October, the situation quickly went from troublesome to dire.

"Something always happens to mess up my game plan," a frustrated Tracey Thornton said.

While Robert Thornton continues job hunting, the couple has been consulting with Jennifer Cray, a certified financial planner with Investor's Capital Management in Menlo Park, Calif., to help determine their financial game plan.

They face multiple challenges: tackling debt, boosting meager retirement savings, trying to save for college for their children and simply making ends meet.

"There is a consumption problem here," Cray said. "The family is not awash in life's luxuries, but they have been living for today."

Visitors to the Thornton home will find no expensive shower curtains, but the couple did pay $28,000 for a sport utility vehicle, and they shell out more than $300 per month on cable television, Internet connection and cell phones for themselves and the kids.

"It points out the danger of using home equity to live a life disproportionate to your income," Cray said.

Several cash-out home refinancings, including one that is pending, will boost the family's housing debt to $162,000 on their three-bedroom townhouse, worth $175,000.

The Thorntons hope to use the roughly $34,000 from the latest cash-out to pay off their $5,600 in credit card and credit union debt and make some long-needed home improvements.

"We've been here for 12 years and haven't really done anything to the house," she said.

But Cray warned the couple to go slow on spending, particularly with him being out of work. She also wishes the couple had negotiated a better deal on their refinancing: They're paying more than 2 points on the new loan.

$20,000 cushion

"One of the things you need is an emergency spending cushion, and I would like that to be worth about six months of emergency expenses, or about $20,000," she said. "That is going to be your safety net."

Why not consider the cash-out refinance as the emergency fund while Robert Thornton is out of work?

Because the family can no longer afford to use refinance money for daily living expenses, Cray said.

"You need to make a solemn vow to each other that you will never borrow against the house again," she said. "You have to get out of this cycle of borrowing."

Cray recommended the couple use the refinance money to pay off their credit cards and credit union loan and put $5,000 into savings. Then they should make a budget on home-improvement necessities and use the refinance money exclusively for those repairs, she said.

Any remainder should go back to their lender for home equity, Cray said. Once they've saved another $5,000 on their own, they should put the $5,000 earmarked for savings back into home equity, too, she said.

"The risk right now is that all this cash may make it seem less urgent for Robert to get back to work. It's not," Cray said.

He needs a job

He needs to find a job making at least what he made as a special-events coordinator for a beverage company, Cray said. He's been taking exams for public service jobs, but so far hasn't found anything, although he's pulling in $250 per week in unemployment benefits.

There's little time for his wife to pick up the slack by working extra hours because she's already working three jobs: as an assistant in a doctor's office, as a medical assistant who draws blood at a nursing home and as a cashier at a local superstore.

Oddly enough, this much financial stress leads some people to spend even more. So Cray emphasized the importance of developing a spending plan that allows a few frills here and there without running up more credit-card debt.

"If you decide you can afford $75 a month to eat out, then spend $75. But enjoy it without feeling guilty. Set limits, but give yourself the freedom to enjoy what you do spend," she said.

Long term, once he is working again, the couple needs to buckle down and save for retirement, because their retirement accounts have less than $2,000.

If he lands a public service job that comes with a pension, all the better. But at the very least, both spouses need to open Roth individual retirement accounts, which allow taxable contributions that then grow tax free and are withdrawn tax free in retirement.

After reviewing the Thortons' expenses and income, Cray believes the couple can save $9,000 a year for their future if he secures a job with similar income to his last position. That would be a significant 12 percent of gross income, but they should be free of the credit payments, which should free up some cash, Cray said.

Where to invest?

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