Single-income family buckles down - personal finance case study - Brief Article - Statistical Data Included

Black Enterprise, July, 2000 by Christine Albano

The Browns pave the road to the future

For Sonya and Jerry Brown, the road to financial security has been bumpy recently. In particular, the past three years have been fiscally challenging for the Detroit couple. In November 1998, Sonya, 30, quit her $32,000-a-year job as a technical recruiter for the Volt Services Group in Detroit to become a full-time mother and part-time student. Since then, they've been living on Jerry's paycheck--he's a director with computer software company Baan in Troy, Michigan.

They were elated to become first-time parents of' son Malik in December 1996, and to have moved into their dream home in September 1998. But it wasn't long before the endless demands of parenthood, two full-time careers and a new home began to take their toll.

Life was hectic--Jerry, 32, was traveling 90% of the time, while Sonya was putting in a tiring 60-hour workweek. Still, with their combined annual salary of $142,000, they started paying down their $229,000 mortgage and planning for their newborn's college expenses.

The Browns decided that Sonya would leave her job. While it was not the most ideal financial situation, the stress reduction seemed to be a quick fix for their harried lifestyle.

After Sonya quit, living only on Jerry's salary meant making sacrifices. First, the couple had to temporarily put saving on hold. Previously, they were padding their nest egg with $500 to $750 a month. But living on a single income meant they were focusing on monthly bills and everyday expenses, such as diapers and baby clothes. Leisure activities were kept to a minimum.

They refinanced their home in the fall of 1999, and borrowed $20,000 to pay off their outstanding credit cards and other personal debt. They kicked off this year still celebrating the arrival of their second child, daughter Candace, born in November, as well as Jerry's December promotion (plus the promotion he got in June 1999), which will increase his salary to $175,000 this year.

They've recently resumed saving for their retirement and their children's education. For example, they invest $200 a month in the Fidelity Prime fund (Nasdaq: FPRXX) for their kids' education. And Jerry contributes 6% of his weekly salary to his 401(k) plan and Baan matches that with 3%.

In about three years, they may be able to loosen their fiscal belts a little more. Sonya is planning to reenter the workforce when Candace attends preschool. In the meantime, Sonya is currently attending Oakland community college and plans to get her bachelor's degree in marketing in a year and a half.

                        Household Income

Gross income/yr.:                                $175,000
Household expenses/mo.:                               900

                          Investments

Portfolio:                                          8,000
  (incls. mutual funds, E-Trade account
  & employee stock option purchase plan)
  Retirement savings/401(k)                        25,000

                           Insurance

Disability insurance/mo.:                             750
Life insurance coverage:
  Jerry (personal)                                500,000
  Jerry (group employer)                          248,300
  Sonya (personal)                                300,000

                        Debt/Liabilities

Credit cards:                                       3,000
Car loan #1 (mo.):                                    388
Car loan #2 (mo.):                                    460
Mortgage (mo.):                                     2,700
Mortgage (rental property mo.):                       800

Expert Advice

FINANCIAL ADVISOR: James Walton, managing partner and registered representative, Financial Solutions Network Ltd., a unit of Franklin Financial Services, Birmingham, Alabama.

Walton's Recommendations:

Enhance savings and investments by using a variety of conservative vehicles, increase their insurance coverage, cut excess spending and pay off credit cards.

Since Sonya is currently unemployed, opening a Roth IRA is her best bet. She has agreed to contribute $166.67 a month, which satisfies the $2,000 annual maximum contribution, and grows tax-deferred--in her case, in the Putnam Voyager fund (Nasdaq: PVOYX).

If necessary, Sonya can begin making withdrawals five years after inception, and because the account is portable, she can keep it or roll it over into her future employer's 401(k) plan.

Since the Browns currently rely on Jerry's salary, Walton recommends increasing his disability insurance coverage from a benefit of $750 a month to approximately $9,700 a month, which is roughly two-thirds of Jerry's income.

The annual premium for this policy is $3,370, but it produces a more adequate safety net for a family of four should Jerry suddenly find himself out of work. And if Jerry never files a claim, the premiums are returned to him upon retirement.

Using a concept called pension maximization, Walton advises the Browns to establish an additional $350,000 life insurance policy in Jerry's name as a supplement to his existing coverage--$500,000 from personal coverage and $262,500 from his employer.