Taking the next big step: Edwin Beale must decide whether to pursue an M.B.A., buy a second house, or both - Family Finances

Black Enterprise, Sept, 2002 by Donald Jay Korn

EDWIN BEALE'S PRIMARY FINANCIAL GOAL IS A FAMILIAR one. He'd like to move ahead in his career and increase his compensation. At the same time, he realizes achieving this objective would also result in a higher tax bill. "Even as things are now, I'm looking for tax relief," he says. Therefore, he's seeking the best of both worlds--more income without a painful tax bite.

To turbocharge his career, the 30-year-old sales and marketing representative for a Newark, Delaware-based biotechnology company believes he needs an M.B.A. "Ideally," he says, "I'd like to get my M.B.A. from a school, with a top program such as Duke."

The cost, however, might run $60,000 or more. "If I keep my present job and go to school part-time, my company would pay $10,500 per year toward the degree. I'd have to pay the rest myself, perhaps by taking a student loan," says Beale.

Another alternative: Beale, who hopes to start grad school by the fall of 2003, could become a full-time student. Such a move would enable him to rapidly earn his degree, but require him to take out huge loans as well as figure out a way to make a living. "Not only would I have my current living expenses," he says, "I'd also have to pay for a car because I'd no longer be able to drive a company car."

But Beale is also trying to cope with taxes, a burden that may grow heavier after he hangs his diploma on his wall. "As a single person with no dependents, I don't have much in the way of deductions. That's one of the reasons I bought a house a few years ago," he says.

Currently, his house is worth more than $100,000, thanks, in part, to some sweat equity he has put into it. "My mortgage is less than $70,000, so my mortgage interest payments are relatively modest. Deductible interest payments are about $5,300 a year. If I didn't own a house, I could take a standard deduction, so I'm not getting that much tax benefit from my mortgage interest payments," Beale notes.

One solution Beale is now exploring is buying a bigger house with a larger mortgage in order to gain a greater tax write-off. In fact, he's eyeing a local property selling for around $230,000. "With a little work," says Beale, "it could be turned around for $280,000." To buy such a property, Beale would come up with the down payment either by taking a second mortgage on his present house or borrowing from his 401(k) plan at work.

What would he do with his present home? One option would be to rent it out and move into the new one. Beale estimates he could net about $300 per month from the rental, even after making his present mortgage payments. Another avenue would be to stay in his present home and use the new one as a rental.

Beyond those main goals--furthering his career and reducing his taxes--Beale has other financial concerns. He'd like to build up his cash reserve, which now barely amounts to $1,000. "I spend fairly heavily each month on clothing, other purchases, and dining out," he says. "In fact, I rarely cook."

Moreover, Beale wants to beef up his investment practices. He's currently putting 15% of his pay ($650 a month) into his 401(k) plan, where he holds several Vanguard funds, mainly large-company stock vehicles. He hopes to put another $2,000 into a Roth IRA this year. He already has $4,800 in a brokerage account and invests aggressively in a small-company mutual fund and some biotech stocks.

THE ADVICE

Beale would like to have it all: an M.B.A., higher pay, lower taxes, cash on hand, and a comprehensive investment plan. To help make it happen. Walt L. Clark, president and CEO of Columbia, Maryland-based Clark Capital Financial L.L.C., offers these recommendations:

* KEEP THE DAY JOB

"His company has indicated it would pay a total of $10,500 toward an M.B.A. program, so I would recommend that Mr. Beale attend school part-time," says Clark. "By maintaining employment with the company, he would keep his company car, eliminating expenses such as car insurance and car payments. If he decides to attend a school with higher tuition, he should use a home equity loan to finance the additional expenses rather than a student loan, because the interest from a home equity loan would be tax-deductible."

* BUY, THEN RENT

For even more tax savings, Clark suggests that Beale buy a more expensive home with a larger mortgage to increase his interest deductions. "If possible," says Clark, "he should rent the existing property. From what I understand, the current rent for such a home in that neighborhood will be around 40% higher than his existing mortgage payment. If he nets an additional $300 per month, this amount could be used for additional investing or to help pay tier graduate school expenses."

* SAVE AND INVEST

"Mr. Beale now spends $400 per month dining out and $300-$500 a month on clothes and discretionary spending," says Clark. "To [accrue] additional capital for [his cash] reserves and to pay off his credit card debt, I would suggest reduce dining expenses to no more than $200 per month and [reduce] clothing expenses to no more than $200 per quarter. This approach will save an additional $600-$700 per month, which could be used for cash reserves and debt reduction."