Increasing earning power through education: the Richardsons have a financial curriculum that includes advanced degrees and greater investments - Financial Black Fitness Enterprise Contest Winner No. 45

Black Enterprise, March, 2004 by Carolyn M. Brown

Rafael and Janice Richardson of Montgomery, cAlabama, have dedicated their lives to education. The young couple--he's 32 and she's 34--are both teachers. Up until last September, the Richardsons had a household income of $82,000. But since Rafael left his job as a high school science teacher to pursue a doctorate in educational leadership fulltime, the two now rely on Janice's $35,000 salary as a primary grade school teacher.

"Once I complete my Ed. D. in another three years, I'll be able to teach at the college level," says Rafael, who anticipates a $15,000 increase in his salary, raising him to almost $65,000. Janice has a master's degree and is considering pursuing her educational specialist certification in the hopes of bumping up her salary as well. If she decides to get that certification, it would mean an additional $1,400 per year in tuition that they would have to pay out. A $15,000 annual fellowship is helping offset the costs of Rafael's education. (His tuition, fees, and books run about $2,500 per semester.)

Meanwhile, the couple must find a way to pursue higher learning while building up their retirement savings. Right now, they have about $14,800 in retirement savings from their IRAs and 403(b) accounts. They're also concerned about their debt, particularly since Rafael is debt-averse. "In college (undergraduate), I ran up $3,000 in credit card debt. I got behind on my payments. It was a terrible experience having creditors hound me," he says.

The Richardsons would like to reduce their debts by paying extra on their balances. They owe about $1,000 in credit card debt, $12,000 on what's left of a home equity line of credit, $22,600 in student loans, and $175,000 on their house note. When the couple recently refinanced their mortgage, they were able to roll over a prior home equity loan ($30,000 for home repairs) and the majority of a home equity line of credit ($33,000) that they'd taken out to buy a 2001 BMW. "[With the home equity line of credit], we got a lower interest rate--4.5%. Plus we could write it off on our taxes," explains Rafael. "That was a better deal than taking on a new car payment."

The Richardsons add, "We are very conservative at this stage in our lives." Married seven years, the couple plans to have children down the road. Beyond saving for retirement, they are already thinking about building generational wealth.

THE ADVICE

Financial adviser Cheryl Creuzot, president and CEO of Wealth Development Strategies in Houston, notes that in terms of budgeting and cash flow management, "the Richardsons have done an excellent job holding down their spending." However, she adds, "they don't have the wherewithal from a budgetary standpoint to do a whole lot of saving because he is not working right now."

To aid the Richardsons in developing a financial plan, BLACK ENTERPRISE paired the couple with Creuzot.

The following are her recommendations:

APPLY FOR GRANTS AND SCHOLARSHIPS. Even with the $15,000 fellowship, Creuzot says Rafael needs to explore other options to pay for school. He can check with the Council of Graduate Schools (www.cgsnet.org/ResourcesForStudents/fellowships.htm; 202-223-3791) and the National Association of Student Financial Aid Administrators (www.nasfaa.org; 202-785-0453).

MAINTAIN A CASH RESERVE. The Richardsons currently have $11,400 in a money market account. Most planners like their clients to have three to six months worth of living expenses saved up. The Richardsons' monthly expenses are relatively low at $2,200, therefore, six months of living expenses would equal $13,200. Creuzot says the couple should pay off the $1,000 credit card debt with half of their cash prize winnings and add the other $1,000 to their reserve.

FOCUS LESS ON DEBT. Creuzot says there is such a thing as being debt averse to a fault. The Richardsons should employ additional monies toward growth and retirement opportunities instead of accelerated debt reduction. Because they are in a low tax bracket (15% marginal and 10% effective tax rate), every dollar of interest they're paying is really costing them 90 cents. Creuzot says Rafael made a smart, one-time move by consolidating his $22,600 student loan debt (undergraduate and graduate) to get a low rate of 4%. Since he gets to deduct the interest, he's paying 3.6% after taxes. Also, the couple recently refinanced from 6.88% to 5.875% on a 30-year fixed mortgage, saving $300 monthly on a home they built for $125,000 that has increased in market value to $275,000.

TAKE TAX CREDIT. Rafael should deduct the interest on his student loan. He can also take advantage of the academic costs he is incurring by using the $2,000 Lifetime Learning Credit available to graduate students beyond the first two years of college or professionals attending classes parttime to improve or upgrade their job skills. IRS Publication 970 and Form 8863 offer complete instructions (www.irs.gov).

READ JUST RETIREMENT GOALS. The couple wants to retire early--age 55. But in order to do that, they would need to save $19,000 a year. That's not plausible at this point nor once Rafael re-enters the workforce, says Creuzot. She recommends that the Richardsons retire at 60. This is more realistic since they are in their early 30s, still pursuing their education, and planning to add children to the mix. If they retire at 60, they would only need to save $11,000 a year.