... And nephew makes four.

The Fosters try to plot the finances of a growing brood

"Where there's a will there's a way" best describes Kelvin and Michelle Foster. The new year ushered in some challenges and changes for the Houston-based couple--a new baby girl and a two-story family home. They are also seeking legal guardianship of their 10-year-old nephew, Gary Robertson, whom they've been caring for during the past five years. Their daughter, Dominique, is now six months old.

The Fosters are living on one salary of $81,228 (after taxes) for the time being. Michelle decided to give up her job as a paralegal with a prestigious law firm to spend more time with her daughter. (She plans to go back to work this year.) Fortunately, the decision proved to be less of a drain on the family's cash flow thanks to Kelvin landing a higher-paying job as a senior associate with a Houston financial services company.

Currently, the couple has nearly $30,000 in savings and investments. "We established a debt reduction plan right after we got married [in 1994]," says Kelvin, 28. "The idea was to pay off our debts and use the money to buy a home. But we wanted a professional financial advisor to help with the big picture--determining how much life insurance we needed and calculating the costs of our money today to meet retirement needs tomorrow."

Kelvin has about $7,000 sitting in a 401 (k) account at his previous employer, Sybase Inc. This month, he'll be eligible to start contributing to his current employer's 401 (k) plan and the company's stock option plan. Michelle has about $7,200 in a defined contribution plan that she can't touch until retirement or age 65. Together the couple have $8,000 worth of shares in four technology companies: Sybase (Nasdaq: SYBS; through an employee stock plan), America Online (NYSE: AOL), Earthlink (Nasdaq: ELNK) and Mindspring (Nasdaq: MSPG).

The couple has had to ride out the tsunami of tech stocks. "We decided we could assume more risk and be more aggressive investors because of our age," says Kelvin. "So, our initial buys were technology and Internet stocks. Soon after we purchased shares in Earthlink and Mindspring, the market took a dive. But we just stuck it out."

In addition to saving for an early retirement--at age 50--the couple is concerned about saving for Dominique's and Gary's college educations. Right now the Fosters have enough cash flow to contribute to their daughter's college fund. But until the guardianship process is over, the Fosters will have to put off saving for Gary's college education.

Kelvin is quick to point out, "We have always figured our nephew into our costs and whether we get legal guardianship or not, we will factor him into our future financial plans and goals."

Financial Snapshot: The Fosters

Household Income (after taxes)   $ 81,228(*)

Household Expenses                 68,640

Investment Portfolio               29,200
  401 (k)                          14,200
  Savings (bank accounts)           4,000
  Stocks                           11,000

Debt/Liabilities                  157,600
  Mortgage                        150,000
  New Car                           7,600

(*) Assumes prorated 1999 salary

Expert Advice

Financial expert: Cheryl Creuzot, president of the Financial Strategies Group in Houston.

Her strategy: help the Fosters achieve three primary objectives: (1) buy a home, (2) better manage their cash flow in order to retire some existing consumer debt and (3) set up a retirement fund as well as a college fund for their daughter.

Creuzot recommends that the couple secure a 75/20/5 mortgage, which comprises a base loan that is 75% of the amount on a 30-year fixed rate mortgage, a second loan that is 20% of the amount on a 15-year fixed rate mortgage and a 5% down payment from the Fosters. "The rationale was for them to avoid PMI (private mortgage insurance), which is a cost that the buyer pays if he or she isn't able to make a down payment of at least 20%," says Creuzot. "It runs between $700 and $1,000 a year, and it's not tax deductible."

After taxes and household expenses, the Fosters have about $12,000 in disposable income. The next step is to retire $5,000 in existing debt, says Creuzot. That frees up $7,000 for savings and investments. By consolidating their credit card bills, Creuzot says the Fosters can save at least $1,000 a month, which they can add to their savings.

Some of Creuzot's further recommendations:

* Build up cash reserves. The Fosters should sock away three months' worth of living expenses in a money market account.

* Increase insurance coverage. Kelvin should buy a $400,000 variable universal life insurance policy and $300,000 of convertible term life insurance. This will cost a total of $200 a month to finance. Michelle should buy a $275,000 variable universal life insurance policy, which will also cost about $100 a month.

* Invest for children's college education. The Fosters should start Dominique's college savings by investing in a large-cap growth fund. By the time Dominique reaches 18, tuition at the University of Texas--from the freshman year to the cap-and-gown ceremony--is projected to be nearly $202,000, assuming a 7% rate of inflation. To reach this goal, the Fosters need to start saving $100 a month (increasing to $213 a month as their cash flow improves) and earn a 10% after-tax return.

* Make contributions to a 401(k). Kelvin should contribute to his company's 401(k) plan as soon as he becomes eligible. Because his cash flow is limited, he should start deferring 3% of his salary (the minimum allowed to take full advantage of the company match), but the goal is to get him up to the maximum deferral, or 12% of his salary. He should roll over the money from his old account into the new one.

--C.M.B.3