Better days ahead: for the Baker family, patience and discipline are the keys to financial freedom.
The young couple, both 29, are determined to see that their daughters, Safiya, 1, and Nailah, 3, are not forced into taking on staggering student loan debt like they did. "I don't want my kids or grandkids to have to graduate college and do something they don't want to do," says Bakari, who is attempting to reduce his family's debt and increase savings for his daughters' education.
Having so much debt has been somewhat depressing for Amber, especially since she started deferring loan payments three years ago to stay at home to raise her daughters. "One of my biggest hurdles right now is to stop linking my financial worth to my personal worth," she says. "I sometimes feel like I'm a bad person because I have school debt."
As a temporary fix, Amber works part time at a women's clothing store. She has put away $700 in savings bonds to fund her daughters' college education. She's also managed to pay down her credit card debt. Still, she can't seem to catch up. As the result of a few late payments, the Bakers are paying 24.9% on their $5,000 credit card balance.
With the financial constraints, earning advanced degrees seems impossible for Amber and Bakari. "I see my friends getting PhDs and other degrees and I want that, but then that would mean more debt," says Amber, who says she's looking into a master's program at the University of Louisville that pays tuition for anyone intent on teaching. The one-year program also provides a $30,000 living stipend. Amber believes such a move could lead to a significantly higher paying job.
The Bakers recently qualified for an affordable home loan program. The couple put down $2,000 to buy a two-family house, with plans to use the second unit to generate rental income. They hope to move into the home, which they had built for $237,000, by yearend.
Once the Bakers are in their new home, they plan to wait a year before researching ways to leverage the equity in the home to buy other properties. This could entail buying another house for the family to live in while renting out both units at the first house. "I want to be able to have enough money to comfortably invest for my future and my babies' future," says Bakari. "I want to create a trust for my children so that when they graduate from college they have a head start."
BLACK ENTERPRISE paired the Bakers with Gwendolyn Kirkland, managing principal of Kirkland, Turnbo & Associates in Matteson, Illinois.
Here, she outlines the following plan:
Focus on reducing debts. Kirkland says if the Bakers re-prioritize their goals and pay bills on time, they could possibly reach a positive net worth in three to five years. "College savings should be a delayed goal, more like number No. 4 on the priority list," she says. The Bakers have a positive cash flow with a monthly income of $2,400 and expenses around $2,300. Kirkland recommends that Amber return to work full time now. At her last job as a research associate at a non profit housing organization, she made $24,000. She is likely to increase her monthly financial contribution from $200 to $1,200 should she take on full-time employment. While returning to work would trigger repayment of her deferred $50,000 student loan at about $500 per month, Amber would have enough income to pay off other debt. She should negotiate a lower interest rate with creditors. Also, the Bakers should use the $2,000 contest winnings to purchase a used car to get Amber to work.
Move in with parents. When the Bakers' current lease expires, Kirkland advises they move in with Bakari's parents for six months until their house is finished. "That will reduce their living expenses and provide affordable, in-house child care because Bakari's mother is retiring and is willing to babysit," she explains. Even if he pays his parents $500 a month in rent, that would provide $400 in savings. Kirkland suggests the Bakers get an interest-only mortgage. This will reduce their mortgage payment because it will not include the principal, thus freeing up more cash for savings. Choosing this strategy means the Bakers may have to wait until their property appreciates in value over time before they leverage it to buy other properties, because interest-only mortgage payments don't build equity.
Build an emergency fund. Kirkland suggests the Bakers each save at least $100 per month. She recommends an INGdirect.com account, which is currently offering 3% interest with no minimums or penalties. Once they reach $10,000, they should diversify into mutual funds, which offer greater capital appreciation.
Contribute to 401(k) plans. "Bakari not contributing to his 401(k) was a big miss," says Kirkland. If he had contributed $100 a month for the five years he's worked, he would now have at least $6,000 plus any matching funds from his employer and interest. Over the next year, Kirkland advises Bakari to contribute at least $50 a month.
Create an estate plum. The Bakers should stop buying savings bonds or contributing to a savings account for the children until their debts (sans the student loans) are paid off. However, any cash gifts their girls receive should be deposited in a 529 college savings plan. Kirkland says a complete trust would include estate planning, guardianship, and power of attorney instructions. The Bakers need to draw up simple wills for right now. The couple has two term life policies at $130,000 each. Within the next five years, they should convert those into permanent variable annuities to build up cash. "They should take advantage of the tax sheltered annuity," says Kirkland, "and that can be tax deferred money to will to the children, or to withdraw from for college expenses."
Financial Snapshot: Bakari & Amber Baker HOUSEHOLD INCOME Bakari (full time) $38,000 Amber (part time) $3,000 Total: $41,000 ASSETS Checking $1,050 Savings 200 Credit Union 50 Government Bonds 700 Value of Car 500 Retirement Account 7,800 Total $10,300 LIABILITIES Student Loans (his) $14,000 Student Loans (hers) 50,000 Credit Card Debt 6,800 Total $70,800 NET WORTH -$60,500
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|Title Annotation:||FAMILY FINANCES: FINANCIAL FITNESS CONTEST WINNER NO. 60|
|Author:||Spruell, Sakina P.|
|Date:||Jul 1, 2005|
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