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Getting back on track.

It was just 23 days after the 1989 San Francisco earthquake when Mary and Calvin Ransom moved into their first home on Oakland's east side. In fact, "we rushed over to the house a few weeks early to make sure there wasn't any extensive damage," Calvin recalls. Who could blame them, since their new neighborhood was roughly 15 miles from the Bay Bridge, whose collapsed upper deck, flashed on TV screens nationwide, had become a dramatic image of the earthquake's devastation.

The three-bedroom bungalow survived the quake, all right. But taking a look at the Ransom's finances, it's clear that their worries are hardly over: the house itself has them all shook up. Since they unpacked, it has been a virtual "money pit," eating up $15,000 in extensive renovations. Even so, the couple expects to spend another $8,000 on additional upgrades, including a new roof "We believe that the improvements will eventually make the home more salable," explains Mary.

Ordinarily, such home repairs might indeed be a smart move on the Ransoms' part, especially since both have backgrounds in architecture and home renovation. And if all

The ransom family must goes as planned, once they've fastened the last bolt, the Ransoms, both 40, estimate that the alterations will have vaulted the home's value to $169,000, nearly 50% more than their initial investment.

Play cacth-up in the race Frankly, though, the cost of remodeling has become a major financial strain. For one thing, the Ransoms and their two children are living off one paycheck. Calvin, who works in the Architectural Services Division of the City of Oakland's Office of Public Works,

For financial security. has a salary of $51,383. After the birth of the Ransoms' second child, Amadi, in 1989, Mary left her design position with the city to work full-time at ARC-3 Consultants, a drafting and design firm she set up in 1985. Unfortunately, business for her one-person practice, specializing in home remodeling and renovations, has earned only $5,000 to $13,000 annually.

Such circumstances make for a frugal lifestyle: Calvin spends modestly on his wardrobe; they can't afford to frequent pricey restaurants; and vacations outside the state are a rarity. Despite the sacrifices,the Ransoms are satisfied with their decision that Mary should stay at home, although it cut their comfortable $65,000 combined income (in 1987) by 15%. "I plan to spend as much time as I can with my children until they enter school full-time," explains Mary, who enjoys spending time with Asha, her five-year-old daughter, and three-year-old son, Amadi.

A close-knit bunch, the Ransoms eat dinner together every night - a true feat for today's modern family - precisely at six o'clock. Playtime is always a family affair, as are backyard cook-outs and camping trips. The downside to such parental bliss is that devoting most of her time to the kids has given Mary little time to nurture her business. ARC-draws 3 about 10 projects a year, so unless the Ransoms are willing to put more time into growing their fledgling firm,they will continue to be in a tight squeeze. At their age, and with two children, Calvin and Mary must play financial catch-up - and quickly.

They've already had one financial false start. Shortly after they were married back in 1985, the couple purchased two $100,000 variable life insurance policies from a relative. Four years later, with their second child on the way, they upped the values to $250,000. "But the policies never earned more than 8%," laments Calvin, even though that's a fairly typical rate for such products. Unfortunately, the Ransoms learned by trial and error: No one should buy insurance strictly as an investment or savings vehicle. Meanwhile, the family let Mary's policy lapse, since they were unable to afford the $100 monthly premium. Calvin's policy has been converted into a $250,000 term policy.

The couple, like most Americans, have bowed to the temptations of plastic. Right now, the Ransoms have decided to pay the minimum monthly balances on two Visas (at 15.7% and 14.7%, respectively). The result is a total tab of $4,062 - some of which went straight to the remodeling money pit. Other bills they can stay on top of include their $821 monthly mortgage payment, plus the $2,060 that Mary owes on loans from her graduate studies at the University of California at Berkeley (six years to go at 6%).

On the brighter side, their two cars are paid for (he has a 1985 GMC four-wheel drive truck; she drives a 1978 Datsun). Also working in their favor is the fact that the city of Oakland takes care of its own: Calvin's health benefits cover the entire family, with no deductions from his paycheck.

When it comes to investments and savings, however, the Ransoms come up painfully short. Calvin has a total of $225 deducted from each paycheck: he contributes $75 each pay period to his deferred compensation program at work, while another $75 gets deposited into his 4% employee credit union account. The other $75 goes toward paying off a $5,000 home improvement loan. The only retirement vehicles the couple has is an IRA (individual retirement accounts), into which they've placed just $344, as well as Calvin's city pension. Besides these minimal set-asides, the Ransom's sole investment is a handful of Series EE savings bonds, each valued at $219 (they won't reach their 3,000 face value for another 12 years, or when their first child enters college).

There's no point in lecturing the Ransoms about their tattered financial affairs. They realize they've shortchanged their formative asset-building years - normally ages 25 to 35. Instead, they are banking on the lump-sum big payoff they expect to receive when they sell their renovated home. The Ransoms also figure that they're in a field where the biggest bucks come from developing projects such as office complexes. "We're definitely living in the red," shrugs Calvin, "but we're hoping once the business blossoms that will change."

The couple has quite a ways to go to reach those lofty business goals. First, they need to get their architectural licenses, a process that requires them to take an eight-part written and oral exam. Already, they both meet most educational and work requirements. (Mary holds a bachelor's degree in interior design from San Jose State University and a master's degree in architecture from the University of California at Berkeley; Calvin earned a five-year bachelor of architecture degree from Kansas City University.) Still, it's the license that will give them the authority to sign off on big projects - the kind they need to fuel their business. "We know that the license is crucial to our credibility," says Calvin, explaining how their decision to start a family put this goal on hold. Calvin expects to be licensed in 1994, and Mary hopes to be qualified no later than 1997.

THE ADVICE

To help the Ransoms get a jump-start on their financial future, BE had Mary and Calvin sit down with certified financial planner Lynn Ballou, president of the Ballou Financial Group in Lafayette, Calif. The good news from her assessment: The couple is indeed more fortunate than many folks, since they have, at least, managed to pay their bills. "To live on one income in the Bay area is a tremendous feat," offers Ballou. "Things could be a lot worse - they could be in horrible, horrible debt."

Yet in order to win in the tough game of financial "catch-up," Ballou seriously doubts that Mary can remain a full-time mom. "It's a matter of priorities," says Ballou. As long as the Ransoms insist on being a single-income family, she says, "they're not being realistic about improving their situation in the near future." The couple, does, however, have some options. Even if Mary is not ready for a 9-to-5 commitment, she might consider working part-time for a private design firm. By working 20 hours a week, she could earn at least $425 a week, which would help take up the slack in their personal and business finances.

She can also tap friends, family members or a baby-sitting cooperative to free up a few hours a week so that she can more aggressively pursue her license and court potential clients. As Ballou points out, the Ransoms can no longer afford to wait for referral work. They need to define their target market and energetically pursue it Such a move is more critical than ever, given California's tumultuous real estate market. To start competing effectively, Mary might even seek out a business partner to do some initial legwork.

That said, Ballou recommends several strategies to help plan a brighter future for this family of four.

Get A Grip On A Monthly Budget

Ballou says the Ransoms' net worth - their total assets minus liabilities - is disappointingly low at $25,244. That's roughly two-thirds under the $88,000 nationwide average for similar households. So, unless their income increases, this family is destined for serious monetary gridlock.

According to their own written budget, though (see chart), the Ransoms should have a bit over $1,000 a month left to save. But this is "lost money" or funds they simply can't account for. The biggest culprit is probably their endless home renovation. The only way they'll know for sure is to track their expenses judiciously each month to see just how each dollar falls through the cracks. On this score, Ballou says their home computer can help out. She recommends they try the excellent budget-tracking software package, Quicken ($49),to help solve the mystery of the lost cash. At that point, they should be able to salvage at least a few hundred dollars per month for "basic needs."

Build An Emergency Fund

At the top of their list should be an emergency fund equal to at least three months' living expenses. Even if they manage to plug their monthly cash flow leaks, explains Ballou, they'll still have to stop raiding Calvin's credit union savings. In addition, they "must defer all home upgrades until their cash flow improves." The exception is a new roof, which the couple hopes will be funded by a $6,000 contracting gig.

Increase Insurance

Typically, insurance may not be an urgent concern for financially strapped couples, but it should be, emphasizes Ballou. Having proper disability coverage is key for the Ransoms, in particular. "Calvin's income is this family's single biggest asset," she points out Because a disability of any length would surely shatter the Ransom's already fragile finances, they need to protect Calvin's earning power at all costs. Presently, his disability plan would pay just $286 a week, or less than a third of his present income in the event of serious illness or accident. Instead, he needs a comprehensive policy that would pay up to 80% of his income - one that costs a minimum of $2,000 a year. This might sound steep for a family with lean savings and investments, but it's a safety net they simply can't afford to do without. Another reason why this type of insurance is so important: Americans aged 40 are three times as likely to become disabled for at least 90 days than they are to die.

Life insurance is next on the agenda. The couple currently holds one policy. Even with Calvin's $250,000 policy in place, he needs at least $500,000 in total coverage. For roughly $765 a year, says Ballou, he could purchase a renewable $500,000 ten-year term policy from the highly rated USAA Life Insurance Co.

Living in quake-prone California, the Ransoms also need adequate homeowner's insurance to protect their castle, which represents an enormous investment. Their present $75-a-month policy is basic, covering merely the home's cash value, rather than actual replacement costs. Ideally, they should protect their refurbished home with a plan that covers "guaranteed" replacement costs (for both the home and its contents) as well as extra liability insurance for up to $1 million. Assuming their home appreciates as expected, the tab for such beefed-up coverage should cost them an additional $350 in annual premiums.

Refinance The Mortgage.

The Ransoms should consider refinancing their present $104,000 mortgage, though they lack the equity and stellar credit required for a home equity (or consolidation) loan. They'd be well advised to shop around for a 30-year fixed-rate loan with no fees and points. (Right now they pay a rate of 8 7/8%.) This approach will allow them to lock in a rate that could be two percentage points lower, and thus deduct the interest on a higher loan balance. Such a move could free up as much as another $100 a month.

Plan Now For The Future

Though every couple needs a solid plan for college savings, and retirement, the Ransoms must first satisfy the steps outlined above. Realistically, they simply can't afford to do any high-stakes, long-term investing, explains Ballou. Since the couple is banking on a more profitable future - that Mary's business will eventually succeed - they can at least begin thinking about strategies for the future.

Maintaining their current lifestyle upon retirement - at age 65, and counting income from all sources - means the Ransoms need to save $30,000 a year (assuming an average return rate of 8%). Given that Calvin's city pension and Social Security combined will probably add up to less than half of what they'll need, the Ransoms may well have to work through their seventies. And there's little chance for them to stash away significant savings in the near future. Unless, of course, their business pans out and their income rises significantly.

To gird for their golden years, then, they should place $150 a month in Calvin's deferred compensation 457 plan. Once they are debt-free, they can contribute at least 73% of the maximum ($7,500) allowed in the matching fund. If Mary is still self-employed, they might try a Simplified Employee Pension IRA or KEOGH plan. These plans, along with the current deduction of home mortgage interest, are some of the last available tax shelters left. As their finances improve, says Ballou, they can consider a mix of other investments, such as stock mutual funds and bonds.

As for college costs, the Ransoms' children, Asha and Amadi, may be largely on their own. To cover four years at a public college for Asha alone,the ransoms would need to sock away as much as $3,744 annually. Instead, the Ransoms are looking to contribute half of each child's tuition costs. To do so, they should make regular deposits into a solid growth mutual fund as soon as they're able. A good starter pick is Strong Opportunity Fund (800-368-3863), which has returned an average of 15.7% over the past three years.

Largely, though, this family's future depends on how quickly, and how seriously, Mary and Calvin are about grooming their business and expanding their professional reach. Should things improve dramatically, the Ransoms may well be able to achieve what others only wish for: living out the American Dream.
 RANSOM'S FINANCIAL SCORECARD

INCOME
Calvin $ 51,383
Mary $ 4,920

TOTAL INCOME $ 56,303

ANNUAL EXPENSES
Property Taxes $ 1,320
Property Insurance $ 2,100
Housing $ 12,432
Food $ 3,804
Auto Expenses $ 2,208
Charity $ 312
Entertainment/Activities $ 576
Clothing $ 960
Personal Loan $ 1,800
Life Insurance $ 792
Medical $ 240
Taxes (Fed, State, S.S.) $ 9,733
Miscellaneous $ 2,448
Credit Payments $ 4,125

TOTAL EXPENSES $ 42,850

ASSETS
Home $129,000
Savings $ 2,064
Bonds $ 219
IRA $ 344
Life Insurance (cash value) $ 500
Autos $ 6,175
Clothing/Jewelry $ 500
Household Goods $ 535
Other (Computer/Supplies) $ 1,000

TOTAL ASSETS $140,337

LIABILITIES
Mortgage $104,000
Graduate Student loan $ 2,060
Credit Cards $ 4,062
Insurance $ 1,692
Personal Loan $ 3,279

TOTAL LIABILITIES $115,093

NET WORTH $ 25,244

ANNUAL DISCRETIONARY INCOME $13,453
COPYRIGHT 1993 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:1993 Money Management Guide; family financial planning
Author:Brown, Carolyn M.
Publication:Black Enterprise
Article Type:Cover Story
Date:Oct 1, 1993
Words:2643
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