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Squeezing out a savings plan from a tight budget.

With their first child just over a year old and a second due next month, Ralph and Vivian Baker, like many young parents, are thinking about their children's education. And like many parents who are disenchanted with public schools, the Bakers are considering private schools.

"If we could find a Christian school, that would be ideal," Vivian says. "Some of the public schools are good, but Georgia ranks pretty low in national educational rankings [with regard to the lack of funding]." But private schooling means money--lots of it.

An even greater financial burden on the Bakers will be the cost of sending their children to college. By the year 2008, tuition, fees, books and room and board at a four-year public college will cost about $104,934. The cost to attend a private college for four years will skyrocketto about $200,217 by that time.

The couple, from the Atlanta suburb of Mableton, realize they will have to salt away a fortune to meet the goal of educating their children. That means they must budget, cut back on their credit card use and devise a savings plan now, before 18-month-old Matthew is ready to enroll in preschool and their second child begins to walk. "We'd like to do something for our retirement, too," Ralph adds. To live comfortably in retirement, the couple, both 32, may need to save at least $2,500 a year until then.

The only retirement savings the Bakers have is their company 401(k) plan, which they just began contributing to this past January. Both Vivian and Ralph work for the long-distance carrier MCI Corp. In fact, that's where they met before marrying three years ago.

Ralph, with the company seven years, is a support consultant, handling MCI's national accounts. Vivian, at MCI six years, is a senior customer service professional. Together, they earn a little more than $70,000 annually. Ralph makes $42,756, and Vivian about $30,000. Monthly, they net $4,100.

Working at MCI has helped them realize a few of their financial dreams. Thanks to a stock-purchase program, they were able to pay for their wedding and make the downpayment on a new$34,000 house.

However, those expenses wiped out most of their savings, leaving them with only $1,000. Their savings are split between the MCI stock option and the 401(k) plan. With a second child on the way, the Bakers are more determined now than ever to add cash as quickly as possible to their savings program.

But finding the money to meet their financial goals won't be easy unless the Bakers change their spending habits. "We feel squeezed," Vivian says, "but we both have good incomes and we should be able to put aside more than We do."

In addition to their salaries, the Bakers net $3,500 annually from an apartment complex in Buffalo, N.Y., that Ralph owns with his brother. Right now, that income is used to improve the rental property.

The couple's expenses are not atypical of many middle-income families, but they still need to expand their disposable income. Their mortgage payment is $853 every month. Since they are tied to a 30-year, 10.5% fixed-rate mortgage, that cost won't change unless they refinance. Utilities add another $269 every month for a total of $1,122, or 27% of the Bakers' take-home pay.

Suburbanites need cars, of course. The Bakers have two: a Jeep Cherokee and a Volvo. The car notes and insurance for the two automobiles total about $780 a month, with four years left to pay off the Jeep and six years for the Volvo. Ralph and Vivian spend about another $100 each month on gas.

Aside from lunch, the Bakers haven't eaten out much since Matthew was born. Ralph has taken to brown-bagging it at work sometimes. They spend $350 a month for food, including lunches and groceries.

Because Vivian will continue working after the baby is born this fall, aside from a three-month maternity leave, the couple will have to pay about $828 monthly for day care.

Then there's $95 a month they pay for the life insurance policies on each other, which jointly provide $1 million in coverage. And the couple tithe (10% of their net income) to their Methodist church. Clothing and entertainment expenses-which now mean maybe a movie and dinner out once a month --are at a minimum.

Going out on the town may be only a memory, but Ralph and Vivian still cling to the American Express card motto: "Don't leave home without it."

The Bakers know that they charge more than they should. This is the expense that Ralph is trying to cut, because he realizes that until they are out of debt, he and his wife will have little chance to save.

Indeed, Ralph and Vivian can't always recall what they bought with those shiny green rectangles, aside from an annual vacation charged to the revolving sign-and-travel portion of their American Express account. It's not unusual for their charge card--which unlike bank credit cards must be paid in full every 30 days--to end up costing $800 some months.

The Bakers also carry $5,300 in debt on their MasterCard and Sears credit cards; This costs about $280 a month. An $8,400 bank loan, costing $262 a month, won't be paid off until the end of 1995. "We've tried paying some of that off in bigger chunks" Ralph says, "but then our everyday expenses become really tight."

Still, as they attempt to create a budget, the Bakers do have some positives to fail back on. Each month, $255 is deducted from their paychecks for company-sponsored investment plans. They invest 50% of the 401(k) money in an aggressive growth fund, 25% in a fixed-income fund and 25% in company stock.

That amount may not sound like a lot, but the fact that they participate in a savings plan and divvy uptheir small stake is a great start.

Besides, the Bakers are not afraid of investing. They're willing to take on some responsibility and risk with their money. Indeed, the couple has started to follow the prices of stocks and mutual funds in the newspapers. That may be a simple step, but it's one that everyone is prepared to take.


Budgeting and saving is hard for people who have never done it. But spurred by the upcoming new addition to their family, the Bakers are ready, willing and able. Financial planner Charles Ross of Atlanta offers the following game plan.

Create a budget. Ross, host of the nationally syndicated radio show "Your Personal Finance," says: The Bakers should put down in black and white how the family pie gets divided, Printed budget workbooks are available at K-Mart, Sears or any number of outlets.

Build a cash reserve for emergencies. Set aside at least three months of expenses or about $12,000. To do this, the Bakers should stop investing $255 per month in the 401(k) and instead put that money into a money-market fund. The yield--about 3.5%--won't be high, but this is money for a rainy day where easy access and safety are paramount.

Reduce debt. Payments on the Bakers' bank debt and credit cards total 13% of their net income. A safer figure is 5%. Ross offers tough, but simple advice on how to do this: "Leave the credit cards at home."

Reduce transportation expenses. The cost of the two cars is 21% of the couples' net income; ideally, it should be no more than 15%. Ross suggested they trade in one car for a cheaper, used model.

Save for college. Ross recommends that Ralph and Vivian start a college fund for the kids by spiriting away $20 a week in a conservative growth mutual fund yielding about 10% a year. In 15 years, they will have earned $35,000. Ross recommends the no-load Nueberger & Berman Partners Fund.

Follow through on a savings plan. It is important that the Bakers keep updated and accurate financial records. This will make it easier for them to adjust the investment mix in their portfolio to accommodate changing times.

As the Bakers acquire more free cash by lowering their debt, they'll have the flexibility to manage and further develop their savings plans.

They also might consider refinancing their mortgage, since the current 30-year fixed rate is 8.5%. This option would be especially attractive if their lender offers reduced closing costs.

Rather than preparing their own tax returns, Ralph and Vivian might also find new ways to save by paying $50 to $100 for a professional tax preparer. Of course, they already know one tax fact: This year, come November, they'll be able to claim an extra deduction. TABULAR DATA OMITTED
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Author:McNatt, Robert
Publication:Black Enterprise
Date:Oct 1, 1992
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