Staying ahead of the game: the Lewis family is changing its spending habits to make it through a temporary loss of income.
The Lewises decided that one way they could amass wealth was through real estate and they started with the goal of buying one property a year. But over the past 12 months, they've liquidated about $20,000 in stock and put down 0% on their first home, 5% on a second, and 10% on a third, where they currently reside. The couple rents out their first and second homes. Their first home has a $131,000 mortgage at 4.5% interest, their second has a $102,000 mortgage at 6.75% interest, and the third home has a $92,000 mortgage at 7.5% interest.
Aaron and Erica's liabilities include $31,000 in student loans and $6,300 in credit card expenses from two credit cards they used for the second and third properties. Erica drives a 2004 Toyota Camry, which she leases for $322 a month, and Aaron drives a Ford Escape company car.
They were both employed full time until last fall when Erica decided to go back to college to get a second bachelor's degree in language, with a concentration in Spanish. As a result, their gross household income dropped from $90,000 to $52,000. But the couple was smart enough to plan ahead.
Before Erica left her job as a trainer for a wireless telephone company, which she'd held for seven and a half years, Aaron had suggested that they do a test run and see what it would be like to live on just one income. "Aaron didn't want us to stop cold turkey and be faced with him suddenly paying all of the bills," says Erica.
Over the course of four months, the Lewises used Aaron's salary for their monthly house-hold expenses and saved Erica's--a portion of which was used to pay for her first semester. Erica is looking into scholarships and financial aid to cover tuition costs and at the time of this writing, she was in the process of starting a business--E. Camille & Assoc.--and opening a home office to offer language translation and interpreting services.
BLACK ENTERPRISE had the Lewises consult with Pierre Dunagan, principal of the Dunagan Group in Chicago, to fine-tune their financial plans, especially for the next 11 months while Erica is attending college. Dunagan thinks the Lewises set a great example for married couples because they are of like mind when it comes to investing and saving. Dunagan points out that once Erica re-enters the workforce or has begun to generate revenue from the home office, the pair will need to focus on putting her income toward reducing debt and acquiring more real estate and equity investments. He also gave the following advice.
Rebuild a cash cache. The Lewises used a lot of their cash savings to acquire their third property, so they need to begin setting aside money on a monthly basis for an emergency fund. Since their monthly expenses amount to about $2,310, Dunagan suggested that they save around $7,500 toward that goal. He also suggested that they use their $2,000 Financial Fitness Contest cash prize as a starting point, putting the funds in a money market account.
Rent out their first home. Dunagan thought the couple made a smart move when they moved out of their first home and into their third, which has the most equity and the lowest mortgage payment. But if they sold their first home now, "all they would pretty much do is break even," he says, explaining that "in the last year [or so], since the time they purchased the home, it has not appreciated enough for them to sell it." Therefore, Dunagan suggested that the Lewises continue to rent it out for no longer than a year. This will give it time to appreciate as well as generate positive cash flow. Then at the end of that period, they should put the house on the market in anticipation of the next spring and summer buying season.
Dunagan reasons that after the Lewises have built up their emergency savings and sold their first home, they can begin looking for another property that would provide them with some extra money to pay down their student loan debt.
Roll over 401(k) and relocate assets. Erica has $20,000 in a 401(k) from her previous employer that she has yet to roll over. Dunagan suggested that she put those funds into a traditional IRA. She also needs to reallocate the assets in her retirement account. Dunagan recommended placing 50% in a large-cap stock mutual fund, 25% in a growth-stock mutual fund, and 25% in a small-cap aggressive-growth stock mutual fund. At Erica's age, and with her high risk tolerance, Dunagan reasons she can afford to go through many market cycle fluctuations.
Purchase additional life insurance. Aaron has a $100,000 life insurance policy through his job and two $1,000 dollar policies through his credit union. Dunagan advised him to get a $300,000 term life insurance policy to replace his income if something were to happen to him. He advised Erica to take out a similar life insurance policy on herself after she starts working again.
The Lewises should then raise the limit of both life policies to $500,000. Considering their ages, term insurance should be fairly inexpensive, says Dunagan, adding that they should also consider getting disability insurance, especially if Erica intends to run a home-based business.
Financial Snapshot: Erica & Aaron Household Income $52,000 ASSETS Checking $100 Savings $200 Market Value Home (1) $136,000 Market Value Home (2) $110,000 Market Value Home (3) $120,000 His 401(k) $20,000 Her 401(k) $20,000 IRAs $1,200 Mutual Funds $6,000 Stock $3,300 Total: $416,800 LIABILITIES Mortgage Home (1) $131,000 Mortgage Home (2) $102,000 Mortgage Home (3) $92,000 Credit Cards $6,800 Student loans (hers) $20,000 Students loans (his) $11,000 Total: $362,800 NET WORTH $54,000
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|Title Annotation:||Family Fitness Contest Winner No. 54|
|Author:||Brown, Carolyn M.|
|Date:||Jan 1, 2005|
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