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Staying ahead of the game: the Lewis family is changing its spending habits to make it through a temporary loss of income.

THE HONEYMOON MAY BE OVER FOR Aaron and Erica Lewis of Detroit, but the couple is still enjoying the fruits of the financial labor they put in before they said "I do." Married since March 2003, the Lewises own three homes and $30,000 worth of equity investments. Aaron and Erica, both 25, are much further along than most people their age and that's because they began discussing their finances six months into the relationship. "We ended up pulling each other's credit reports and writing down what our goals for the next five to 10 years were," says Aaron, a sales rep with an office furniture manufacturer. Through experience and education, the couple learned that they needed to be aggressive and proactive about reducing their debt and increasing their savings and investments.

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.

THE ADVICE

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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Article Details
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Title Annotation:Family Fitness Contest Winner No. 54
Author:Brown, Carolyn M.
Publication:Black Enterprise
Geographic Code:1USA
Date:Jan 1, 2005
Words:1129
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