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N.Y. couple can't save
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August 16, 2001: 8:46 a.m. ET
Thirty-something family should budget and diversify their assets, experts say
By Staff Writer Shelly K. Schwartz
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NEW YORK (CNNfn) - On the surface, Marybeth and Phil Grieser appear to be doing fine.
The Hicksville, N.Y., couple pay their mortgage bills on time, they purchased a new car earlier this year, and they've managed to tuck away a little something for themselves and their two young sons. Trouble is, they feel they can't get ahead.
"We are not saving anything," Marybeth said. "We don't go out to eat. I pay the bills and it just seems like that's it."
Top on the Grieser's list of financial priorities is to save enough for their kids' college education. Next comes the nest egg.
To that end, Marybeth, 32, is pursuing her bachelor's degree in nursing through a home-study program in the hopes of becoming more marketable when she returns to work full-time. She now earns $20,000 per year working 15-hours a week at the hospital.
Phil, a plumber who commutes into Manhattan daily, brings home about $65,000 per year.
They each contribute 10 percent of their salaries into tax-deferred 401(k)s. Phil's account, which is invested in a Scudder Kemper investment fund, is valued at about $20,700 with nearly all of it in cash reserves. Marybeth's is worth $30,000 – with 30 percent of it invested in the Vanguard Inst Index fund, 60 percent in Vanguard U.S. Growth, and 10 percent in Vanguard Wellington.
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But those aren't their only assets.
The Griesers also have a $50,000 whole life insurance policy on Phil with a cash value of $4,330 and a $25,000 whole life policy on Marybeth with a cash value of $1,400. They have $1,500 in the New York State College Savings Program for their 4-year old son, another $1,300 stashed away for him in a savings account and an additional $800 in the Invesco Dynamic Fund.
Their 10-month old son, Kevin, has a similar college savings plan valued at $1,500, and a savings account worth $1,200.
The Griesers also hold a small portfolio of individual stocks including: Bank of New York (BK: Research, Estimates), valued at $2,900; Home Depot (HD: Research, Estimates), worth $4,000; MetLife (MET: Research, Estimates), valued at $1,500; and FTCHX mutual fund valued at $415.
And then there's the debt.
They have $99,000 left to pay on their $250,000 home, plus $29,500 for a home equity loan. They owe $10,000 more on their car loan and have $2,500 in credit card debt.
"I can't seem to save at the end of the month," Marybeth writes. "What are we doing wrong?"
What the planners say
It's no wonder the Griesers feel overwhelmed by their finances, said Phil Cook, a certified financial planner and head of Cook & Associates in Torrance, Calif. They haven't done their homework, he said.
"The very first thing you should do is sit down and work on creating and implementing a budget," he advised. "You don't have a detailed grip on where all of the money is going."
Cook suggests the Griesers create a category for savings within the budget they create, finding ways to reduce their cash outflow in other categories, including groceries and entertainment, until they have enough left over to meet their monthly needs.
Once that's complete, their first order of business should be eliminating credit card debt.
"From this day forward, do not charge anything on the credit card that cannot be paid off at the end of the month," Cook said, noting they should destroy all but one card.
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At the same time, David Bermann, a CFP with Wealth Advisory Group in Marina del Rey, Calif., said the Griesers need to boost their cash reserves for emergencies – which now stand at $3,000.
An easy way to get there from here, he notes, is to "tax manage" the sale of their existing individual stocks, the proceeds of which could be dropped into a liquid savings account – like a money market fund – that provides a small but steady return. A Roth IRA would do the trick as well, since they can be tapped in case of emergency before age 59-1/2.
"In your cash flow situation, this might be a good tool to store those emergency funds so that the earnings thereupon are never taxed," he said.
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Planners say the Griesers should focus on building an emergency fund | |
Cook, who agrees the Griesers should leave individual stock picks to the pros, recommends a different strategy. According to him, the couple should build their rainy day fund gradually by funneling a little extra money each month into an account until it reaches at least $8,000. They should direct the proceeds from their stock sale, he said, into a mutual fund account instead.
Diversification drill
As for their nest egg, Cook and Bermann agree the Griesers are on the right track. But they note their asset allocation should be addressed.
"You are to be commended for aggressively putting money into your 401(k) accounts," Cook said. "Do not stop doing this."
He said, however, that Marybeth's account is 90 percent allocated to large-cap growth funds and 10 percent in large-cap value – an unbalanced mix. A closer look reveals, too, that her Vanguard US Growth Fund and Vanguard Wellington Fund, which comprise the bulk of her retirement investments, hold 71 percent of their total value in the same stocks.
For a more comprehensive analysis, check out our weekly Portfolio Rx column. Click here to go to CNNfn.com's 401 (k) and pension-plan page.
They should allocate their portfolio as follows for optimum diversification: 5 percent real estate, 15 percent international stocks, 30 percent mid-cap, 35 percent small-cap and 15 percent large-cap.
Phil would be wise, too, Cook added, to move his Roth IRA from its current cash position into equities through a trustee-to-trustee – a growth mutual fund might be appropriate.
Safety net
When it comes to owning insurance, the Griesers are dangerously under-insured.
Cook said a life insurance policy on each of them for $250,000 or more is close to the appropriate amount. And he said a 20-year or 30-year level term policy with a guaranteed premium is advised.
Disability insurance also is important. At present, if Phil were unable to work for longer than a year, the Griesers would be forced to sell their house.
"You will find it somewhat pricey and, perhaps, difficult to find given your husband's occupation, but it is a substantial risk that should not go unevaluated," Bermann said.
The road to higher learning
Lastly, Cook said any new money earmarked for college costs, including the cash now in their kids' savings account, should be invested in a 529 state sponsored tuition plan, since the earnings become tax-free if used for qualified educational expenses.
He stresses, too, they should each draft a will. Without it, in some states including California, the court decides who will be the guardian of their children and their assets.
And while they're at it, the Griesers should have their attorney draw up a durable power of attorney (DPOA) giving them the right to make financial and health-related decisions for each other in the event they are unable to make those decisions on their own.
Failure to do so could cause unnecessary financial or emotional hardship. 
* Disclaimer
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