Financial strategies change at various stages of life. To illustrate the differences, here are strategies for five hypothetical families. Financial planners and accountants Thomas Gau of Torrance and Michael Blue of Woodland Hills developed the strategies, assisted by Times staff writer Carla Lazzareschi. Both Gau and Blue work on a fee-only basis, and don't earn commissions for selling products. The strategies assume that all families live in Southern California, with its high living costs and incomes.
Family status: Single worker. Age 28. No children. Renter.
Current income: $25,000.
Future earning prospects: Better than the rate of inflation.
Attitude toward risk: Comfortable with some risk.
Current assets: Automobile worth $5,000; $2,500 in bank account.
Investment goals: Set aside money for future home purchase, possible marriage. A nice vacation.
Open an individual retirement account or join a 401(k) savings program.
Start an austerity program by trimming all unnecessary spending and paying off all consumer credit cards. Put savings into bank account or money market fund.
Start looking for a friend or relative with whom to share a home purchase.
It would probably kill this person to learn this, Blue says, but he or she is in the maximum possible tax bracket. "He's in the same boat as the millionaire and has a whole lot less to enjoy," Blue says.
This person's primary objective, Blue says, should be to shelter some income from taxation. Because he earns $25,000, this person is eligible to contribute up to $2,000 annually to an IRA and deduct the full contribution from his taxable income. Blue says the $2,000 contribution, which also accumulates earnings on a tax-deferred basis, will save this person $660 in taxes come April 15.
The next step should be a home purchase. Because of income constraints, this person is probably going to need assistance coming up with a down payment, particularly in Southern California. Sharing home ownership with a good friend or relative is often a good approach for the first home purchase.
Family status: Married couple, both full-time professionals. Both aged 32. One child. Renters.
Current income: $80,000
Future earning prospects: Far better than inflation.
Attitude toward risk: Willing to accept some risk, but want balanced portfolio.
Current assets: Automobiles worth $30,000; stocks worth $4,000; savings account of $3,000.
Investment goals: Buy a house and save for college education for one or more children.
Make sure all insurance needs are met. This includes medical, as well as life, auto and disability, if not provided by employer.
Get on a firm budget. Trim spending, pay off credit cards. Start an aggressive savings program.
If stock holdings are not a part of an IRA, sell and put proceeds into a money market account or mutual funds.
Because they rent and have few deductions, this couple is in the top tax bracket and probably pays close to $27,000 of its $80,000 gross income in taxes. That doesn't leave much left for savings, especially with high Southern California rents and child-care costs.
This couple's top priority, Gau says, should be buying a house because it provides physical shelter and a tax shelter. Saving for sending Junior to college should be put on the back burner until the first goal is met.
To buy a house, this couple clearly must try to save more money. That means aggressively cutting spending on discretionary items such as eating out, expensive vacations, clothing and the like.
If possible, this couple should consider asking a family member for a loan to make a down payment. In addition, the couple should consider selling stock holdings and putting the proceeds into a money market fund or short-term certificate of deposit.
"When you're saving to buy a house, you can't afford to have your nest egg in something like stocks where the principal is at risk," Gau says.
MIDDLE-CLASS, MIDDLE AMERICAN
Family status: Married couple, both aged 39. One full-time worker; one part-time worker. Two children, aged 8 and 12. Homeowners.
Current income: $60,000
Future earning prospects: Will keep pace with inflation but unlikely to exceed it.
Attitude toward risk: Not comfortable with much risk.
Current assets: Vested pension rights; $30,000 in mutual funds; $10,000 in money market fund; $10,000 certificate of deposit; $40,000 in home equity.
Investment goals: Save for children's college education and couple's retirement.
Except for home mortgage, pay off all consumer debt.
Check all insurance needs. As they get older, this is especially important.
Consider buying a universal life insurance policy to save for the children's education.
Consider putting some assets into the children's names.
When the certificate of deposit matures, put proceeds into zero coupon municipal bonds, a debt-free real estate limited partnership or even Series EE U.S. savings bonds.