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Wall Street, California | Money Make-Over

Laying Down the Laws of Family Finance to Legal Eagles


Marriage sent a wake-up call to Bill and Kelly O'Kelly, two thirtysomethings who had allowed their spending to run amok during their freewheeling single days.

When they wed in 1995, the couple had $42,000 in credit card debt, mostly from impulse purchases, vacations and restaurants. Bill, a lawyer, had a habit of charging plane tickets to attend baseball games across the country, and Kelly, a legal secretary, would think nothing of popping over to Palm Springs on a whim.

Matrimony, however, inspired the Thousand Oaks couple to get their finances in order by cutting back frivolous spending and paying off credit card debt. No longer focused on living for the moment, the O'Kellys have committed themselves to securing their future. They're saving for retirement and building a tidy college fund for their children, yet maintaining a comfortable, not extravagant, lifestyle.

"We got married relatively late in life, and when we did, it was a mess of a financial picture," said Bill, 39. "We both make good incomes"--their combined annual gross is about $138,000--"and that led us to being undisciplined. We didn't believe in delayed gratification. But once we got married, we wanted to buy a home and start a family."

And so they did. Now the challenge for the couple is to think carefully about what their priorities are and how they will go about meeting them.

Sizing Up the Balance Sheet

"Your timing in looking for help is absolutely appropriate," said Mitchell Freedman, a fee-only certified financial planner and accountant in Sherman Oaks. "You've come to a place in your life where you want to avoid past mistakes and start a new life on a sound financial foundation."

The O'Kellys' assets include $16,000 equity in their Ventura County home, which they bought this month for $320,000 and have both first and second mortgages on. They borrowed $26,000 from their 401(k) retirement accounts--they work at the same Los Angeles law firm--to make the $16,000 down payment and pay closing costs.

Bill's father, who died last October, left Bill his Sacramento home. Bill expects to net between $17,000 and $21,000 from the property, which is now on the market. The couple also own vacant parcels in Montana and Twentynine Palms that together are estimated to be worth less than $10,000.

For retirement, Bill and Kelly have about $30,000 left in their 401(k)s and about $65,000 in various individual retirement accounts.

Their other assets include $4,500 in cash savings and two investments Bill's father gave him--about $2,000 in BankAmerica Corp. stock and $3,000 in the Prudential Utility B fund (three-year average annual return: 19%).

The couple's only other debt, aside from mortgage and 401(k) loans, is $8,000 remaining on Bill's student loan. The couple paid off their credit card debt with part of $70,000 left to them by Bill's father. (About $15,000 of that gift has gone toward making mortgage payments on the vacant Sacramento home.)

"I think the two of you are very fortunate," the planner told the couple. "You have a good, steady income, and you didn't buy too expensive a house. I also think you made a very wise investment to pay down your consumer debt from the inheritance, because it puts you on solid footing to move ahead."

They're going to need it. Their $2,600 monthly mortgage obligation, for instance, exceeds their previous rent by $1,550. After their first child is born in December, Kelly plans to take a three-month unpaid maternity leave, then cut back to a four-day workweek, reducing her pay by 20%.

The couple are considering having a second child within a few years. In that case, Kelly might scale back her work obligations further or perhaps not work at all while the children are young.

"One of the most significant issues you face is how long Kelly works," Freedman told the couple. "With Kelly working, you'll be able to put money aside. If Kelly doesn't work, it could have a significant impact on your long-term plans."

Retirement savings, for example. For purposes of illustration, say Kelly, now 35, does not work at all from age 37 through 42, and she wants to retire at age 60. Suppose further that her 401(k) savings realized an average annual return of 8%. The cost to her at retirement of forgoing five years of tax-deferred saving at her present rate of contribution would be roughly $165,000.

"We're finding couples really need two incomes not only to meet their retirement needs but lifestyle needs," Freedman said.

Diversifying Retirement Investments

In considering the couple's entire retirement savings portfolio, Freedman said they need to make some changes that will ensure that their investments are well-diversified so they'll be cushioned from severe market falls and that the money invested outside their 401(k)s is in mutual funds with strong performance histories and low fees.

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