Parents-to-Be, Once Indulgent, Now Play It Safe

Michael and Anita Meagher see their baby’s expected arrival in August as a strong incentive to get their finances in gear.

“We’ve already cut back on our spending, but with a baby on the way, we’re trying to take even more responsibility and get things in order,” said Michael, 33. “We’re trying to get that good feeling when you’re working toward a goal, your money is in order and your responsibilities are taken care of.”

Given the couple’s short-term goals of buying a house and allowing Anita to be a stay-at-home mom, Delia Fernandez, a fee-only certified financial planner in Los Alamitos, recommended a conservative plan for the Meaghers’ short-term savings. She suggested the couple focus primarily on income investments that can be expected to maintain their value in the next few years, rather than the riskier stock market.

This approach is all the more important because doctors have ordered Anita, 36, to spend her entire pregnancy on bed rest, which means the pair must now get by without her $35,000 annual salary as a school bookkeeper and rely solely on Michael’s $48,000 winemaker’s salary.

Whittling Down Debt

The couple are already on the right track, having eschewed the freewheeling spending habits, lavish vacations and designer clothes of their 20s. They whittled down $40,000 of credit card, car and school loan debt to less than $5,000 in the last seven years.

“I can’t say enough nice things about how you’ve reduced your debt,” Fernandez said. “And you should be proud that you’ve lost one income and haven’t gone into crisis.”

But partly because of the current financial squeeze the Meaghers face, Fernandez advised them to be as conservative as possible for a couple of years--including continuing to live in a one-bedroom rented guest house even after the baby arrives.

As top priorities, she encouraged them to buy disability and life insurance and save their money to reduce their debt and make a larger down payment on a home in a few years.

With such a plan and a little discipline, Fernandez believes the couple can achieve their goals. Despite the loss of income, the Meaghers have $400 remaining each month after paying their bills. That’s all the more impressive because the Meaghers didn’t start out as savers.

Married five years, they met 13 years ago as checkout clerks at Trader Joe’s in Ventura. For many years, they lived beyond their means, using credit cards to buy $200 shoes, $300 Coach bags and vacations at Ritz-Carlton and Four Seasons hotels. They also got into the habit of writing checks to stores before their paychecks arrived, playing with financial fire.

“I don’t think I respected money during that time,” Michael said.

Said Anita: “When we did something, we always went all out.”

But in 1994, Michael began learning about personal finance through radio programs, magazines and newspapers. That inspired him to stop frittering away money and start paying down their debt. “I started to think I wasn’t indestructible any more,” Michael said.

It took Anita time to get used to Michael’s new attitude. “The beginning was so sickening,” she said. “My husband wanted to put our budget on the refrigerator, listing our $40,000 in debts. I was screaming invasion of privacy. But now, I’m the one who gets down on him, saying, ‘You can’t buy that.’ ”

One of the psychological tactics the Meaghers use to save money is to save all of their coins, only spending bills. By the end of the month, their pot of change comes out to $60, Anita said.

“Plus, it helps that there aren’t any department stores like Bloomingdale’s in Ventura,” she added.

Buy a Home? All in Good Time

As a winemaker for Leeward Winery in Ventura, Michael receives no retirement, health or disability benefits beyond what basic government programs offer. The Meaghers now pay $232 a month for health insurance but have not purchased disability coverage despite Michael’s physically demanding duties.

“I spend about two hours a week behind a desk,” said Michael, who is in charge of overseeing production and maintaining the style of his company’s wine.

To Fernandez, obtaining disability insurance should be the couple’s top priority, since Michael’s job entails lifting 100-pound barrels, driving a forklift, working with big machines and handling chemicals.

At Fernandez’s suggestion, Michael researched the matter and found a company willing to provide him with $2,000 a month in disability coverage at a cost of $1,050 a year. Fernandez said the price seemed reasonable, but she urged him to find out if the coverage includes cost-of-living increases and provides benefits until he can return to work in his chosen profession rather than paying only if he cannot work at all.

Fernandez also believes the Meaghers should both buy life insurance. She estimated that $600,000 of 20-year term insurance for Michael would cost $400 to $470 a year.

To further prepare for their baby, the planner encouraged the couple to establish wills, naming guardians for their child upon their deaths.

Although the Meaghers would like to relocate to a more rural wine region, they wanted to buy a home in Ventura as soon as they could. Ideally, they wanted a two-bedroom home for about $200,000. They’re now paying $1,000 in rent for a one-bedroom guest house, which Anita fears will be too small once the baby arrives.

However, Fernandez made a strong case for them to not buy a home now, especially since Anita is not working and they’re planning to relocate in a few years.

“You can’t predict the real estate market for such a short period, and you could find yourself tied to a house you no longer want to live in due to a slow market,” she said. “Renting will give you the freedom to build for a down payment.”

Plus, buying a home often leads to added expenses for furniture, decorations and other items, the planner added. “I guarantee you, you’re going to want to fix something or paint something. And don’t forget, having a baby costs money.”

The Meaghers have a good start on retirement saving, although they hope to tap some of those funds for their first home.

Anita has about $20,500 in various retirement accounts, about half in a bond fund through TIAA-CREF, the nonprofit Teachers Insurance and Annuity Assn. College Retirement Equities Fund. (New York-basked TIAA-CREF runs the nation’s largest pension funds and handles retirement plans for teachers and certain other public employees.)

Besides that bond fund, Anita has $2,400 in three TIAA-CREF stock funds and a money market fund. She also has $4,400 in a 403(b) plan with the teachers association, allocated to four stock funds and a money market. Another $3,500 in a 403(b) is invested in Fidelity’s Contrafund.

The Meaghers figure that when they buy a home, they will take from Anita’s retirement funds the maximum $10,000 that can be withdrawn without penalty for a first home. That’s why they kept about $10,000 in bond funds, a conservative strategy that Fernandez says makes sense.

“If you’re going to buy a home in two years, the bond fund is the right place for your money,” she said. “If you’re not going to need the money for five or more years, I would consider stocks.

“It’s hard not to put all your money in growth stocks, especially when you’re young and the stock market has been performing like it has,” Fernandez added. “But if there’s some terrible event in the stock market, the bond fund will look good to you. Maybe when Anita starts working again, you can go for more growth opportunities.”

To have the option to make a larger down payment and thus perhaps avoid paying mortgage insurance, Fernandez suggested that Michael invest the maximum $2,000 a year in his own IRA, which is deductible because he does not have a retirement plan at work. Because the money might be tapped again in a few years for a down payment, the planner recommended the sum go to a safe bond fund, such as Vanguard Short-Term Bond Index (three-year average annual return: 6.3%).

In particular, the couple could save extra money by taking that IRA deduction for 1998 (he has until April 15 to do so). The couple could then withdraw up to $10,000 free of penalties for a home down payment. They would still have to pay income taxes on the withdrawal, but if the money is withdrawn in a year when Anita isn’t earning as much, they would be in lower tax bracket.

For example, a $2,000 IRA contribution would only cost them $1,324 because it saves about $676 after taxes are considered, since they are probably in the 33.8% combined federal-state bracket. Withdrawing $2,000 later without penalty at a lower combined tax rate of about 19% would only cost $190 in taxes.

With regard to Anita’s retirement savings, Fernandez suggested minor changes. In general, she said the teacher’s retirement fund offers excellent investment choices that perform well compared to its peers and have low management fees and expenses.

Her only suggestion was for Anita to keep $10,000 in the bond fund and divide the remainder of her TIAA-CREF accounts equally between the Equity Index and Growth funds, the best-performing funds offered in the plan. (Anita now has money in those funds as well as the Global Equities and Stock funds.)

“Overseas investing has not paid off in recent years, and the Stock fund’s performance has not performed as well as the Growth and Equity Index funds,” the planner said.

Fernandez suggested that Anita keep her money in the Contrafund (five-year average annual return: 21.6%). “The manager of the Contrafund has done a good job of providing nice returns even though the fund has grown larger and larger,” she said.

Outside of retirement funds, the couple has $4,200 in a money market fund designated for emergencies.

Some Wiggle Room With Baby on the Way

The planner recommended that any extra savings go toward building their emergency fund to at least $9,000 and paying off the rest of their credit card balance.

To reduce their credit card burden, the couple have long taken advantage of various credit card deals offering attractive introductory interest rates. They’re now paying 4.9% interest on their one card, but the rate will increase to 16% in June. At that time, they plan to transfer the remaining balance to another low-interest credit card.

Fernandez said there’s nothing wrong with juggling credit card deals, but she urged the Meaghers to pay more than just the minimum every month on their remaining balance.

“We don’t know how long all these great credit card deals are going to last,” she said. “You may not be able to always count on it.”

Fernandez wasn’t keen on putting the couple on a strict financial plan, in which every dollar is accounted for, because she believes they need some “wiggle room” with the baby coming. Having a baby is one of the most stressful things a couple can take on, she added.

“Everything needs to be concentrated on making a healthy baby, so I don’t want to put a lot of stress on your budget,” Fernandez said. “You need to have some discretionary money to keep yourselves comfortable.”

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Diane Seo is a regular contributor to The Times. To be considered for a published Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. You can also e-mail to [email protected], or you can save a step and print or download the questionnaire at http://ukobiw.net./HOME/BUSINESS/FINPLAN/make-over.htm.

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This Week’s Make-Over

* Investors: The Meaghers, Michael, 33, and Anita, 36

* Occupations: Michael, winemaker; Anita, bookkeeper

* Combined gross annual income: About $48,000

* Financial goals: Buy a home, save for retirement, pay off debt

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Current Portfolio

* Cash: $4,200 in a money market account

* Retirement accounts: Anita has $20,500, mostly invested in plans sponsored by the Teachers Insurance and Annuity Assn. College Retirement Equities Fund.

* Debt: $4,600 owed on credit card

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Recommendations

* Don’t buy a home too soon.

* Michael should allocate $2,000 annually to an IRA for retirement and part of a down payment on a home.

* Purchase disability insurance for Michael; both should purchase term life insurance.

* Write wills, consider estate plan.

* Use any excess savings to pay credit card debt and build emergency fund to at least $9,000.

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Meet the Planner

Della Fernandez is a fee-only certified financial planner at Fernandez Financial Advisory in Los Alamitos. She serves as an instructor and member of the advisory committee for UC Irvine Extension’s Personal Financial Planning Certification Program.