It's time to add bulk to thin financial cushion
A hardworking Seattle couple don't have much of a financial cushion, but a financial planner has given them a plan that also gives them hope.
Special to The Seattle Times
About this series:
Do you know how much money you'll need for retirement? What's the best way to invest?
This is the latest in a series of monthly "financial makeovers" by The Seattle Times for readers who want to get real about their money.
Recent surveys show that half of all Americans have only a one-month financial cushion or less if they were to lose their jobs.
Matt Slinger, 37, and Erin Fetridge, 40, a married Seattle couple, can relate. Slinger, who nets about $4,000 each month from his concierge job at a condo tower downtown, describes their current savings as meager and pathetic.
"Up to this point in my life, any sort of cushion I had was money I could borrow," Slinger says. "If this credit card is full, then I'll just go get another credit card until I get on my feet again."
But Slinger says he knows the days of easy and inexpensive credit are over. And Fetridge, who owns Stumbling Goat Bistro on Phinney Ridge — an upscale restaurant featuring local, organically grown and raised food — has been feeling the pinch of the stumbling economy.
Though her business grew last year overall, profits didn't and by the end of the year, the economy was taking a toll, she says.
She was forced to lay off four part-time employees and reduce her own take-home salary to about $2,400 a month.
"Owning a restaurant, you never know what's going to happen," Fetridge says. "Another long-term hit on the status of the economy in people's eyes would probably send me down. Because people get fearful, and the first thing they do is cut out eating out."
Even before the downturn, Fetridge and Slinger already had taken a closer look at their personal finances and made some changes.
They'd been free and easy with their money for years, Slinger says, but they felt they'd plateaued and had all the stuff they needed. So they started diverting $100 a month to savings, paid off their credit-card balances and stopped using both credit and debit cards.
Instead, each person got $140 in cash at the beginning of the week to use for anything that wasn't in the household budget. Often, they found they had money left over, but no plan for what to do with it.
"We had already, in the past three or four years, really cut back," Slinger says. "Not like Quakers or anything, but we'd really simplified."
Fetridge agrees, adding that though comfortable, they are not superconsumers and prefer that whatever shopping dollars they do spend stay local.
Not having children takes a rather large financial commitment off, they say, but the future is still a concern.
Slinger says they don't have a retirement plan.
"No stocks, no bonds, no IRA, nothing," he says.
Fetridge cashed in a Roth IRA to make a small down payment on the couple's Seattle home, for which they paid $328,000 nearly five years ago.
The rest was financed with a pair of mortgages, the largest of which has a balance of about $234,000, and an adjustable rate of 4.75 percent that resets this month — another source of angst for the couple.
"It's kind of this blind spot for us, like we've known that we need to proactively go out there and look for a better rate, but the longer we stick with the adjustable rate, the less we are paying because it is so low," Slinger says. "But it feels like gambling."
Their second mortgage has a fixed rate of 7.89 percent and a balance of roughly $49,000. Further complicating matters is a home equity line of credit (HELOC) they took out about a year ago, which has a variable rate of 3.35 percent on a balance of about $114,000.
After paying off some credit-card balances, they used the bulk of the HELOC to make improvements to the house: building a fence, remodeling a bathroom and adding closets and carpeting.
Otherwise, Fetridge and Slinger are debt-free and say they would love some help getting a grip on their financial present and planning for the future.
Enter John Goddard, the founder of Goddard Financial Planning in Seattle and a member of the Financial Planning Association — Puget Sound Chapter.
The certified financial planner recently sat down with the couple to help them sort out where they stand and give them a financial blueprint. Goddard identified several priorities for Slinger and Fetridge, including establishing an emergency fund of at least $17,000 (to cover three months of household expenses and savings) and, he said, holding it sacrosanct.
"They don't have a lot of breathing room now if they get unlucky," Goddard says.
Goddard suggested the couple boost the amount they save each month from $100 to $500 and put those funds in a money-market account that pays interest.
Goddard's cash-flow analysis showed that the couple need to start aggressively saving for retirement if they want to stop working at 67. If Slinger and Fetridge can find ways to slash $500 of discretionary spending each month and if they would temporarily pay only interest (no principal) on their second mortgage and their HELOC, they would have $600 freed up to invest in an IRA such as Vanguard STAR.
As for the mortgages, Slinger and Fetridge have a little homework to do. Goddard wrote in their financial plan that since they do not have at least 15 percent equity in their home, it is unlikely they would qualify to refinance now.
But once the details of recently enacted federal mortgage-relief programs are clarified, Goddard wrote, refinancing may be possible. So the couple need to check with their lender to see if their mortgage is held or guaranteed by Fannie Mae or Freddie Mac.
If it is Freddie Mac, they will have to apply to their lender for rate quotes and terms under the new programs. But if it's Fannie Mae, they will have more options. Goddard recommended they work with a qualified mortgage broker to determine if they qualify for new refinancing plans as they become available.
In any case, Goddard said that Slinger and Fetridge should obtain their credit scores from all three credit-reporting agencies and dispute any errors. Another action item in their plan is to obtain long-term disability insurance that would replace at least 60 percent of their gross income in the event of an accident or illness.
"If either one of them cannot work for a period of time, that would put the household under tremendous strain," Goddard says.
Other items on Goddard's to-do list for Slinger and Fetridge:
• Look into purchasing $300,000 of additional term life insurance on Fetridge that would help Slinger pay the mortgage off in the event something should happen to Fetridge.
• Verify that their homeowners-insurance policy adequately covers the value of their home and its contents.
• Consider purchasing earthquake insurance.
In the tax area, Goddard says they should consider opening a Health Savings Account (HSA) that uses pretax contributions to pay deductibles and co-pays as their health-insurance plan has a high deductible.
Finally, he advised they consult an estate-planning attorney to complete wills, financial and medical powers-of-attorney and advanced health-care directives.
Though Slinger says he was filled with dread before their final meeting with Goddard, like going to the doctor's office and expecting a really horrible diagnosis, he says Goddard was a tactful lifesaver who has filled the couple with optimism that their financial goals are achievable.
"It's a little bit like how some people need a personal trainer to motivate them to get to the gym and some people are happy to do it on their own," Slinger said.
"I just don't have the discipline, or the knowledge, frankly, to sit down and come up with a plan like these guys did."
He and Fetridge are already tackling some of the tasks on their to-do lists, such as checking into their mortgage and looking for more ways to cut back on discretionary spending.
"Erin and I, when we do hit retirement, we're absolutely going to be eternally grateful we did this," Slinger said. "This was a milestone moment in our lives."
Information in this article, originally published April 5, was corrected April 6. A previous version of this story incorrectly identified the financial planner advising the couple as John Stoddard of Stoddard Financial Services.
Copyright © 2009 The Seattle Times Company
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