Money Makeover
Multiple goals require a unified plan

By Janet Kidd Stewart
Your Money columnist

Posted March 6, 2005

Dori and Chris Dinsmore can almost see daylight.

For all of their seven-year marriage, the Chicago couple has struggled with credit card and college loan debt, which today stands at nearly $20,000.

After a six-year tour of duty as a Marine that took him around the world, Chris, 35, has spent the last several years as a stay-at-home dad and college student while Dori, 33, pulled in most of the family income as manager of the Chicago office of World Relief, a non-profit agency that helps refugees get settled in the United States.

They've had to spring for new brakes, tires, a muffler and other repairs for their car, a 1995 Volkswagen Jetta. The young family has virtually no cash savings. In the early years, despite a modest income, the couple "went out and had fun anyway," Dori said, a philosophy that made the debt mount. And they had different ideas about fixing the problem -- pay off the credit cards, buy a home to start accumulating equity or build up a savings account?

"I manage a multimillion-dollar budget at work and have no problems keeping our spending in line with grant and donation income. However, at home, it's two people with different philosophies addressing the issue. We hear different advice from friends and family and it's hard to know whose perspective is most helpful," she wrote to the Your Money section after learning about the new Money Makeover feature.

Fortunately, the Dinsmores' future looks brighter than their recent past. Chris expects to graduate from Northeastern Illinois University in May with a liberal-arts bachelor's degree focused in English and linguistics. And the couple's daughter, Gabrielle, 7, is in a full-day private school, where they have qualified for a tuition scholarship, freeing up Chris to start hunting for full-time work.

Still, two major challenges remain. Chris needs to land that job -- one with future career prospects and good benefits -- and the couple has to avoid the temptation to ramp up spending along with the new income. Instead, they need to focus on turning their debts into a growing nest egg by striking the right balance between debt repayment and savings.

For help with all that, Money Makeover turned to Sue Stevens, director of financial planning for Morningstar Inc. and a certified financial planner with a private practice in the Chicago suburbs. And Elizabeth Handlin, founder of Ultimate Resumes (www.ultimate-resumes.com), agreed to coach Chris through the job hunt.

"This is a pretty typical situation for people in this age group who tend to have multiple goals," said Stevens. "The good news is that things are going to get much better soon, when Chris starts working. At the moment their net worth is negative, but a year from now that should look a lot different."

Stevens put together a financial plan that blends Dori's desire to knock down the credit card debt with Chris' preference to start saving for emergencies. Impressed that the couple already had a written monthly budget, Stevens focused on setting savings priorities.

If Chris pulls in an annual salary of $35,000 or more -- starting salaries for liberal-arts majors were about $30,000 in 2004, but Chris is an older student with bankable military experience -- the couple should start building an emergency savings fund first, Stevens said.

She suggested hunting for a higher-rate money market fund through www.bankrate.com and starting an automatic savings plan with it once Chris is working. The goal: $8,400, which will be about three months' living expenses once the couple replaces the decade-old Jetta with a slightly newer car, taking a loan of no more than $10,000. At current interest rates, that car will be paid off in four to five years, at which time there should be enough money saved for a $25,000 car with no new debt.

As for the couple's dreams of buying a house, Stevens suggested putting that off a couple of years while they pay down debt. Once Dori's student loans are paid off in the next year or so, Stevens said, start plowing that money, plus $250 more from Chris' income, into credit card debt repayment. At $500 per month, the $18,000 in credit card debt will be gone in roughly three years.

After that, the couple can take a 15-year, low-interest VA home loan to buy a townhouse worth roughly $125,000. They'll have to look long and hard to find housing at that rate in their preferred location, the north side of Chicago -- the median home price in their Rogers Park neighborhood, for example, was $189,000 in 2004. But there are properties listed for $125,000 to $130,000, and the couple believes they'll be able to find something suitable. If they wait a couple of years, as Stevens suggests, they can boost their price limit to $130,000, meaning they could reasonably consider properties listed for up to about $140,000.

At the end of that mortgage -- when 7-year-old Gabrielle is finishing college -- they can trade up to a home worth about $375,000 in today's dollars.

Stevens also suggested opening a Coverdell Education Savings Account rather than a 529 college savings plan. The Coverdell has lower investment maximums, but the Dinsmores don't have a lot of extra cash for education savings anyway, and they can use the savings for private grade school and high school if their income grows and they lose their scholarship assistance.

She also suggested balancing out Dori's current retirement plan assets by putting 40 percent in an equity index value fund, 25 percent each in a balanced and an international fund and 10 percent in a growth-stock fund. They can complement those choices with Chris' retirement plan down the road.

The bottom line: If Chris lands a job with a good retirement and benefits plan, even if the couple gets only modest yearly salary increases they have a good chance of retiring comfortably, Stevens said. Using Monte Carlo analysis software to stress-test the couple's plan against many worst- and best-case scenarios, Stevens projects the couple can retire in their mid-60s.

All that will take a lot of spending discipline, and the couple knows it.

"We've already been scrimping, and I expect we'll continue that," said Dori, an avid coupon-clipper who checks out museum passes from the public library and schedules park play dates as entertainment. The couple skips gift-giving for each other, putting that money toward occasional vacation trips. A few years ago, Dori gave up department-store makeup and now gets $9 haircuts.

"We got ourselves into this credit card mess, and the reality is we have to get ourselves out of it too," she said.

As for the job hunt, Chris knows that won't be easy, either. He's a non-traditional student, coming out of college at age 35 with a military background and just having spent several years as a stay-at-home dad, though he picked up some part-time office work as his home and school schedules allowed.

Until recently, he was getting nervous about his future career and lacking much direction to jump-start a job search.

"My real problem is not knowing what's out there," he said early in the Money Makeover process. "In the military, if you do certain things you know where you're going to end up. I chose a broad liberal-arts degree, but I didn't really know what I was going to do with it."

Enter Handlin, who went through every word of Chris' resume, getting him to articulate the details of his Marine training.

"Chris just had a bare-bones resume that assumed the reader had a lot of prior knowledge about the military," Handlin said. "It turned out he had some really high-stress State Department and embassy jobs that required a lot of quick problem solving, and I immediately thought of the consulting world.

"If you're switching careers, it's your job to make it clear why your experience fits, to translate what you did in the old job that will play well in the new industry," she said.

"Chris is on the right path now and has the right attitude about the job search, and I'll continue to coach him through the process," she said.

Said Chris: "As a Marine, you learn to do what the mission requires, which is why we agreed that at first I would stay home with Gabrielle and we'd rely on Dori's salary because she was the one with the master's degree. Now I'm really excited about the future, and Liz [Handlin] has opened my eyes to a lot of opportunities."

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Janet Kidd Stewart is a Your Money columnist.

Reprinted with permission

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