Making Change: Getting ahead on a single income By Nasoan Sheftel-Gomes, Esq.

Editor’s Note: Columnist, lawyer and single mom, Nasoan Sheftel-Gomes and 8 other single moms determined to create successful strategies for getting ahead on a single income will share their stories with you in Sheftel-Gomes’ column on 247Townhall. Read about each single mom’s unique challenges, concerns and questions about money management, savings strategies, and college and retirement savings and many other topics. Gain valuable advice from professional financial planners and follow these 8 women as they seek to create greater stability for themselves and their children on a single income.

Divorce Changes Everything
Agnes (not her real name), age 36
7-year old son
Psychologist (licensed to practice in Spain)
Divorced one year

Agnes has experienced many life changes in the year since she and her husband divorced. Agnes wanted a fresh start and moved back to her native Spain. She had been living in the United States for 7 years with her Spanish born husband and their son. But the couple separated and ultimately divorced last year. In the United States her training as a psychologist was being put to use as a social worker for Latinos with HIV since she is not able to see patients privately as in Spain where she was educated and licensed. She spent the last year getting situated in Barcelona, working, seeing private patients and picking her son up from school at dismissal. Ultimately, she missed New York and after being away for a year, she decided that her son would benefit from being able to see his father weekly and she would benefit from being back in Brooklyn, NY.

There is nothing like a transition to make a person reevaluate. In her marriage, Agnes had left the money management and financial planning to her husband, and before that, she had been able to rely on her father’s input. Becoming a single mom has provided her a crash course in managing her household expenses. She is proud of her new found confidence and her growing financial independence. “I felt very insecure about whether I could do this on my own,” she said remembering her fears about becoming a single mom.

Evaluating finances for life as a single mom

She is doing it. Agnes is learning to manage her finances alone and seek financial stability without the help of a partner. “The idea of buying a car on my own was scary. But I am building my life and showing myself that I can do it.”

In many ways, Agnes is very fortunate. She comes from a family that was conservative with money. “We never spent more than we had and we were always careful with money. No luxury or extra expense in my family,” mentions Agnes who grew up in the economic recession of post-Franco Spain, a time of high inflation, high oil prices and high unemployment rates. She has no consumer credit debt or student loan debt. (However, she is paying back an interest-free loan made to her by her mother.)

She also benefits from child support provided by her ex-husband and rental income from a property she acquired as part of her divorce. But Agnes is concerned that in the current market her tenant and her ex’s income may not be secure enough to rely on. She believes that for a sense of stability, she needs to decrease her dependency on the income from her rental property and child support from her ex-husband, so that her personal income is sufficient to cover her expenses.

Other financial hurdles include the moving expenses she will incur. She’s also not sure what her actual monthly expenses will be and has estimated “up” thus her expenses are not a realistic projection of what she may actually need to cover monthly. Perhaps most importantly, Agnes has no college savings for her son or retirement savings for herself, no life insurance or disability insurance to provide for her son should she die prematurely and no cash reserves to help her in case of a sudden financial shock such as the loss of a job-either hers, her ex-husband or her tenant. More long-term concerns include Agnes’ desire to go back to school to gain the necessary credentials to allow her to see patients here in the United States.

First Steps: Identify Goals

Agnes identified the following goals for herself on her road to financial independence and stability:
• Increase monthly income
• Decrease dependence on rental income and child support
• Go to school to gain necessary credentials to practice in her field in the U.S.
• Save for down payment on a new apartment/home large enough for her and her son.
• Begin to save for her son’s college education and her own
• Begin to save for her retirement
• Develop a savings habit
• Pay off moving expenses sooner rather than later

Making Change:

We consulted a financial planner to determine whether it’s possible for Agnes to accomplish all of her goals given her current situation. There are several things going for Agnes in her current financial situation:
• Agnes’s income is covering her expenses, with potential cash reserves
• Agnes has a valuable asset. (a 1.5 bedroom coop apartment in Brooklyn, NY worth $275,000 acquired as part of her divorce settlement. It currently generates rental income).
• Her professional skills are likely to keep her in demand. Adding to her credentials could make her more marketable and more secure in her field.
• Agnes has no consumer credit debt and no college loans because her education in Spain was essentially free.
• Agnes’ only debt is a no interest $11,000 debt she owes to her mother and plans to pay back in monthly installments.

Agnes’ Projected Monthly Finances Winter 2009
Rent $2000
Utilities $ 250
Car lease $ 350
Insurance (car/home) $ 200
Gas $ 100
Groceries $ 600-800
Cell phone $ 90
Internet $ 35
Childcare/extracurricular for son $1000
Clothing/entertainment $ 800
Gym $ 80
Weekly cash allowance $400
Misc. Medical $100-200
Debt $300
TOTAL PROJECTED EXPENSES $6,305.00-$6605.00
Child support $3000
Rental Income $1200
Gross income $4,333
Health insurance contribution $ 50
Taxes $921
TOTAL PROJECTED INCOME $7,562
THE DIFFERENCE $1,257-$ 957

The Plan:

The plan devised for Agnes is both a short-term and long-term plan meant to address the specific concerns she expressed in our interviews. Although written specifically with Agnes’ situation in mind, some of these suggestions are appropriate for people in many different situations.

Short-term Plan:

1. Build a cash reserve of approximately $5000 • Set aside enough money to weather a small storm then a larger one. Agnes should first set aside enough to cover one month of lost rent ($2000) then enough to survive a month of lost child support ($3000).
2. Consider whether to sell the apartment she owns or continue to collect income. Both options are good ones, but Agnes needs to consider which one better fits her situation and goals.
   • For example: at the current rental rate it may take almost 7 years for her to draw $100,000 (while running the risk of her tenant falling behind or damaging the apartment) of income from the apartment, whereas if she is able to sell it, that $100,000 would be immediately available plus an additional $150,000, allowing her to meet many of her other goals in one fell swoop.
   • If the decision is to keep the apartment, become the renter, for faster progress toward owning a second property.
3. Track and plan expenses.
   • Keep a daily log of all money spent for a few months
   • Once Agnes gets an idea where her money is being spent she can make adjustments that could easily result in a 10 to 20% savings with no noticeable change in lifestyle.
4. Slow payments to her mother, a no interest creditor until she has a better idea of cash flow
   • Earmark the savings of approximately $100 a month for cost of roundtrip flights to see her mother in Spain yearly.
5. Purchase, don’t lease the next vehicle.
   • If she is willing to downgrade to a used car or a non-luxury vehicle she could save close to $3000 over the life of the vehicle.
   • Paying off a car loan will build Agnes’ credit rating and assist her in getting a better rate on her future mortgage.
6. Learn current limits to aspire to for workplace plans and Roth IRAs
   • $16,500 to the 403b and $5000 to the Roth IRA
   • This seems unattainable now but steady progress could make this seem more realistic in the future.
7. Obtain individual life insurance and disability insurance to be certain coverage is in place no matter the employment situation.
   • It is possible for Agnes to find this type of coverage for as little as $50 to $100 per month.
   • Life insurance would provide for Agnes’ son if she died prematurely and perhaps payoff any mortgage or fund four years of college or provide food and clothing for a decade.
   • Disability insurance would cover income lost due to illness or injury if if the illness/injury was not job related.
8. Review other insurances (car/home) to be sure they cover what Agnes believes they do.
9. Consider using a credit card (but not abusing it by leaving unpaid balances to accrue interest over many months) to pay regular bills and expenses then pay the balance in full monthly.
   • This will help build a good credit score
10. Consider obtaining an equity line of credit against her apartment to provide low cost flexible back up while she builds true cash reserves.
11. Consult with a tax professional and a lawyer for tax and estate issues.

Long-term Plan:

1. Begin contributing to her 403b plan at work immediately. • Despite the fact that her plan does not include employer matching the contributions are still pre-tax which means she is getting a discount on her taxes in exchange for applying money to her retirement.
   • 2 or 3% of each paycheck is doable and will be “forgotten” soon
   • Tax benefits
2. Consider funding a Roth IRA
   • If the cash is needed NOW any contribution can be withdrawn without tax or penalty.
   • Match investment selections to timeframes and risk tolerance. If money is going to be invested for decades then more aggressive investment is ok.
3. If cash flow allows it, consider funding a 529 plan for college savings
   • College costs may arrive before retirement but college costs should not take priority in saving.
   • It is easier to borrow money for college and easier to pay it back than it is for retirement.

GLOSSARY

Leasing a vehicle: Perhaps the greatest benefit of leasing a car is the lower out-of-pocket costs when acquiring and maintaining the car. Leases require little or no down payment and there are no upfront sales tax payments. Additionally, monthly payments are usually lower, and you get the pleasure of owning a new car every few years. With a lease, you are essentially renting the car for a fixed number of months (typically 36-48 months). Therefore, you pay only for the use (depreciation) of the car for that period, and you are not forced to absorb the full depreciation cost of the vehicle. Leasing a car will never put you in an upside-down position. But you will alwys be making a car payment

403b: a 403b plan is a tax-advantaged retirement savings plan available for public education organizations and some non-profit employers, akin to the 401k. It allows employees to save money from their salary into a 403b plan before income tax is paid and it is allowed to grow tax deferred until the money is taxed as income when withdrawn from the plan
Employer matching contribution: The amount, if any, that a company contributes to its employees' retirement accounts, typically in proportion to each employee's contribution.

Roth IRA: A Roth IRA is an Individual Retirement Account (IRA) allowed under the tax law of the United States. Direct contributions to a Roth IRA may be withdrawn tax-free at any time. Direct contributions to a Roth IRA (i.e., not including rollovers) may be withdrawn at any time with no tax or penalty, since they have already been taxed. Contributions to a Roth IRA are not tax deductible.

Risk Tolerance: The degree of uncertainty that an investor can handle in regard to a negative change in the value of his or her portfolio.

529 Plan: A 529 plan is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary. Money from a 529 plan can be used for tuition, fees, books, supplies and equipment required for study at any accredited college, university or vocational school in the United States and at some foreign universities. The money can also be used for room and board, as long as the fund beneficiary is at least a half-time student. Off-campus housing costs are covered up to the allowance for room and board that the college includes in its cost of attendance for federal financial-aid purposes.

Life Insurance: a contract between the policy owner and the insurer, where the insurer agrees to pay a sum of money upon the occurrence of the insured individual's or individuals' death or other event, such as terminal illness or critical illness. In return, the policy owner agrees to pay a stipulated amount called a premium at regular intervals or in lump sums.

Disability Insurance: Disability income insurance can help you pay your bills by replacing a portion of your income if you are unable to work. It can help you maintain your current lifestyle and help protect you and your family from going into serious debt.

Equity Line of Credit: A method of borrowing in which a homeowner may borrow against home equity as needed using a checkbook or credit card. It differs from a standard loan in that the borrowing may be done over a period of time, preventing excess borrowing and limiting interest costs.

For more information and budgeting tools:

http://www.thebeehive.org/money

http://pic.tv/family-amp-life/diary-single-mom