Young Professional

Background

Meet Jesse and Becky. They are 35 years old and they have 2 wonderful kids, Mary Kate and Ashley. They are dealing with a Mortgage, Student Loans, Credit Cards, College Planning, 2 Car Payments, and 2 Retirement Accounts. Combined, they earn $250,000 per year.

Issues

Becky and Jesse came from modest beginnings. Becky is an Attorney and Jesse teaches 5th grade in Collier County. The are having a hard time deciding how to allocate funds as they feel they are being pulled in a hundred different directions. They seem to have fallen prey to what is known as “spending creep”. The more they make, the more they seem to spend. Their kids are 6 and 3 and they have not started saving for college. They are paying over $1,900/month towards their Student Loans and they still owe $300,000. They also have $30,000 in credit card debt. Their car payments are $1,000/month combined. They bought a home for $500,000 in 2010. Mortgage payment is $3,000/month. This is a 30-year mortgage they took out 10 years ago at 5.0% APR. Monthly expenses equal $12,000 and they only have $10,000 in the bank.

Plan

The first thing we do with any client is gather all of their information. We use powerful software to pull all of the data onto one screen. From there, we switch to our Financial Planning software and start analyzing the situation. In Jesse and Becky’s case, we immediately saw a few glaring issues. First, their Emergency Fund should have been funded to cover 6 months of living expenses. They should have had $72,000 saved but they only had $10,000. Therefore, they had a liquidity deficit of $62,000. Second, their $30,000 in credit card debt was costing them $6,000 in interest PER YEAR. Third, mortgage rates are much lower now than when they bought their home so we ran a refinance analysis. Their Credit Scores were in the 680 range. They were only contributing about 4% towards their 401(k) and 403(b).

Actions

We looked at their mortgage and recommended they refinance into a 15-year mortgage at 3.0%. This served three purposes: Lowered monthly payment by $100, reduced the life of the mortgage by 5 years and reduced the total interest they would pay by almost $100,000.