Like many young couples, A.J. and Amy Roberts borrowed to become first-time homebuyers and to finance their college educations.
But the duo — a 32-year old broadcast technician and a 33-year old crisis counselor, respectively — in 2010 began facing a combined $1,500 monthly student-loan tab, largely linked to the master’s Amy completed that year.
With a $1,360 mortgage payment, and a stint of unemployment for Amy during the economic downturn, the pair soon began struggling to pay the bills.
“We’re from the Midwest, and in the Midwest you pay your debts,” A.J. says. “But we found ourselves having to ask family for help. We were getting close to maxing out credit cards just to buy groceries.”
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The couple made the difficult decision last year to stop paying on the Edmonds condo they’d bought for $226,000 at the height of the real-estate boom and focus on repairing their finances so they could seek a cheaper rental situation. They have since sold their condo at a loss, for just $80,000, and paid down $20,000 in credit-card debt. They’ve been living a simple life — no cable, one car — in an $865-a-month rental in Shoreline.
Finally, this fall, they’re getting back on track.
With their $85,000 in combined income from steady jobs, they’re determined to pay down student loans, contribute to retirement accounts, own a home again — and plan for children. For help prioritizing these goals, they completed an online survey for a free financial makeover from a member of the Puget Sound Chapter of the Financial Planning Association and were paired with Lowell Parker, an investment adviser with Merriman Wealth Management in Seattle.
After a first meeting with Parker, the couple learned one big lesson: Crisis averted. They’re handling things better than they thought, and are budgeting well.
“I thought our spending was out of control,” Amy said. “It was reassuring for me to hear that the way we were spending our money was reasonable.”
Parker recommended that the two continue to make steady payments on their student-loan debt, which they’re on track to pay off by 2020, but not necessarily accelerate their payments. Since they both have low interest rates on their debt (1.6 percent for A.J., 2.6 percent for Amy), it makes more sense to start building up retirement funds.
He suggests they keep $13,000 they’ve inherited in savings for future use as a down payment on a new home, and that they study FHA loan programs, which have down-payment requirements of as little as 3.5 percent. This would allow them to make a purchase without compromising their momentum on investing for retirement.
A.J. has saved $22,000 via a 401(k) at work and has $1,000 in a brokerage account. He can also buy stock via an employee stock-purchase program. Parker suggested that he reallocate his 401(k) from A.J.’s current mix of stocks and bonds into an all-stock mix of funds, half domestic and half international.
For A.J., Parker’s suggestion led to a lesson about market fundamentals: Because he and Amy have many working years ahead of them, they can consider investments in stocks, which are riskier than other assets but also have higher potential for returns. Because of their youth, they have time to rebuild if the market takes a downturn. Both Amy and A.J. also can adjust their strategy as they age to a more conservative approach.
“I probably chose investments that were a bit too conservative for someone my age,” A.J. says. “My investment strategy is what Lowell is really changing.”
Amy becomes eligible next year for a 403(b) account, a retirement account for nonprofit employees, and plans to use it. In the meantime, Parker advises both Amy and A.J. to open Roth IRA accounts, which allow for tax-free distributions at retirement.
Parker suggests that the couple use an automatic investment plan to contribute $50 to $100 a month into the IRA. He recommends they invest it in a diversified all-stock fund, which contains two-thirds domestic stocks and about one-third international.
They’ll also need to draft a will and end-of-life documents, paying attention so that these papers comply with Washington state tax laws and with their wishes regarding the use of their funds.
For her part, Amy feels much better; the couple’s on track to build savings, slash their student-loan balance and to return to homeownership. Still, she’s a little nervous.
“I don’t know how we’re going to do it all,” Amy says of their many obligations — and a future where household income might have to shrink if and when children enter the picture. “But we have time going for us.”