Joe and Ki Cooney say they've learned a lot of financial lessons the hard way. When they were in their 20s, for example, the couple ran up a credit-card balance of more than $20,000 by charging too much, avoiding paying the bills in full, and seeing big finance charges added to the balance. Paying off that debt taught them financial discipline.
They've come far since then, having acquired a South End condo and higher-paying jobs along the way. Now parents of 16-month-old Emmett, the Cooneys decided it was time for them to get "serious about getting serious" about their finances. But Joe, 32, who is in sales, and Ki, 34, who does fund-raising for a local school, said they didn't want to do the kind of seat-of-the-pants learning that marked their early days as a couple.
So they applied for a Boston Globe Money Makeover with a long list of questions on topics ranging from life insurance and estate planning to 529 college-savings plans and the mix of investments in retirement portfolios.
One of their biggest worries: With the recent expenses of renovating their condo and having a baby, they seemed to be living paycheck to paycheck despite a combined annual income of about $200,000. Already juggling retirement savings, student-loan debt, mortgage payments, and college tuition for Ki's MBA program, they wondered what would happen to their bank account if they decided to have another child.
"You have high income, but your net worth doesn't really reflect that," fee-only financial adviser Lisette Smith told the couple when they sat down in her Faneuil Hall office. But Smith, a principal with the Garnet Group, said that's not unusual for people at their stage of life, when mortgage payments and student loans are still overwhelming the family budget.
Even with an additional child, Smith said, the Cooneys would eventually find some financial breathing room as their salaries continued to rise and they paid off Ki's school debt. If they do choose to have a second child, the biggest financial obstacle would be more college savings, a task made more manageable by saving regularly when the child is young, she said.
Of more concern, Smith said, were the issues the Cooneys hadn't yet addressed. The two have no wills, no healthcare proxies, too little life insurance, insufficient disability coverage, and a meager emergency fund. Not surprisingly, those items headed the to-do list that Smith handed the couple at the end of their meeting.
Having learned from their early credit card problems, the Cooneys now use automatic payment for their biggest bills. "We didn't trust ourselves," Ki explained. They are also making regular monthly contributions to retirement plans and their son's 529 college savings plan. The rest goes to food, child care, and other expenses. There's not a lot left at the end of the month.
As a result, the couple has just $12,000 in the bank to cover unexpected expenses. With housing and loan payments alone running about $3,000 a month, that emergency fund would not go very far, Smith said. "You really should have more liquid savings," she said, encouraging the two to build their emergency fund to about $24,000.
Smith made the task tougher by recommending that they add new expenses to the monthly budget. "Our analysis shows that both of you are underinsured," Smith said. Joe, she said, should have life insurance coverage of $1.7 million and Ki should have about $725,000. With some life insurance provided through their workplace, the Cooneys turned out to be about $2 million short. Smith suggested that they buy 30-year level-premium term coverage to make up the difference, estimating the cost at about $2,000 a year.
Their disability insurance also turned out to be insufficient. Smith recommended that Joe buy a policy to supplement his workplace coverage until Emmett is out of college. And she suggested that Ki - who has no disability coverage - shop around for her own policy.
Estate planning was also an issue. "If you didn't have a child, you could almost get away with it," Smith said. "But the will is the only place where you can name a guardian."
Ki had considered using a legal website to create the needed documents, but Smith recommended that they also set up a trust for inheritance money that might come to Emmett and any future children.
"You don't have a taxable estate right now, but you will have life insurance, and that will be a lot of money," she said, recommending that the couple get a lawyer who could draw up not only the will and trust documents but also address other important issues such as healthcare proxies and durable powers of attorney.
The self-taught Cooneys turned out to have done pretty well in selecting diversified investments for their growing retirement portfolios, particularly given the options available through their workplace plans. They currently have about 90 percent of their investments in equities, which Smith said is a bit too risky. She suggested increasing the fixed-income portion of their portfolio by shifting some money into bonds, including an inflation-protected fund.
The Cooneys, who had felt uncertain about the quality of advice readily available online and in the media, said they were relieved to get an objective assessment of their issues. "It is really nice to have it simplified," Ki said.
The two left understanding that there might be trade-offs. Smith told them, for example, that they shouldn't contribute fully to their retirement plans at the expense of buying needed insurance. Joe said he had a clear understanding of their priorities. "Get the wills, buy the insurance, get out of debt, max out the 401(k)s, and build the cushion," he said. After that, he said, they'd be in a good position to tackle other issues.