Where did it all go?
A young working couple grapples with an age-old budget predicament
When it came to money, Mike Rutledge tried hard to do all the right things. He set up payroll deductions to save for both retirement and college education for his three children. He used automatic banking to make sure mortgage payments were on time, and he didn't carry large credit card balances. But at the end of the month, he and his wife, Julia, both police officers, simply didn't know where all the money went.
So he applied for a Boston Globe Money Makeover, saying he needed some help. "We are fighting over finances constantly and trying to figure out if we can send our oldest daughter to private school next year," the 36-year-old sergeant wrote in his application. "With as much as we make - over $160,000 last year - we still seem to be maybe three paychecks away from serious financial trouble."
Fee-only financial adviser Katie Weigel of LongPoint Financial Planning in Concord says many families find themselves in a similar situation. "Everyone else may look like they are doing great," she told the Natick couple when they sat down for their money makeover. But as with ducks that seem to glide effortlessly across the water's surface, the reality is that "underneath everyone is paddling really fast."
To get the planning process started, Weigel had the couple pull together their numbers. That meant quantifying not only income and future pension benefits, but also how much they spend each month on everything from groceries and cellphone service to cable TV and trash pickup.
"That was hard," said Mike, noting that he had never before broken down a budget in such detail.
With the couple's cash-flow numbers in hand, Weigel easily spotted the reason for Mike's financial angst. The cash flow, which was still missing amounts for expenses such as children's activities, gifts, and home maintenance, showed the family was overspending their income by roughly 5 percent or just over $8,000 a year.
"I've seen a lot worse," Weigel said.
A little digging, however, made it clear that the Rutledges are in better shape than the numbers initially indicated. That's because every year the two offset their cash shortfall with a big tax refund. The result: They end up just making ends meet.
But that kind of seat-of-the-pants budget balancing is stressful, and the lack of detailed information makes it hard to establish control over family finances. The planner told the couple to start tracking their expenses so that they actually know where their money is going.
One approach, she said, would be to sign up with www.Mint.com, a free online service that would allow them to pay bills, analyze their credit card costs, generate budget reports, and follow investments. Alternatively, the couple could save all their receipts and add them up at regular intervals.
Tracking is important because the couple is going to need extra cash to address some important planning issues. For one thing, they currently don't have enough in their emergency fund to cover living expenses for the commonly recommended three to six months. Moreover, neither has any disability insurance, and they only carry the life insurance provided through work.
"You guys are in your 30s," Weigel said. "Term insurance is cheap. You get it now and lock in the premiums."
She recommended $1 million to $1.5 million in coverage for Mike and $500,000 for Julia. And she told both to check out disability and life insurance options through their jobs, noting that Mike's undercover work and Julia's night-shift patrol work would be less likely to trigger higher premiums in such a group plan.
Julia called the makeover process overwhelming, but the biggest surprise was the retirement calculations based on their pension benefits. "I thought we were completely set," Mike said, when Weigel told the couple that they might not be able to retire as early as expected.
Julia, now 34, had hoped to retire by 50 or 55, while Mike was aiming to retire by 60 or 62. But Weigel said they'll both likely need to work an extra five years if they want to make sure they don't run out of money in retirement.
The issue, Weigel said, is making sure that neither is left with insufficient resources if the other dies. Although their pension plans would allow both of them to opt for survivor benefits, doing so would reduce the amount of their monthly pension payments. Without survivorship benefits, however, Julia or Mike could end up with too little income should the other one die. Rather than paying for the surviving spouse to get 100 percent of the other's benefits, however, Weigel recommended planning for a less-costly 50 percent benefit.
Still, retirement is a long way off, and there's lots of opportunity to improve these planning scenarios. For one thing, their mortgage will be paid off at about the same time that their 14-year-old daughter, Melanie, graduates from college. That will free up more than $1,400 a month starting in 2017. Invested over the next 20 years, that money alone could provide an additional $576,000 for retirement.
As for Melanie's move to a Catholic high school this fall, the Rutledges will be working that additional $9,000 a year into their budget. It will make for a couple of tight years, but with the other children - Shaylie and Mikey - now just 1 and 3 years old, the family will have lots of time to plan for the next round of educational expenses.