Time for Couple to Get Together, Get It Together

Mike and Regina Brown share a financial boat but are paddling in different directions.

She likes to shop. He prefers to save.

She uses credit cards. He wants to cut them up.

She’s all for maintaining separate checking accounts. He argues for a joint one.

“When it comes to money, we have different philosophies,” said Mike, an accountant with the Internal Revenue Service in Laguna Hills, where the couple live.

The Browns, both 41, admit that their his-and-her approach to money makes creating a unified strategy impossible--although they’re well aware that they have some serious financial issues that must be settled together.

They want to start college education funds for their two sons, now 7 and 4, and have their finances on track for retirement, but they are not sure whether they are wisely handling their assets, which include a rental property, tax-deferred retirement accounts, a variable annuityand a certificate of deposit.

Tackling these issues for Money Make-Over was Violet Woodhouse, a fee-only certified financial planner and family law attorney in Newport Beach .

In reviewing the Browns’ situation, Woodhouse said she had several investment recommendations but that the couple must cooperate more if they ever hope to manage their money effectively.

“It’s essential that you get on the same page financially,” Woodhouse warned both Regina, a department store saleswoman, and Mike. “You need to communicate and be accountable to each other.”

Woodhouse offered several suggestions to foster teamwork.

For example, the Browns should schedule a couple of hours each month to discuss how much each has spent and how much each has saved, she said. They could enroll in a personal finance class at a local junior college. Attending the class together could create a sense of camaraderie as well as increase their financial knowledge. And at least once a year, they should have a “State of Our Union” discussion.

At that time, “you should talk about your goals, your ideas, things you are happy about and things that disappoint you,” the planner said. “It’s a time to do an overall assessment of where you are headed financially and personally.”

Although happily married, the Browns should note that financial differences are among the most common sources of friction between couples, said Santa Monica marriage and family counselor Robert Strock, who specializes in what he describes as psycho-economics.

Money “is so charged emotionally that small disagreements can quickly turn into major arguments,” he said.

Clearly, the Browns can’t organize a money management program until they agree on the details. “If you can really get focused on pulling together and tackling your finances as a common goal, you can achieve what you are aiming for,” Woodhouse told the couple.

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The Browns, despite a combined annual income of about $67,500, are saving little beyond what’s going into their workplace retirement accounts. But, Woodhouse reassured them, better spending habits and improved management of their assets could rapidly improve their financial outlook and allow them to begin saving for their children’s education.

The first matter to address is the use of credit cards for nonessential purchases. The Browns have accumulated debt of about $6,000--they owe about $1,500 to department stores and $4,500 on a bank loan recently taken out to consolidate the balances on other credit cards.

The couple are making the minimum payments on these accounts, which comes to about $175 a month.

Although it was smart to consolidate the card balances into the bank loan, which carries an interest rate of 13%, Woodhouse said the couple must make a firmer commitment to get out of debt and stay out.

“My advice is to stop charging things and cut up all your credit cards except one that you can use only in emergency situations,” Woodhouse said. Then the couple should start paying off the accounts as quickly as they can, tackling the higher-interest-rate department store accounts first.

“If you keep paying the minimum,” Woodhouse warned, “it’s going to take you forever to pay off that debt, and you’re going to pay a tremendous amount of interest.”

The Browns, like anyone accustomed to using credit freely, may find the change difficult. But Woodhouse admonished the couple that unless they stop running up credit card debt, a significant portion of their income will be going to pay interest, thus making their savings goals difficult if not impossible to attain.

The Browns also need to free themselves from their Laguna Hills condominium, an albatross since the real estate crash of the early ‘90s.

When the couple bought their house in 1994, they owed more on the condo than it was worth. Rather than sell it at a loss, they decided to rent it out. But it’s still a losing proposition. They get $1,000 a month rent, but the mortgage payment, association fees, taxes and other expenses typically total more than $1,300 monthly. Although deducting the loss from their taxes reduces the bite somewhat, they’re still losing about $3,000 a year on the deal.

“You’ve got to find a way to cut your losses on the property,” Woodhouse told the couple.

With property values climbing in Orange County, she noted, the Browns may soon be in a position to sell and pay off the mortgage. The condo’s value is now $115,000, and they owe $125,000 on the mortgage.

An alternative, Woodhouse said, would be to approach the lender with the possibility of a “short sale”--a procedure in which debt is forgiven when an owner sells a home for less than the amount owed on it. Depending on the circumstances, some lenders will accept a short sale to avoid the time and expense of a foreclosure. But some lenders balk at the idea unless the owner is in financial distress and heading for foreclosure.

It’s also important to note that homeowners receiving debt forgiveness will face a tax bill on the amount forgiven because that money is considered income.

Though the Browns say they never would, some people in a situation like this might be tempted to stop making the mortgage payments and just allow the lender to foreclose. But taking that course will hurt the property owner’s credit rating, and, depending on whether the property had been refinanced, the owner may not even be free of further collection efforts on the property.

Woodhouse emphasized the need for the Browns to explore all possible avenues to alleviate the situation. She noted further that if major repairs should be required or the interest rate rises sharply on the condo’s adjustable-rate mortgage, the Browns could find themselves facing an even more substantial monthly shortfall.

Another way for the couple to increase their cash flow would be to change their insurance coverage, Woodhouse said.

Currently, the Browns pay $2,200 annually for two whole life insurance policies, each with a $100,000 death benefit. Each policy has a cash surrender value of $5,000.

Woodhouse suggested cashing in the policies and purchasing 15-year level-term life insurance. Term policies have no savings element and no surrender value, but they do have the advantage of lower premium payments for a higher death benefit.

Premiums for policies that would pay $1 million in the case of Mike’s death and $500,000 in the case of Violet’s death, for example, would come to a total of roughly $1,300 annually. Woodhouse recommended the higher amount for Mike, as he provides a higher percentage of the family’s income.

The insurance change would save the couple about $900 a year, give them $10,000 cash from the surrender of their current policies and create a larger financial safety net for their children.

Another area of the family’s finances that appears ripe for change is the $29,000 variable annuity Mike has in an individual retirement account.

Mike bought the Massachusetts Mutual Life Insurance Co. annuity nine years ago when he rolled over money from a 401(k) plan with a former employer. A major advantage of a variable annuity is that its earnings accumulate tax-deferred. However, Mike holds the annuity in an IRA--and IRA earnings are already tax-deferred--so Mike gets no benefit from the annuity’s tax treatment. Further, the annuity’s fees are high.

By investing his IRA money in some of the mutual funds Woodhouse suggests below, Mike would reap the tax benefits, pay lower costs and also be more likely to get a better return on this money.

The planner also urged the couple to increase their emergency fund, now $5,000 kept in a nine-month certificate of deposit, by $5,000 from one of the insurance policies. Woodhouse also would prefer to see those savings in a money market account rather than a CD, pointing out that the interest earned on a money market account isn’t much lower than that for a shorter-term CD, and the couple would not be risking an interest penalty if they needed to make a withdrawal.

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Ordinarily, Woodhouse said, she would urge that the remaining $5,000 of the insurance money go to pay off high-interest consumer debt. It would be the best possible use of the money. But the planner said she is concerned that the Browns may see that clean slate as an invitation to run up new balances.

“There’s no point to pay it off if that just encourages you to go out and start charging again,” Woodhouse told the couple. “There has to be a change of behavior.”

The Browns acknowledged that they have periodically discussed getting rid of their credit cards but that they’ve never actually done so. Having the suggestion come from a third party, though, they said, may finally do the trick. Woodhouse, noting the difficulty of breaking bad financial habits, is not convinced and thus suggested that the $5,000 be used to start the children’s college fund.

If, however, the couple can steer clear of running up more credit card bills and can unload their condo, she said, they should be able to add several hundred dollars a month to the kitty.

Because it will be many years before their children start college, the Browns can invest that money in stock mutual funds, which have historically appreciated faster than other investments.

Specifically, she recommended that 80% of the college-fund money go into growth-oriented stock funds that invest in U.S. companies. Her menu of recommendations includes Safeco Growth (five-year average annual return: 24%), Vanguard Primecap (24.5%), Warburg Pincus Capital Appreciation (19.8%), Safeco Equity (23.4%), Spectra (23.1%) and Janus (15.9%).

All have managers with solid long-term records, Woodhouse said, and all except Spectra charge management fees of less than 1% a year.

The remaining 20% should go into stock funds investing in foreign companies. Woodhouse recommended Vanguard International Growth (five-year annual average return: 14.2%) and Managers International Equity (14.9%).

As the time for college approaches, some money might go into a bank account to minimize the risk of having to liquidate mutual fund holdings in a down market.

As for retirement, the Browns’ participation in their workplace plans should go a long way toward ensuring that they are comfortable.

The couple have a total of $61,000 in tax-deferred workplace retirement accounts. Each invests 10% of pretax income in the accounts and has an employer who matches half what the employee contributes.

Regina and Mike direct all their retirement savings into investments that seek to replicate the performance of the Standard & Poor’s 500-stock index.

If the Browns stay with their present employers and continue investing in their workplace retirement plans at the present rate, they will, assuming an 8% average annual return, have more than $950,000 in the accounts when they retire at age 65. And that estimate does not factor in any raises Mike or Regina may receive.

The roughly $29,000 now in the annuity, if it is reinvested in mutual funds and earns the same average annual return of 8%, would grow to almost $184,000 in 24 years.

“You can achieve your goals, but only if you create a common goal and go for it together,” Woodhouse told the Browns. “You need to communicate and compromise.”

For their part, the Browns say they are willing to make some changes.

“Her advice is good, and it’s probably a good idea to get rid of the credit cards,” Regina said.

“I’m encouraged, and I hope this results in some changes for us,” said Mike. “If it helps us understand each other’s viewpoint a little more and communicate about our finances more, it will be well worth it.”

Graham Witherall is a regular contributor to The Times. To participate in Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.

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The Situation

* Investors: Mike and Regina Brown, 41

* Combined gross annual income: About $67,500

* Goals: Save for retirement and for college for two children.

* The problems: Consumer debt, “upside-down” in rental property, lack of financial coordination

* The plan: Cut debt, sell rental property or reduce its ownership cost, face financial problems together.

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This Week’s Make-Over

* Investors: Mike and Regina Brown, 41

* Combined gross annual income: About $67,500

* Financial goals: Start college funds for two children, now 7 and 4; save for retirement.

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Current Portfolio

* Real estate: About $17,000 equity in house; about $10,000 negative equity in condominium

* Cash: $5,000 emergency fund in certificate of deposit; about $1,300 in savings and checking accounts

* Retirement accounts: About $61,000 in tax-deferred workplace retirement accounts; about $29,000 in a Massachusetts Mutual Life variable annuity, held in an individual retirement account

* Life insurance: Cash value of $10,000 in two whole life policies

* Debts: Combined total of about $6,000 on store credit cards and a bank loan

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Recommendations

* Start working as a team when it comes to finances.

* Close all credit card accounts except one bank card account to be used only for emergencies. Start accelerating payments on loan and credit card accounts.

* Cash in whole life insurance policies and buy 15-year level-term insurance instead. Use $5,000 of cash from insurance policies to increase emergency fund.

* Explore ways to sell condo.

* Sell annuity and invest that money, to remain in an IRA, in mutual funds.

* As soon as possible, begin putting aside several hundred dollars a month to pay for children’s college. That money should also be invested in mutual funds.

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Recommended Mutual Fund Choices

* Safeco Growth: (800) 426-6730

* Vanguard Primecap: (800) 662-7447

* Warburg Pincus Capital Appreciation: (800) 927-2874

* Safeco Equity: (800) 426-6730

* Spectra: (800) 711-6141

* Janus: (800) 525-8983

* Vanguard International Growth: (800) 662-7447

* Managers International Equity: (800) 835-3879

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Meet the Planner

Violet Woodhouse is a fee-only certified financial planner and a family law attorney in Newport Beach. She is the author of the book “Divorce and Money.”