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Monday, Aug. 3, 1998
Small-business owner is scraping by
Adviser: Pay off credit cards, start emergency fund, then begin saving for house
By JEFFREY TOMICH
Staff WriterRecently divorced and managing a small business, 38-year-old Corpus Christi resident Sue Logan is struggling to make ends meet.
Logan (not her real name) earns about $30,000 a year - about $1,200 less than what she spends to run her business and care for herself and her 21-year-old stepdaughter, who is living with Logan while attending college.
If her business picks up as she predicts it will, Logan's cash flow position should improve. But for now, she's finding it difficult to balance her budget.
Logan doesn't have much money saved. Her assets of $43,300 consist mainly of personal property, a car and $12,000 in savings invested in growth mutual funds. Her only debt is $5,000 owed on credit cards.
Logan's financial goals start with being able to retire debt-free at age 55 and buying a house within the next two years. She's seeking advice on investment, insurance and retirement matters.
Sylvia Ramsey, a certified financial planner with American Express Financial Advisors, analyzed the case.
Ramsey said Logan should pay off her credit card debt as soon as possible.
Because Logan is spending about $1,200 per year on her credit card debt in interest charges, she should consider whether she would be better off paying off some of the debt using her savings.
``She needs to check with her credit card company to see what the current rate of interest is and then see what her mutual funds are producing,'' Ramsey said. ``If Sue's investments aren't outpacing the credit card interest she is paying, she may want to consider liquidating $2,500 of her mutual funds to pay off at least half of her credit card balance.''
Before taking money out of her retirement savings, Logan should consult an accountant about any potential income tax consequences, Ramsey said.
When her credit cards are paid off, Logan needs to be careful not to charge anything she can't pay for immediately, the adviser said.
``One technique she might utilize is to use her credit cards as a matter of convenience and pay the entire bill on a monthly basis,'' Ramsey said.
She said Logan also might consider dedicating one credit card for business use and one for personal use. Some issuers will even separate business expenses into categories to assist cardholders in filing income taxes.
Regarding insurance needs, Ramsey said Logan shouldn't settle for the standard $250-deductible medical coverage, but instead should consult an insurance agent and accountant about the possibility of adding her stepdaughter to her coverage for a little extra money.
``Some group medical plans allow individuals to add a life insurance rider on their policy,'' she said. ``This would be an inexpensive way of obtaining a small amount of life insurance for both (Logan and her stepdaughter).''
For example, a medical plan with a $500 deductible for Logan and her stepdaughter might cost about $200 a month with a $2,000 out-of-pocket maximum, Ramsey said. Being self-employed, Logan could take a 45 percent income tax deduction on her yearly premium, making the actual monthly cost of the plan approximately $62.
Also, Logan has a $100,000 whole life insurance policy that is designed to pay her approximately $700 a month at retirement.
While the concept of saving money in a tax-deferred manner such as a life insurance policy is good, Ramsey said, Logan isn't in a high enough tax bracket to take advantage of the savings and only has $1,300 in cash for emergencies.
``She may want to build this area prior to putting a whole lot of money into the policy,'' Ramsey said, adding that Logan could ``pay the minimum for now and then when she is in a higher tax bracket and needs to shelter some money, she'll have a place to save it.''
Logan's second goal is to be able to afford a house within two years.
Depending on the price of the house, Ramsey estimated Logan will need to begin saving some money on a monthly basis.
Figuring that Logan will need $10,000 to $15,000 for a down payment, minor repairs and some furniture, she will need to save about $400 to $600 a month to develop a nest egg for the house and build an extra cushion of money in case of an emergency, Ramsey said.
Looking at her retirement planning, Logan has many choices, Ramsey said. Among the most common savings vehicles are IRAs.
Ramsey said Logan could set up a draft from her bank account for $166 per month into an IRA. The money could be invested in a money market account, mutual fund or individual stocks.
The most important thing for Logan to remember is to maintain diversification and get professional financial advice regarding the most appropriate investment for her, Ramsey said.
When Logan's business stabilizes and she's producing a steady income, she may want to consider other available retirement plans, Ramsey said.
She should also have an up-to-date will prepared and strongly consider disability insurance.
Because Logan is the lone provider for herself and her stepdaughter, she needs to particularly think about what would happen if she became disabled, Ramsey said. A disability policy could provide some income, in most cases to age 65.
With an annual income benefit of approximately $14,000 plus additional riders, a disability insurance policy would cost approximately $65 a month, Ramsey said.
Logan needs to consider many things in her financial planning, but she is on the right track, Ramsey said. The next step is doing some research and developing a plan.
The Caller-Times is seeking people to share their financial situation with the newspaper's readers. Your name will not be used in a story and the financial planner's advice is free. Call Caller-Times business writer Jeffrey Tomich at 886-4316, e-mail him at tomichj@scripps.com or write him at P.O. Box 9136, Corpus Christi, Texas 78469.Post your comments about local news eventsFront Page || Main Index || News || Business || Texas || South Texas Outdoors || Birdwatching || Sports || Entertainment || Selena || Education || South Texas Attractions || World Wide Web