Money Makeover By Dorothy Rosen, "The Dollar Diva" • Bankrate.com

Pending adoption gives dad-to-be financial jitters

George and Gayle are 41 and 37 respectively. They've been married for two and a half years, and are ready to start a family. They can't have children of their own, so they are going to adopt a baby girl from China.

"We cannot wait to begin the adoption process and have our child in our arms," says George. But it's an expensive deal, and he's not quite sure how he should finance it. "The process will take about 18 months, and cost $20,000-$25,000," he says. He doesn't want to borrow the money, but he's very nervous about depleting the family's savings.

Gayle is going to be a stay-at-home mom when the baby comes; that will reduce their current net income by $1,000 a month. George wants to be on steady footing financially, and feels an expert may be able to lead him in the right direction.

It looks like George is experiencing pre-daddy jitters; a common malady experienced by fathers prior to the stork's arrival. The Diva will help George put his fears in perspective so he can stop worrying so much and start enjoying the prospect of falling in love with the most wonderful baby in the whole world; his little girl.

Savings goals
The Franken's need savings for the following:

• Adoption costs ($25,000)
• Emergencies ($14,000)
• Future goals (Undetermined)

Adoption costs
George and Gayle have $25,000 in savings; that's about what the adoption is going to cost. Most of it is in a savings account, earning less than 3 percent. Since the adoption fees are due in four installments, and the last one isn't due until September 2002, the Diva suggests stashing this cash in certificates of deposit or a money market fund, where it will earn a better return. Read the Diva's "Where's the best place to put our emergency fund?" for more on this.

Emergencies
With their entire $25,000 in savings earmarked for the adoption, what about emergencies? "Unless TV advertising goes bust," says Gayle, "George's income is pretty secure." With that kind of job security, an emergency account equal to three months of bare bones living expenses should be enough. They can fund it with the $13,000 tax refund that's coming in this month.

The Franken's should consider saving at least part of the tax refund in U.S. Series I Savings Bonds. I Bonds are indexed for inflation, interest is tax-deferred, and if they're used to pay for higher education expenses, the interest may be tax-exempt. Go to the Series I Savings Bonds Web page to learn more about the bonds and the requirements for the "education bond program."

Future goals
Gayle recently started working part-time, but will be a stay-at-home mom when the baby comes. Because it's temporary, the Diva has not included the $1,000 Gayle brings in each month as part of the couple's monthly income.

Instead, the Franken's should view this income as gravy, and use it to enhance their financial position. Seventeen months at $1,000 a month gives them $17,000 to play with. The Diva recommends disbursing it as follows:

• Student loan ($5,000): Pay off Gayle's high interest (9 percent), $5,000 student loan. If they continue paying $100 a month on this debt, it will take five years and almost $1,300 in interest payments to get rid of it.
• Roth IRAs ($8,000): As long as the couple's modified adjusted gross income is under $150,000, they can each contribute $2,000 to a Roth IRA. That's $4,000 between them for 2000 and $4,000 for 2001.
• Spruce up the kitchen and foyer ($2,500): Gayle considered using home equity to put new floors in the kitchen and foyer. The Diva nixes the idea, and suggests using current earnings, instead. Home equity is something you build up, not suck out.
• Start investing ($1,500): The couple has savings, but no investments outside of their retirement plans. Wealth accumulation comes from investing, and now's the time to start. The Diva recommends tax-friendly mutual funds for their taxable investments.
  
  

Tracking the expenses
George worries "While I make a pretty good living, we do not seem to be saving as much money as we should." The Diva reviewed the couple's expenses and thinks George may be worrying more than he has to. The past three years have been very expensive for the Franken's. The engagement ring, wedding, down payment on their home, moving costs, furniture, a new roof, landscaping and other home improvements were all paid for with cash. The Franken's live well within their means. They don't anticipate any major home repairs this year, and if they pay off the student loan they'll have a monthly surplus of $500 for funding future goals.

One expense the Diva frowns on is the private mortgage insurance (PMI) they pay each month ($60) because they couldn't afford to put 20 percent down when they bought their home. However, the couple has been making extra payments on the mortgage, and their home's value has soared, so they expect to be able to get rid of the PMI this summer.

Investing
George contributes the maximum to his 401(k) plan, and tells the Diva "I am worried that my IRA and 401(k) funds are not in the correct funds for our needs." The Franken's have over $50,000 in retirement accounts, spread haphazardly over a dozen or more mutual funds. They have not set up an asset allocation plan to guide them in their investing activities, and that's something that needs to be done pronto.

The Franken's need to determine what asset allocation will work for them, then adjust their portfolio accordingly. Read the Diva's "What is asset allocation?" and "Novice investor needs advice" for more on the subject.

Here is an example of a simple asset allocation plan for couples in their late thirties, early forties:

Surfing Bankrate.com's investment archives will help the Franken's become more knowledgeable about investing their hard earned money in the years ahead.

College savings
It's never to early to think about college savings, and the Diva would feel remiss if she didn't mention qualified state tuition programs here. State sponsored savings plans offer tax-deferred college savings, and should be investigated by the Franken's. If they don't like their state-sponsored plan, they can look into the offerings of other states; many of them allow non-residents to participate. For the last word on these plans, go to Joseph Hurley's "Saving for college" Web site.

The Diva concludes
The Franken's have perfected one of the most important skills in personal finance: they spend less than they earn. Now they need to work on managing the $500 that they have left over each month. They need to set goals, determine how to reach them and keep track of their progress

A software program like Microsoft Money or Intuit's Quicken will make it easier to keep track of their money, and help them achieve their financial goals. The Diva thinks that having a clear picture of their financial position each month will keep George from worrying so much. And he's sure to enjoy the fruits of his labor as he watches the family's assets grow over time.

Success is a journey, not a destination. The Diva wishes George and Gayle the best of luck on the road to financial freedom. The Money Makeover is a weekly feature of Bankrate.com in which money experts help readers untangle their finances. Do you need to get your financial house in order? Could you benefit from the guidance of a customized financial plan? If so, click here to enter the Money Makeover contest! To read more makeovers about people just like you, click here.

-- Posted: May 4, 2001