Money Makeover winner | Photo courtesy of Avery Alexander

Profile

Avery Alexander, 35, is a mutual fund accountant in Lee’s Summit, Missouri, a suburb of Kansas City. Avery and his wife Kim, a housing specialist for a nonprofit, have been married for 2 years, are new homeowners, and are expecting their first child in July. They are representative of middle America in their finances, too, with a mortgage, car loan and student loans. Yet, they manage to save regularly for both emergencies and retirement on their middle-class incomes.

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Goals

The financial challenges Avery wants to address through the Money Makeover are starting an education fund for their new baby, finding out if they are saving enough for retirement and determining which debts they should be focused on repaying first.

The Challenge

While they don’t utilize a budget, Avery does have a rough idea of how much they spend every month, which he acknowledges will be critical once the baby is born. They don’t live extravagantly, but with $800 per month in infant day care costs looming this fall, the breathing room narrows considerably. Avery says, “There are some areas we could decrease if we really needed to.”

The Alexanders have a nice start on savings, having accumulated more than 6 months’ of expenses. Their emergency fund is split between 2 checking accounts. They utilize a high-yield rewards checking account and maintain a balance of $15,000 — the balance cap for the 3% yield — and have another $20,000 sitting fallow in a non-interest bearing checking account.

Retirement contributions

Both are actively contributing to their workplace retirement plans, though neither has an IRA. Maximizing the 5% employer match, Avery is contributing 10% of his pay — with 8% going to a post-tax Roth and 2% pre-tax. All of his contributions are being invested in a 2045 target-date fund, with 91% of his $56,000 balance in this fund. The remaining 9% of his balance is in an emerging markets index fund, but since the target-date fund already has a large allocation to this sector, there is a bit of overlap, with 41% invested in foreign markets.

Kim is contributing 8% of her pay to her 403(b) plan and receiving the maximum 4% employer match. She currently has $6,000 in her account. She puts 1% of the balance toward the managed account option. Although the allocation is appropriate, she may want to consider whether she’s getting enough value from the service to warrant an ongoing 1% annual fee. While this fee is currently small, it will grow as the balance does.

She also has a fairly small 401(k) from a previous employer, but they haven’t checked on it in nearly 4 years.

Aside from retirement savings, Avery has a small $120 balance in a brokerage account and an Acorns app with a $500 balance. The Acorns app automatically invests spare change from his purchases, and the money is fully invested in a moderate allocation fund, consisting roughly of 60% stocks and 40% bonds.

The couple’s current net worth
Home value $187,000
Money makeover award $10,000
401(k) account balance – Avery $56,000
403(b) account balance – Kim $6,000
Combined value of 2014 Kia Soul and 2009 Hyundai Sonata $16,690
Checking accounts – total $35,000
Acorns account $500
Brokerage account $120
Current total assets $311,310
Mortgage balance $186,000
Auto loan $10,000
Student loans – Avery $5,800
Student loans – Kim $31,000
Current total liabilities $232,800
Current net worth $78,510

Mortgage, auto and student loans

The Alexanders have a manageable debt load, including a $186,000 30-year fixed-rate mortgage on their newly purchased home, a car loan with a modest $10,000 balance, and about $37,000 in student loans combined.

They’d paid off their credit cards last year. One of their 2 cars is free and clear, and the other is a 2014 model with a loan balance of just $10,000 and a sub-4% interest rate, so they have some equity in that vehicle as well.

Avery’s student loans, which he’d refinanced years ago down to a rate of 2.125%, amount to $5,800 with monthly payments of $100. Kim has an outstanding balance of $31,000, all of which are federal student loans carrying a rate of 6.375%. She’s on an income-based repayment program with a required monthly payment of $380 per month. Despite the higher interest rate, the protections of federal student loans — including the income-based repayment plan — are particularly relevant, with both maternity leave and motherhood looming.

They both have short-term and long-term disability insurance through their employers, and appropriately for new parents, they have recently secured life insurance. Their life insurance policies are a combination of whole life and term policies, with a child rider as well. They pay nearly $1,000 in annual premiums on all of these life insurance policies. The coverage on each is a modest $250,000, while the cash values to be accumulated through these policies in the next 30 years is extremely modest, bordering on inconsequential.

The Plan

  • Open and fund Roth IRAs for both Kim and Avery.
  • Track down the 401(k) from Kim’s former employer.
  • Address emerging markets overlap in Avery’s 401(k) plan.
  • Get excess cash out of the non-interest checking account and into an online savings account.
  • Open and begin regular contributions to a 529 college savings account.
  • Make one-time additional deposit to Acorns account.
  • Adjust life insurance coverage to get best bang for the buck.

Organize their retirement accounts

The Alexanders are in the enviable position of having more than sufficient emergency savings. They have about $8,000 more than the required 6 months’ of expenses. Between that and the $10,000 contest winnings, they have a nice chunk of cash they can put to work.

They should each start by opening and fully contributing $5,500 to a Roth IRA. Further, they should track down Kim’s 401(k) from her previous employer. Because the balance is less than $5,000 it is likely this money will — if it hasn’t already — be forced out of the plan into an IRA. It is best if Kim is the one to determine where that money goes and how it is to be invested. Otherwise it will likely end up sitting in cash with a less than optimal administrator.

There is some doubling down on emerging markets stocks in Avery’s 401(k), such that his allocation to international stocks is 41%. Because of the heightened risk profile of emerging markets, Avery should consider dumping the emerging markets index fund and just keep his balance in the target-date fund.

Between regularly investing in their workplace plans and in their IRAs, the Alexanders will be well on their way to meeting their retirement goals.

Put their cash to work

Avery admits they have $20,000 sitting in a non-interest checking account. This is money that can be put to work in an online savings account, earning a return without sacrificing safety or access to the money. At a 1% yield, this is an easy $200 they can pick up each year.

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If the Alexanders contribute $50 a month, assuming a 6% annual return and an initial deposit of $2,500, the 529 plan would be worth $26,710 in 18 years. | Illustration credit: © RASSCO/Shutterstock.com

Open a 529 college savings account

Given the excess cash at their disposal, Avery and Kim have the luxury of being able to seed a 529 college savings account with an initial deposit of as much as $2,500. Signing up for regular monthly contributions — even a modest amount — is strongly recommended. With an initial deposit of $2,500, regular monthly contributions of just $25, and assuming an annual return of 6%, they can accumulate more than $17,000 by the time their bundle of joy heads off to college.

Add to the Acorns account

In Avery’s current Acorns account, he’s being charged a $1 monthly fee. But at his current $500 balance this amounts to a 2.4% annual fee. That’s steep by any measure! But he has enough surplus cash in the checking account that he can make a one-time $4,500 deposit to bring the balance to $5,000. This would change his fee structure from a flat monthly fee to 0.25% of assets, which amounts to $12.50 per year. In other words, he can invest an additional $4,500 for an incremental cost of just $0.50. The money is invested in 6 exchange-traded funds that will likely outperform a money market account if given enough time.

Adjust their insurance coverage

Life insurance is important, but one can overpay for policies with a cash value. By dropping the child rider and the whole life policies, the Alexanders can save more than $500 per year. They could get a higher, and perhaps more appropriate, level of coverage for less than what they are paying now by sticking with term life insurance.

Use this Bankrate.com calculator to determine how much life insurance you need.

Further, the Alexanders could do much better by regularly saving and investing on their own, rather than waiting for the very modest cash value that will accumulate over the next 30-plus years. Avery and Kim are disciplined savers. They don’t need whole life insurance policies to do their saving for them. The classic advice of “buy term and invest the difference” most certainly applies in their case.

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