Show me the money.
That’s where it all begins for middle-class families who hire Eileen Freiburger to help them manage their finances.
“The theme I see for every client I work with is, ‘I can’t see where the cash is going,’” says Freiburger, a certified financial planner from Manhattan Beach, Calif., who says almost all of her clients are middle class, whether their income is $50,000 or $200,000.
The three families who participated in Gut Check America’s coverage of the middle class were a step ahead of the game, already on top of most of their monthly expenses, if not down to the last dollar, she says. But Freiburger says large categories such as “miscellaneous” or a supposed surplus with no money regularly going into savings indicate the need for a closer look. Likewise, a monthly deficit without an increasing debt somewhere else, means some categories aren't being accurately tracked.
Among her own clients, Freiburger says, private school tuition, ever-increasing adjustable rate mortgage payments and untracked ATM withdrawals are some of the biggest sources of “mystery” budget leakage.
Once those leaks are identified, she explains, the money can be redirected into more rewarding categories, or “buckets” as financial planners like to call them. Likewise, once a regular financial commitment such as a car payment is fulfilled, she recommends that money immediately be dedicated to something else instead of being “piddled away.”
Using herself as an example, she notes that when her daughter graduated from elementary school, a regular monthly expense for afternoon child care ended. “The second my daughter went to middle school and we no longer had to foot that bill, that $240 when immediately to her education fund,” Freiburger says.
Aside from not tracking spending accurately, Freiburger says other big financial pitfalls of middle-class Americans include a lack of savings for emergencies, retirement and college educations; buying homes they really can’t afford; impulse spending on consumer goods and entertainment; and lack of clear debt-repayment strategies. She offers these bits of advice:
- Lack of retirement savings should be a special concern because “anyone of us who is not currently 55 or 60 relying on the notion of Social Security, it’s not going to do it for us.”
- Despite soaring housing prices in many parts of the country, Freiburger says exotic loans that get buyers in the door with low interest rates that soon rise sharply are almost always a bad idea. “If you can’t afford the 30-year fixed payment, you can’t afford to be in that home.”
- “I cringe when I see some of the cable and entertainment budgets. I have no idea why the cell phone numbers are as high as we’re starting to see.”
- “People are just tapping into these (credit) cards or their homes (equity loans) without realizing there’s no payoff strategy” because minimum payments do little or nothing to reduce the balance owed.
Freiburger, 43, who has 24 years experience, says most middle-class families could benefit from working with a financial planner. Her advice is to choose a fee-based consultant through the Garrett Planning Network or the National Association of Personal Financial Advisors, preferably one who will work on an hourly, as-needed basis. Steer clear of advisers who also sell insurance, investments or other financial products, she advises.
None of the three families profiled in Gut Check America’s coverage of the middle class was asking for advice when they wrote to msnbc.com about their financial struggles. But they all consented to having some of their budget information shared with Freiburger, who calculated their monthly cash flows and offered these observations on their situations.
The Brennans of Mountlake Terrace, Wash.
Freiburger gives Dale and Darby high marks for their clear goal of saving for a down payment on a house. Given their current income and expenses, they should be able to accomplish it, she says. First, however, they need to establish some emergency savings. She points to the apparent surplus in their monthly budget, along with their categories for "miscellaneous" and "spending money" as the likeliest sources from which to squirrel something away.
After that, “If the family would like $20,000 to $30,000 in five years to put down on a house, the goal is accomplished with $333 to $500 a month. Set up an automatic monthly savings amount to accomplish this goal. If it is not seen, it is not spent. ING Direct makes it simple to have these monthly amounts brought over to a 4.5% savings account for forced savings.”
On retirement savings, Freiburger’s advice is to do something, even if it’s a small start: “It is encouraged that they at least find out if a ‘free’ match is being left behind. If not willing to participate in a 401(k), we would strongly encourage a Roth IRA using Vanguard Funds. If we assume someone’s salary is $40,000, contributing 3 percent of pay is $1,200 a year. At an 8 percent return on investment now through age 62, that’s $224,000. Up the annual contribution to $1,600 and it’s nearly $300,000 at age 62.”
Freiburger says that even though the couple’s $17,000 in college loans is a burden, “it’s still pretty small. I have seen several hundred thousand in some cases.” With the interest on the loans averaging 9.5 percent and the payment at $263 a month, “the loan remains open for another 7.5 years. Make sure each loan gets a minimum payment but leverage the amounts so the highest interest loan can be paid off first. Simply increasing the overall payment to $350 from $263 would reduce the schedule by two years and save about $3,000 in interest.”
The Hamakers of Hayden, Ala.
While financial planners are generally not fans of financing expenses with credit card debt, Freiburger applauds the family’s decision to help pay for Olga’s education this way. Freiburger sees very little discretionary income in the family’s budget. “The good news is that based on rate, amount, payment, all of the loans will be gone within three years. Unfortunately, Ken’s just going to need to take a deep breath and know it shouldn’t get worse and hopefully get significantly better if his wife can also bring in some additional income.”
On retirement savings, Freiburger says, “It’s never good to have an open loan in a 401(k) account that represents this large a percentage of the balance. However, it will probably be paid off in three years. But the amount in the 401(k) and currently not contributing is not good. I strongly encourage he still try to add $50 to $100 a month to principle just to keep this growing. Start with a little now, and then as soon as any loan is paid off, redirect that amount to the 401(k). As things stand, the current $23,000 balance will be only $168,000 in 25 years if it grows at 8 percent.”
Like the Brennans, Freiburger says, the Hamakers should make their top priority to establish an emergency fund.
The Suarezes of Sweetwater, Fla.
Freiburger finds Olga’s situation “very, very difficult.” Simply put, “her income with that size and age of a family is not enough” for all she’s trying to do. “Once we look at the fixed costs, there’s not that much truly left over.”
To Freiburger, Olga is “making the right choice. … It’s wonderful that she prioritized the better school district and putting the kids first. But there’s only so much the income can go toward and if it goes toward the better school and higher rent, that’s the decision. … These aren’t the parents’ faults when that’s what’s going on in our country. It’s a whole big picture situation that’s got to change.”
In the meantime, however, Freiburger says Olga might take a look at the high-interest loans she’s carrying on her car and furniture and see if there’s any way to refinance them to lower rates.
And, as with the other families, Freiburger strongly urges Olga to figure out some way to start a rainy-day fund, even though her monthly budget appears to be running at a deficit.
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