Live Beneath Your Means
Kevin and Heather Bang remember the quizzical look on their mortgage lender’s face.
It was 1999, and the young couple was preparing to buy a 1,400-square-foot, three-bedroom home in Cleveland Heights. “He glanced at our financial statements,” recalls Kevin, 39. “Then he looked up and asked us why we wanted to buy that house instead of a bigger one.”
The lender would have approved the Bangs for more than their requested mortgage amount — about $80,000 — but the couple didn’t need it. “We try to live in a way that feels comfortable without being excessive,” Kevin says.
It’s an often overlooked tenet of fiscal responsibility: Success doesn’t have to yield stuff.
“Many people think the source of their financial problems is they don’t make enough money,” says Bill Russo, principal of Concord Financial Planners in Solon. “The truth is that many couples don’t have an income problem; they have a spending problem.”
Kevin can afford more midday visits to nearby Mustard Seed Market CafÃÂ©, but he usually carries a brown-bag lunch to his office at Cleveland-based Master Consulting Group, which offers employee-benefits strategies, group health insurance and other services. As the firm’s co-owner and vice president, he often entertains clients, but never while wearing a tie that costs more than $20.
“I shop at places like Marshalls and outlet malls instead of higher-end stores,” says Heather, 34, who stays at home with their 3-year-old son, Owen, and 8-month-old daughter, Alaire. “Basically, we just try to be economical instead of going for so-called ‘high-quality’ items.”
The Bangs track expenses primarily through their online banking system, which quickly reveals how much they’ve spent in various categories during the past three, six and nine months.
Their outlook on frugality is likely to yield first-rate results: If a couple in their mid-30s each put $10 a day (excluding weekends) into a pretax retirement account that earned an annual return of 12 percent, its nest egg would total more than $2.3 million at age 65. The Bangs have saved at least 20 percent of their income for the past several years, investing the majority of the savings in mutual funds while also donating to their church and other charities.
The couple’s formula can be a challenge. “Our budget had to change when Alaire came along,” she says. “When you have an infant at home, you’re constantly spending money on consumables.”
The Bangs are also saving for their kids’ education. Kevin paid for half of his tuition and expenses at Miami University, and Heather paid for the bulk of her tuition at the University of New Hampshire.
“It gave us both an appreciation for how much things cost, as well as the importance of not taking education for granted,” Kevin says. Their parents didn’t have the option of contributing to a Section 529 tax-deferred college savings plan, which the Bangs started this year for Owen and Alaire.
When Owen is a college freshman, Kevin will turn 55. The Bangs don’t have definitive retirement plans, but they say they hope to make a difference in the community and “have enough savings to ensure the well-being of our family,” he says. “Meanwhile, whatever successes and blessings come along, we won’t interpret them as reasons to have fancier possessions.”
Pay Yourself First and Diversify
Before Doug and Laura Krzywicki write checks this month to Verizon, The Illuminating Co. and Columbia Gas of Ohio, they’re going to pay someone more important — Doug and Laura Krzywicki.
The couple doesn’t subscribe to the standard saving method: Take hard-earned dollars, pay everyone else — the government, the mortgage lender and the utility provider — and then see what’s left.
“It’s too easy to spend that remainder,” says Doug, 43, CFO of a local manufacturing company. “If we don’t have the money in our pocket or checking account to begin with, we can’t lose it.”
He and Laura, 41, treat their retirement savings contribution as their most important monthly bill. The Krzywickis contribute to Doug’s 401(k) plan and decide each month where to allocate their savings from an investment menu that includes mutual funds; a Section 529 tax-deferred college savings plan for their 3-year-old daughter, Abigail; and a combination of interest-bearing and term-life insurance that would pay for Abigail’s college education and the family’s four-bedroom house in Hinckley if something tragic happened to either parent.
Pretax retirement accounts such as the 401(k) for companies, the 403(b) for nonprofit organizations and different types of IRAs basically work the same way: Money you put in isn’t subject to taxes (income or capital gains) until you take it out. The catch: In most cases, you can’t take it out until retirement age without incurring a stiff penalty.
These accounts allow you to pay yourself first instead of the government. Let’s say you auto-deduct $100 from your paycheck each month and invest it in a pretax retirement account. (Most financial institutions enable such automatic deposits.) Normally for every $100 you make, you have to pay roughly $28 in federal taxes, $7 to $8 in Social Security taxes and $5 to $9 in state taxes, leaving you with about $60 to invest. The capital gains or dividends you earn would be reduced by taxes, too.
With a pretax account, you put the entire $100 to work for you. If a 30-year-old in the 28 percent tax bracket invests $100 a month in a tax-deferred account through the age of 65 and achieves 9 percent annual growth, he ends up with $294,178. Change it to a taxable account, and he ends up with $162,036.
While working for a Los Angeles-based publicly traded firm for eight years before becoming a stay-at-home-mom, Laura took advantage of her company’s discounted stock purchase plan, which enabled employees to buy shares at 80 percent of the current price. When she stopped working, she rolled her 401(k) and pension into an IRA, giving the couple more control over their money. (With an IRA, investors can earmark contributions into stocks, bonds, mutual funds and other investment vehicles. That’s generally not true of 401(k) plans.)
“We also make sure we don’t put all our eggs into one basket,” says Laura. About 75 percent of the couple’s retirement money is in riskier, higher-yield investments such as growth stocks. The rest is in safer, relatively low-yield instruments such as fixed-return bonds and CDs.
The Krzywickis sought diversification broad market exposure, but not so much that they couldn’t track their stocks easily. (Some financial planners recommend “target funds,” which give investors a premixed portfolio that becomes more conservative as they near retirement.)
Doug and Laura also diversified within their investment vehicles. For example, he has a favorite mutual fund family — Calamos — but the couple’s equities portfolio varies by size (large and small capitalization funds), industry (utilities, health care facilities) and location (domestic and international firms). “If one industry collapses like technology stocks did in 2000, we’ll still be fine,” Doug says.
The Krzywickis hope to pay for Abigail’s college education and still have plenty left over to enjoy their golden years, perhaps spending winters in a golf/resort community in Arizona.
Eliminate Debt and Save Early
When Mark Hawald graduated from John Carroll University in 1977, he was a four-time All-American wrestler and a two-time National Champion. On the mat, he was priceless.
On paper, he was worthless.
Mark first calculated his net worth upon graduation, and remembers staring blankly at the bottom line. “The answer was literally negative,” he says. “It was a sinking feeling, and I didn’t want it to last long.”
He had spent most of his savings on an engagement ring for his college sweetheart, Debbie. “I couldn’t wait to go to work.”
Mark and Debbie soon married, and he was hired to manage a company that sold machine tools, while she began a teaching career. At 25, Mark had a $40,000 salary, a $500 monthly expense account and access to the company’s car. “I was living the high life, and I thought that’s the way it would be for the rest of my career,” he says.
The Hawalds bought a house in Solon in 1979 and began paying a 30-year mortgage at 10 percent interest.
That’s when Mark and Debbie began a savvy fiscal strategy they still employ: Reduce debt by paying more than minimum amounts due. “Anytime we had extra cash at the end of the month or received a bonus,” Mark says, “we used the money to achieve two goals: First pay down debt, then save for retirement.
“Even if it was just $50 a month, we added to our regular car payment or house payment.”
He also began contributing monthly to a traditional IRA.
In 1983, things changed. The machine-tool firm closed, and Mark was out of a job. The couple had two kids — 4-year-old Joe and 1-year-old Mark — and little money in their savings account.
Dad decided to try out for the U.S. Olympic wrestling team that would compete in the 1984 Summer Games in Los Angeles. He funded the goal by cashing out his IRA, then worth more than $20,000. “We did what we thought we had to do,” he says. “But we were violating a valuable rule: Never withdraw from a retirement account if you can prevent it.”
Mark didn’t make the team, but it didn’t take him long to pin down well-paying work. The Hawalds restarted their aggressive debt-reduction plan, always paying their credit card balance in full and eradicating their 30-year mortgage in 10 years.
The couple also began teaching their sons the importance of saving money early in life, and the power of compound interest. The lessons sounded like this: If a 14-year-old invests $2,000 annually until he’s 18 and not a penny more from ages 19 to 65 and his investment grows 10 percent, it will be worth $1,174,600 at retirement age. If he waits until he’s 27 and then invests $2,000 each year until he’s 65, the result is $805,185. The 14-year-old invests $68,000 less and earns $369,415 more. In 1995, when Joe and Mark were 16 and 14, respectively, they started their own IRAs.
Today, Mark, 52, and Debbie, 51, own a home on five acres in Bainbridge. They aim to save at least 10 percent of their annual household income for retirement investments, including several stocks, mutual funds and money-market accounts.
Mark makes monthly updates to two Microsoft Excel files — one tracks the couple’s assets, liabilities and net worth; the other projects income and expenses. He adjusted the latter this autumn, after selling his stake in a personal-development firm where he was a partner, Bright Side Inc. in Chagrin Falls, to look for a job at a larger company.
“We all should have a baseline of where we are financially, no matter how good or bad the picture is,” Mark says.
When the Hawalds retire, they will have a nest egg worth well into the six figures. According to the American Association of Retired Persons, only one in five baby boomers has more than $25,000 in assets.
“Today, most people are funding their own retirement, and it’s up to us to be proactive and self-sufficient,” Mark says.
His sons must have paid attention: Joe purchased a home outright after his freshman year at Kettering University, and Mark did the same in 2005 while enrolled in graduate school at John Carroll.
Utilize Dollar-Cost Averaging
Russell Township will never be mistaken for Silicon Valley, but that didn’t stop Dennis Tallerico from trading high-tech stocks in the late 1990s. “At the time, it seemed easy and exciting,” says Tallerico, 58.
When he bought stock in Cisco Systems and watched its share price plummet, he realized the buzz over dot-coms was just like his hometown’s more common name: Novelty. “A lot of people thought they could time the market,” he says. “A lot of people were wrong.”
When the high-tech bubble burst and the U.S. economy began to reel, Dennis and his wife, Jacque, agreed they needed do something different.
They had a traditional IRA with Fidelity Investments, cash-value life insurance with Northwestern Mutual and other “scattered assets,” Dennis says. “We lacked an overall retirement strategy, let alone specific insight on investing.”
Some of their money was earning a return, and some wasn’t. “That’s about all we knew,” he adds.
In 2004, Dennis, who operates a small records and data protection services firm, attended an event held by COSE, the small business division of the Greater Cleveland Partnership. He met Rosalie Scafidi, a certified public accountant and financial planner at Ameriprise Financial Services in Cleveland.
When Dennis and Jacque, 53, who works part time as an administrative employee for a construction company, met with Scafidi, the couple outlined short-term goals such as “taking the sting out of the rising cost of college” for their sons Brian, a freshman baseball player on a 60 percent scholarship at Fordham University, and Scott, a high-school student.
Their long-term goals included retiring with the financial freedom to travel more frequently.
Scafidi analyzed the Tallericos’ risk tolerance, determining the couple valued peace of mind and consistent growth over high-risk stocks.
The investment strategy best suited to meet the family’s goals, Scafidi suggested, was “dollar-cost averaging,” a technique designed to reduce market risk through the systematic purchase of securities at predetermined intervals and set amounts.
For example, instead of investing $15,000 in a mutual fund in one lump sum, Dennis and Jacque buy smaller amounts over a longer period of time — $1,250 quarterly for three years. The technique provides insulation against changes in market price. They purchase more shares when prices are low and fewer shares when prices are high.
“The best part is we don’t have to do any predicting,” Dennis says. “We just select the investments we want to hold for the long term [five years or longer], and invest at regular intervals.”
Scafidi addressed the Tallericos’ main short-term objective — curbing the high price of college — by moving some of the couple’s assets into variable annuities, which basically are mutual funds with an insurance policy wrapped around them.
The “insurance wrapper,” as it’s called, allows the money in the fund to grow tax-deferred. Because the move reduces the couple’s liquid assets, the couple will be eligible for lower-cost student loans, Dennis says. He also will have the flexibility to take money out of the annuity next June, when he reaches 59.5 years old. (Early withdrawals incur stiff penalties.)
“The strategy is perfect for us right now, but probably wouldn’t work as well for younger couples because their money wouldn’t be accessible for a while,” Dennis says.
The Tallericos say they’re looking forward to the next decade, when they’ll retire, downsize their house, travel and spend more time with their kids. “For us, the right path isn’t timing the market,” Dennis says. “It’s being more boring and consistent.”
Take Control Over Your Business and Finances
Helun Bachour-Chahda, 57, left economically depressed Argentina at 25 and came to America with a dream: Start a small business to help support her large family.
“I wanted a better future, but when I came here, I started from zero,” she says. “The beginning was rough, because I didn’t know the culture or language.”
In Argentina, she earned a college degree in accounting and finance. In Ohio, she learned about persistence. Along with her mother, brother and sister, Helun “worked here and there for a few years,” scraping together enough money to make payments on a $32,000 house. “We all contributed to expenses, and just did the best we could to get by and save a little money.”
In 1987, she launched GrayTech International on West 150th Street, which makes small- to medium-sized component parts for machines, including medical equipment. Today, Helun estimates the company is worth about $5 million.
“Every life has a purpose, and mine was to establish a business that not only provided for myself, but also for my family and the employees who work here,” says Helun, who’s single and lives in Rocky River.
GrayTech’s 22 employees include her brother, Mario, and her sisters, Marta and Anisse. “The plan is to keep growing the business, and one day sell it to the younger generation,” she says.
Helun has 19 nieces and nephews, most of whom live in Northeast Ohio. “One of my values is education, and I’m trying to help put some of the kids through school,” she says, adding that one teaches private school in Switzerland and another is a master chef. “We’re all very united.”
Before working toward a goal, Helun considers its underlying value. Two of her values are peace of mind and freedom, so recently she looked for ways to achieve a higher return on “a significant amount of money” she held in a preferred-rate money-market fund at The Huntington Bank’s Rocky River location, while also gaining more control over her taxes. After consulting with the branch’s leaders, she moved the funds to a tax-deferred annuity.
Annuities play an important role in retirement planning, enabling investors to save money while eliminating the fear that they’ll outlive their savings. Helun can invest as much as she wants to her annuity at any time, an advantage over investing in IRAs and 401(k) plans, which have maximum annual contributions. Her annuity is invested in a mix of mutual funds, stock funds and fixed-income funds.
Tax-deferred annuities have two phases — accumulation and payout. Helun’s money will grow tax-deferred for five years, when she can either withdraw it as a lump sum or a series of payments. The payout phase begins when she takes income from the annuity, which is growing at about 8 percent annually — about twice as fast as the money-market fund, Helun says. She’ll pay income taxes based on distributions, but only the portion attributable to earnings.
“I have overcome many challenges to make my business and finances profitable, and I’m not sure when I’m going to stop working,” Helun says. “I plan to pass on the investment to the family, so they’ll have something to lay back on in case they need it. To me, though, life isn’t about having as much money as possible. It’s about having a rich, purposeful life.”