By Steve Garmhausen
AUSTIN, Texas (AP) — Welcoming a first child would be more than enough to keep most couples busy. But Abby Williamson and Matthew Young, who started a family in December, have a few more life changes planned.
Despite the recession, Matthew, 31, wants to change careers — ditching his successful but grueling carpentry and construction business to become a chiropractor. The change would mean relocating from their Austin, Texas home to be near one of Matthew's schools of choice, in Dallas or Atlanta. Still, the couple seems to be in an enviable position: They recently became homeowners and came into an inheritance of $130,000.
Yet there is reason to be concerned about the couple's financial plans. Their nest egg has taken a beating. Given the state of the economy, the couple needs to take a breath and think critically about their career and relocation timetable, according to two experts who analyzed their situation.
Their sobering advice "has inspired us to have lots of long conversations lately about our priorities and plans for the near future," says Abby, 32.
Matthew and Abby earn a total annual income of $67,000 — $40,000 from his job and $27,000 from her fundraising position. One of their challenges is that after maternity leave, Abby recently returned to work on reduced hours. This means she's now bringing home a third less pay.
The couple's inheritance, combined with their prior investment savings, had their portfolio looking good at the beginning of 2008. But the stock market slide in tandem with almost $20,000 in withdrawals for a home remodeling, have cut it to about $80,000.
Still, the couple has costly plans. Matthew wants to start chiropractic school full-time as early as 2010; three or four years of tuition is likely to total $100,000, not including relocation costs.
WHAT THEY SHOULD DO
Matthew is understandably tempted to change careers. He's growing tired of the physically demanding work. In the past, he has benefited from chiropractic treatment, and his dance background and interest in science all make the field seem appealing.
But he should do more legwork before he starts plunking down those tuition payments, says Jan Dahlin Geiger, a certified financial planner based in San Antonio. She suggests interviewing local chiropractors with relatively young practices in order to get a realistic sense of what to expect. Matthew may learn that the market is glutted, she fears.
Relocation can also be extremely risky in this economy, says Ronald Rowland, president of Capital Cities Asset Management, in Austin. The couple bought a new home in 2007, using $15,000 from their savings for the down payment. Selling it in order to move soon could mean taking a loss, and renting it is even riskier since there's no guarantee of steady tenants.
What's more, Rowland advises Matthew to be prepared to operate his new chiropractic business for several years at a loss, something the couple can't afford without dipping heavily into their nest egg. His suggestion: Slow down and focus on surviving the recession. "Relocating and changing careers is a high-risk endeavor in any economic environment," he says. "In the current environment, it becomes extremely high-risk."
Before considering any move, the couple should rectify their budget problems and line up employment in the new location, Rowland advises. They should have a budget in place for the first four years, as well as a plan to cover the startup and first few years of Matthew's chiropractic business, he adds.
Better yet, he advises: Stay in Austin, where the economy is expected to hold up relatively well during the recession and keep the carpentry business. The couple's primary goal, says Rowland, should be to avoid becoming a casualty of what he calls "The Great Recession."
WHAT TO CHANGE
Regardless of whether Matthew pushes ahead with his career change, he and Abby need to make a marked effort to rein in spending. Between her reduced earnings, new childcare expenses for baby Noah and budget-eating items like yoga classes and frequent meals out, the couple is on course to end 2009 a whopping $26,000 in the red, says Geiger.
Sure, they can continue to dip into their inheritance. In fact, squandering that money in such a fashion would be all too typical, says Geiger. "Most people blow through an inheritance in about five years or less," she warns.
Luckily, there is room to maneuver within the couple's budget. They plan to heed Geiger's advice and cut way down on groceries, restaurants and travel. What's more, Matthew intends to switch to a cheaper premium, higher-deductible health plan, and the couple intends to slash their planned nanny hours from 20 to 12. They may even barter Matthew's home repair services for some of the childcare.
In addition, Matthew has the ability to boost his income by taking on more work this year. "I feel confident that we're not going to tap our savings," says Abby.
But they may well have been forced to do just that if they had not itemized their spending at the insistence of Geiger. "Until you know how much is coming in and going out, and where it's coming from and going to, you can never get a grip on your money," she says. For instance, they didn't realize that childcare would cost a whopping $12,480 annually until they sat down and did the math.
HOW TO INVEST
Despite the recent rally, a steady stock market recovery is far from certain. If Matthew and Abby decide to use their inheritance money to fund his career change, they should immediately move their money out of stock mutual funds and put it into cash to prevent the total from shrinking further, Roland says. Their money is currently spread across 11 mutual funds.
"Any money needed for the next five years should not be invested in the stock market," Rowland warns.
That money can be parked in money-market funds, but their yields are a mere 1 percent or less these days. Putting it in a credit union savings account may improve on that yield, and relatively good rates are also available through CDs at local banks. Invest in CDs with durations of six months to a year, and when they mature, be ready to move to money to higher-yielding accounts at a different bank, suggests Rowland.
If, on the other hand, the couple realistically believes they can economize enough to achieve their goals without cracking that nest egg, they should try a different approach than the one that shaved 31 percent off their investments in 2008.
Because they are young and have many years to make up for failed risks, Rowland suggests being aggressive. The couple should invest half of their savings in a diversified selection of actively managed growth funds — both international and domestic.
The rest should be managed using a flexible approach known as tactical growth. The approach includes carefully rebalancing allocations among not just stock mutual funds but also bonds, commodities and cash to maximize returns, lower volatility and limit the damage from any one investment asset class.
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By Steve Garmhausen