Couple:Claus Lulla (37) & Tiffany Miller (31)
Kids: son Jordan (6 months)
Hometown: New York, NY
Incomes: He makes $45,000; she earns $5,000
While her baby is busy trying out solid foods, Tiffany Miller is busy finishing up her Ph.D. in clinical psychology so she can begin a hospital internship this fall. Though she only receives $5,000 a year as a student, Tiffany's internship will pay $22,000 a year, and she has the potential to make four times that amount in the future. Claus Lulla brought in about $45,000 over the past year as a freelance makeup artist on movies and commercials. He and Tiffany have a few thousand dollars stashed away in tax-advantaged retirement plans, but no will or life insurance.
Their goals: They dream of ditching their rental apartment in New York City (where rents are exorbitant) for a home in the suburbs and would like to have another child. They're also anxious to start an education fund for Jordan.
Their roadblocks: Though Claus's salary is substantial, as a freelancer, it can fluctuate from year to year without stability. The couple also feels daunted by Tiffany's $45,000 in college debt. By taking the subway and keeping splurges to a minimum, the two have amassed a cash cushion of $15,000 and want to put the whole amount toward Tiffany's debt.
The expert's advice:
• Write wills. Both Claus and Tiffany should visit a lawyer to draw up a will, as well as name potential guardians for Jordan. Since they have a relatively simple situation, they shouldn't expect to spend more than a few hundred dollars. They may even be able to do it themselves by visiting www.nolo.com.
• Buy term life insurance. Take out a $500,000 policy on Claus and a $750,000 one on Tiffany (because of the potential for her earnings to be higher, and more predictable). A 20- or 25-year term would be appropriate. They can talk to an agent, or go online at www.accuquote.com or www.bestquote.com.
• Continue to pay off the student loans at the scheduled rate -- any quicker than that and they will jeopardize their other goals. Claus and Lulla should keep the $15,000 for emergencies, since Claus's income is unpredictable, and put it in a relatively liquid investment such as Series I savings bonds (which currently pay 4.66 percent and will go up in payout if inflation rises; see http://treasurydirect.gov).
• Once Tiffany's paycheck gets bigger, she and Claus can move on to their house, retirement, and college planning goals, in that order. They should save another $15,000 for a down payment on a house, then focus on retirement savings. Hopefully, Tiffany's future job will include an employer-sponsored retirement plan, which they should max out. Claus should open a Roth IRA if he has a few thousand dollars to invest. If he can afford more, he can open a "SIMPLE" plan, which allows self-employed investors to contribute up to $8,000 of their income a year.
• Look into state-sponsored section 529 plans for college savings. These plans allow for tax-free growth of all deposits, and tax-free withdrawals for qualified higher-education expenses. (See www.collegesavings.org.) But Claus and Tiffany shouldn't go overboard on saving for higher education; Jordan can always borrow money to go to college, but no bank will lend you the money you need to retire.