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Money Makeovers

The Tappers

Couple:Bill (31) & Cheryl (30) Tapper

Kids: son Aaron (1)

Hometown: Metuchen, NJ

Incomes: She earns $58,000; he brings in $40,000

Bill, a high school physics teacher, and Cheryl, an art director for a book publisher in Manhattan, had a busy year. The couple paid off their credit card debt (to the tune of $20,000), bought a $260,000 home, and most importantly, welcomed their son Aaron to the world. To avoid paying for private mortgage insurance on their new home (required when the down payment is less than 20 percent), they took out two mortgages -- one for 80 percent of the home's value, and a second for 15 percent of the value. The interest rates are 7 percent and 7.6 percent, respectively.

Their goals: The house needs a new furnace, and the Tappers want to put in central air-conditioning. Cheryl would like to have a second child and negotiate a more flexible work schedule so she can spend more time at home. Bill would like to free up the money to go to graduate school, which would qualify him for a raise in the school district. In the meantime, their concerns about retirement loom large. Bill just began contributing to a 403b retirement plan at work, and Cheryl has put the minimum in her 401k for six years. "We cringe when we look at the [small] balances," Cheryl says.

Their roadblocks: Cheryl admits she's a little footloose with her ATM card, withdrawing cash whenever she needs it. As a result, they have little extra cash at the end of the month. Despite their good salaries, Cheryl has "no idea where all their money goes."

The expert's advice:

• Refinance the mortgage. "The Tappers could shave several hundred dollars off their mortgage payment if they refinance," says McKinley. They should aim for a 30-year loan with a rate of 6 percent, and pay off their mortgage as slowly as possible. If they build up excess cash that they would have otherwise applied to the principal, McKinley recommends that they invest it instead. The reason: Liquid assets are essential in the event of a job loss. (If the Tappers lose their jobs and their money is buried in the mortgage, a bank would be reluctant to allow them to borrow against it.) By investing their discretionary money instead of using it to pay off their mortgage more quickly, the Tappers can actually make money. Plus, McKinley reminds the Tappers to deduct the amount they pay in interest on their mortgage from their taxable income (if they itemize) for even further savings.

• Control spending. The Tappers have already overcome the first hurdle: acknowledging the problem. The next step is to track every single penny they spend on a discretionary basis for a month -- meals, clothes, toiletries, movies, gifts, etc. -- and add them all up. Once they realize where the money's going, they can rein in the outflow. Bill and Cheryl must put themselves on a reasonable allowance and stick to it.

• Avoid ATMs that aren't a part of your bank's system. In some cases, banks will charge up to $1.50 for withdrawals made from out-of-network machines.

• Begin building a liquid account for emergencies. With the money the Tappers scrape up from cutting their "where did it go?" spending, they should try to save $15,000 -- about three months worth of living expenses which can also be used for home improvements or car repairs. After they've done that, they can then look to raise their retirement contributions.

• Save for school (for both father and son!). The Tappers should consider New Jersey's new 529 plan (get info at www.franklintempleton.com. By opening an account for their son, he may qualify for a $1,500 scholarship to a state school. Best of all, if Bill decides to pursue his master's, he can transfer the account to himself and pay no taxes on withdrawals.

Laura Rowley is an author and freelance financial writer based in Maplewood, New Jersey.

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