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Family Money Makeovers

Struggling to Live Well

Name: Rachel and John Quinn
Child: Jailyn, 10 months
Jobs: She's a nurse; he's an education enrollment coordinator
Income: $58,000 a year

Rachel and John Quinn have the same seemingly modest goals of many new parents: They'd like to have more children someday and move their expanding family into their own home. Yet with big school loans ($35,000 total), two car payments ($700 a month combined), and about $7,000 in credit card debt, they find it hard to live within their means each month, let alone save for the future. "We both have pretty good jobs, work hard, and don't spend extravagantly, so we shouldn't be struggling so much," says Rachel of their paycheck-to-paycheck existence. "There's got to be a better way."

They almost never go out, she says—they stay home at night, playing with the baby and getting in a few rounds of cards or video games. Both fitness buffs, they can't afford gym memberships. "We're only 24 and 25 years old," she says wistfully. "It would be nice to have a little fun sometimes."

John doesn't consider his current jobsoliciting students for online college coursesa career but is unsure about what his next move should be. His college degree is in computer information systems with a minor in business.

The Quinns currently rent one half of a two-family house. They coordinate their work schedules so they don't have to put Jailyn in daycareRachel works weekends, John works weekdays. The baby was born two-and-a-half months prematurely and nearly died, and as a result the couple prefers to look after Jailyn themselves. "She's our little miracle," says Rachel. "We came too close to losing her to leave her with anyone else just yet."

Taking charge of their finances

Drive down car payments.

Financial planners tend to think car payments should be no more than 5 percent of a family's pretax income, but the Quinns spend nearly three times that amount for their 2002 Nissan Altima and 2002 Buick Rendezvous, which they bought used. To lower those payments, Kevin McKinley, a certified financial planner in Eau Claire, Wisconsin, and author of Make Your Kid a Millionaire: 11 Easy Ways Anyone Can Secure a Child's Financial Future, recommends selling one of the cars and replacing it with an older used car purchased outright for no more than $2,000. The rest of the proceeds from the sale can be used to help pay down credit card debt and start a fund for the down payment on a house.

Tackle the credit card debt in other ways, too.

The Quinns should then dedicate some of the money they save in car payments to pay off their credit cards at a faster rate, says Ginita Wall, certified financial planner in San Diego, author of It's More than MoneyIt's Your Life! and cofounder of the Women's Institute for Financial Education. They should start with the highest-rate cards firstin their case, a department store card that charges a whopping 24 percent, on which they owe $400. If they increase their current $50-a-month payments on the card by $75, they'll pay it off in about three months, versus nine months, says Wall. If they then apply that same $75 a month to their next high-rate card, a 14 percent account with a $1,000 balance, they'll pay it off in six months rather than nine. Once they've paid off the credit cards, they can start building a house fund.

Look for everyday economies.

The Quinns spend $80 a month for their home phone and $150 a month for their cells. Getting rid of one or the other or switching to a lower-cost cell service could free up cash for the "little fun" that they'd like to be able to enjoy.

Consult a career counselor.

To explore job opportunities that would make better use of his educationand perhaps offer a bigger salary and better benefits, like a 401(k) or similar retirement savings programJohn should consider talking to a career counselor, says Wall. Local community colleges often offer low-cost counseling programs.

Buy life insurance.

If something were to happen to either of them, the family would go into a financial and an emotional free fall. Since both are young and healthy, they can pick up the protection they need at a relatively cheap price. McKinley recommends they each buy a $500,000, 20-year term-life insurance policy, which would see their daughter through to adulthood. They can get quotes online at such websites as www.term4sale.com and www.insure.com.

Dealt a Tough Hand

Name: Anna Mills
Child: Marshall, age 2
Job: Part-time preschool teacher
Income: $23,500 a year

Former first-grade teacher Anna Mills quit her job shortly after her son, Marshall, was born two years ago and relished her role as a stay-at-home momuntil quite suddenly the marriage she thought was stable started to disintegrate. Within the space of only a few months, the marriage had ended.

She knew she couldn't count on more than modest financial help from her ex-husband, a high school teacher. So she went back to work as a preschool teacher at a local church, a part-time position that allows her as much time as possible with her son, a happy and energetic toddler who loves music and sometimes laughs so hard he can barely catch his breath. She currently earns $8,000 a year and half tuition for Marshall. Her ex-husband pays $450 a month in child support, while both his parents and hers help out with an additional $700 a month.

Still, with just $23,500 a year in income, she finds meeting day-to-day expenses a struggle. She has no savings or emergency fund and worries that any unexpected expense could send her fragile budget into a tailspin. "If the tires blow on my car, I wouldn't be able to replace them," she says. The 10-year-old car has 128,000 miles on it.

Why not just charge them? Mills was recently the victim of identity theft and has spent several months trying to correct her credit record, but until the case is resolved, she can't obtain credit and has no credit cards that she could tap in a financial emergency.

To supplement her income, she's trying to launch a modest crafts business on the web. (She makes memory boxes, which she currently sells to friends and family, earning her an extra $100 or so a month.) Also on the bright side, she just moved into a new three-bedroom house with financial help from her parents, who covered the down payment.

She's extremely grateful for their support"I don't know what I'd do without it"but feels uncomfortable accepting so much assistance. "At some point, I'll need to stand on my own financial feet," she says.

Getting Back on Track

Build an emergency fund.

With no short-term savings and just $200 in her checking account, she rightly worries about how she'd come up with cash in a crisis. Fortunately, she has some recourse: 57 shares of stock that were a gift from her father. Selling it all now would yield about $2,500, which she can put in a money-market account to use if and when needed, says McKinley. Mills can further prepare for a crunch by opening a home equity line of credit. In her case this would give her up to $17,000 to tap in an emergency, but she won't pay any interest or fees unless she actually needs money and draws on the credit line.

Rebuild her credit standing.

She must continue to check her credit reports regularly to make sure the errors have been corrected. One way she can start to rebuild a good record, McKinley suggests, is to get a debit card tied to her checking account that she can use to pay for things here and there to demonstrate that she can use plastic responsibly. She might also look into getting a secured credit card, linked to her new money-market accountbanks are more likely to issue credit if the debt is secured by a tangible asset, like a linked account.

Get tax help.

Her low income means she may be able to wipe out any federal taxes she owes by claiming the Earned Income Tax Credit, says McKinley. This reduction was available to qualifying families and individuals with incomes under $33,692 for 2004. (For more information, go to www.irs.gov.)

Keep growing her entrepreneurial spirit.

Both planners encourage her to stick with her efforts to build her memory-box hobby into an online business to earn extra cash. The cost of the marketing effort is minimal, and the potential payoff in added income is much needed. Once Marshall is a little older and in school for longer periods, Mills might also consider looking for a higher-paying teaching job or perhaps start tutoring students as a sideline to bring in extra money.

Focus long-term on retirement.

Given their financial situation, Marshall is likely to qualify for scholarships and low-cost loans for college, so both planners urge Mills to put away any money she's able to save for her own retirement. Even little bits help over many years: $25 a month, earning 8 percent in a tax-deferred account like an IRA, will grow to nearly $60,000 by the time Mills turns 65.

Stretching One Income

Name: Brandi and Jason Grant
Children: Randee, 7, Kelsey, 3, and Aaron, 1
Jobs: She's a stay-at-home mom and he's an Air Force staff sergeant
Income: $24,000, plus housing allowance

This family of five is struggling to get by on a single military salary. "By the end of the month, we run out of money and start charging the things we need, like food and diapers," says Brandi. "I know we couldwe have todo better."

The Grants are hardly big spenders. Their only real indulgence is going out for fast food a couple of times a week with the kids. Yet they're close to maxing out their two credit cards, and can only make the minimum payments on their nearly $6,000 combined balance. To help out, Brandi's mom regularly buys clothes for them and the children, but the couple realizes this isn't a long-term solution. Says Brandi, "We couldn't afford it without my mom, but we can't go on relying on her."

Jason, currently stationed at Albuquerque's Kirtland Air Force Base, is planning on a military career. The couple expect to stay in base housing until he retires from the military, which means they won't be looking to buy a home for 20 years or so. Their current home, a four-bedroom house on base, which comes rent-free with utilities, is not luxurious but is certainly adequate for the family's needs.

But while the Grants won't have to worry about housing for a while, they're concerned about their ability to pay for virtually everything else, from mundane expenses like curtains (most of their windows are bare) to unforeseen emergency expenses. This was underscored last year when Jason's grandmother was ill and the couple couldn't afford to travel one state away to see her. "We rack our brains over our finances every single pay period," says Brandi, "but we feel like we're just stuck."

Make Their Money Go Further

Refinance high-rate loans.

With the average rate on new car loans recently below 7 percent, the Grants should thoroughly investigate whether they can do better than the 11.25 percent rate they're currently paying for the loan on their $22,000 Dodge Caravan, says McKinley. If they are able to refinance their loan, this move alone could free up more than $50 a month.

Track spending.

They should write down every penny they spend for the next month or so to get a handle on how the small expenses add up, says McKinley. For instance, Brandi estimates that the family spends about $175 a month eating out twice a week. It's tough to make sacrifices, but if they can cut these meals to once a week, they'll save roughly $90 a month.

Consider ways to supplement income.

The Grants currently tithe $200 a month to their church. If this is something they feel strongly they must continue, they ought to figure out how to boost their income by that much. Wall suggests Brandi investigate doing some work directly for the church and then tithing her earnings right back to it.

Redirect savings.

The Grants should use the extra few hundred dollars a month these moves will free up to aggressively pay down their credit card debt, says Wall. Then they can apply that same money to longer-term savings goals, like setting up an emergency fund, college savings, and an IRA for Brandi (Jason will receive a military pension, so saving for his retirement is less urgent).

Write a will.

Every parent needs to write a will that names a guardian for their children and details how they want their assets bequeathed if either or both were to die prematurely. (Simple wills can be drawn up using computer software programs for less than $50; lawyers typically charge at least several hundred dollars.) "Disregarding the potential for tragedy, which is easy to do when you're young, doesn't make tragedy less likely to happen, but it does ensure that your family's pain would be financial as well as emotional," says McKinley. "Taking measures that will protect the people you love is a tremendous gift to give them."

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