A couple asks: Can we afford to have a baby when we are struggling with debt?
AFTER six years of marriage, Saro and Lerna Shirinian would love to have a baby.
They have steady jobs, a twobedroom house in Los Angeles and plenty of family nearby to help out. But between nearly US$ 20,000 ( RM78,000) in credit card debt, US$ 140,000 in student loans and the US$ 320,000 left on the mortgage, they can’t see a way to make it happen right now. “We’re just trying to figure out if we’re on the right path,” Saro says. “Based on our financial status, is having a family and growing a possibility, or is it too scary right now?”
At 34 and 35 years old, the Shirinians are like many young couples struggling with debt. Loans have helped them meet some major milestones, such as earning a college education and buying a home. ( That has paid off so far, as their home equity has grown substantially.)
Still the couple would like to free up room in the budget to spend on diapers and day care. They would also like to start a college fund so their kids won’t need to incur the kind of debt they have.
The Washington Post shared details of their finances with two financial experts, Tony Wykes, a financial adviser with SunTrust Private Wealth Management and Jonathan Pond, founder of SmartPlanner.com, a financial planning software company. Where their money is going With a combined household income of about US$ 112,000, the Shirinians can pay the bills — but there is not much left over to build savings or to make extra debt payments. Although they don’t need to become completely debt-free before having a child — many parents have a mortgage and student loan debt — they should have extra cash on hand and pay off as much of their credit card debt as possible, the advisers say.
“They’ve done some things right,” Pond says, adding that if they increase their emergency fund, which is large enough to cover about a month’s worth of expenses, it can double as a baby fund.
At the moment, their monthly housing expenses — including the mortgage, property taxes and mortgage insurance — add up to roughly US$ 2,200, or about 30 per cent of their take-home pay.
Their combined student loan payments, which total about US$ 1,200 a month, take up about 16 per cent of their take-home pay. The couple is also paying US$ 600 a month to lease two cars, about US$ 230 on gas and another US$ 200 a month for auto insurance. Credit card payments add up to US$ 600 a month. They spend US$ 140 on utilities, US$ 130 on cable and US$ 165 a month for their cellphone bills. Together they spend US$ 500 a month on entertainment, US$ 500 on groceries and home supplies and US$ 285 for short-term disability coverage and supplemental health insurance.
Both Saro, who works with the Los Angeles County Sheriff’s Department, and Lerna, who works for the California state assembly, have jobs that make them eligible for pensions, an increasingly rare benefit that could bolster their security in retirement. Saro also contributes four per cent of his income to a retirement savings account.
But with retirement still decades away, adding to their savings will also help prepare for the possibility that their pensions will be reduced or that one of them decides to change jobs before qualifying for the full pension, Wykes says. “A lot can happen in 30 years,” he says.
Starting in January 2018, the Shirinians will get a break on their biggest monthly expense: housing. By then, they should no longer have to pay mortgage insurance on their FHA loan, which will reduce their monthly payment by US$ 300 — although their property tax bill could grow if their home continues to gain value. Before then they need to find more creative ways to free up cash so they can pay down their credit card debt as soon as possible, the advisers say.
Saro says they piled on the debt over the years to pay for house renovations and to help out family members. In February, they settled with a collection agency on the debt and agreed on a payment plan that would have the cards paid off by 2019 — but at a steep 19 per cent interest rate. One small place to cut down: They pay US$ 70 a month for a gardener. If they cut their own grass, they could put that cash toward their credit cards, Wykes says.
(Saro says he has the time to do the work himself but estimates it would take seven months to break even on the estimated US$ 500 they would spend for the lawn mower and other tools.)
The couple may also find an opportunity to save when the leases on their cars expire next year.
Instead of taking out two new leases, they could consider taking out one and buying a used car that can be financed and paid off in two or three years, Pond says.
Once that car is paid off, they would free up another US$ 300 a month or so. Over the next few months they should also track their spending to see if there is any way to cut down on groceries or entertainment, Wykes says. ( They recently repackaged their cable and cellphone bills to a lower amount.)
Based on the changes the Shirinians are expecting and the suggestions from the advisers, the two could see their monthly expenses drop by about US$ 1,200 by 2019. ( That assumes a US$ 300 reduction to the monthly mortgage, a US$ 300 cut to their car payments and US$ 600 a month that is now going to credit card payments — if they don’t add on any more debt.)
The trick for the couple will be to make sure that the money is saved or used to pay down debt and not spent on unnecessary items. (Though if the baby comes before then, the money could help them cover those very necessary costs.) The funds, as they become available, could be split toward their three main goals: Paying down mortgage or student loan debt; saving more for retirement; and setting up an emergency fund that could make them feel more secure about starting a family.
For instance, say they are able to reduce their monthly bills by about US$ 1,000, a feat that may feel more feasible after their credit cards are paid off. About US$ 600 could go to making extra student loan payments, Pond says.
Another US$ 200 could go to their retirement account, and US$ 200 could be added to their emergency savings.
The allocation can change based on how their priorities change. Once they build up their emergency savings fund to cover between three and six months of expenses, they can focus on making more aggressive payments toward their debt or starting a college savings plan for their child, Wykes says. — WP-Bloomberg