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Plans for a couple and son
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November 6, 2000: 6:05 a.m. ET
With a young child, a Denver couple mull options for their life together
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - Kara and Brigham Cook have an eight-month-old son, a new home and a chance to lay their financial foundations.
They've been married going on five years. But they moved to Denver in May. Brigham Cook took a job there after graduating this spring from Brigham Young University in Provo, Utah.
 "We're just now settling down," Kara Cook, 25, said. "It's a lot of fun." Brigham Cook has an information-technology consulting job with American Management Systems (AMSY: Research, Estimates). They want to build a good base for themselves.
"Basically, we know how to budget and we know how to save," Kara Cook explained. "We just aren't sure what to do with it once we've got it." What should they do?
A rock and a hard place
Kara Cook also got her undergrad degree at BYU, in math, and a master's, in math and statistics. She graduated earlier, then worked as an actuary. She stopped when she had their son – J, short for Joseph. They hope to have at least three or four kids.
The Cooks met in college, shortly after Brigham Cook's engagement to another woman fell apart. Kara Cook's roommate thought he needed company and asked them to go out one night. They dated for a year and got married in 1996.
 Money pressures crashed on them when Brigham Cook, now 27, crushed his kneecap in a rock-climbing accident. With student health covering only 80 percent of the costs, they wound up $9,000 out of pocket.
"It was kind of miserable," Kara Cook recalled. "We had our hard times. It made us grow fast."
College also left them with $6,500 in student debt. They want their kids to be in a better position. They wonder how they should save for J and any future children.
The Cooks are paying off their student debt quicker than the $123 a month required. They hope to finish next July or August. At that point, they'll step up Brigham's 401(k) to 15 percent of his salary, from 3 percent now.
Mapping out their money
They have a few thousand dollars to roll over into an IRA from Kara's old 401(k). They are paying 3 percent into Brigham's 401(k), but he doesn't get a match now.
It's also his turn for a treat -- the couple bought a piano for Kara when they moved. So they want to save for his dream car, a convertible Ford Mustang, for his birthday in 2003.
Since the Cooks are Mormons, they tithe 10 percent of their income to the Church of Jesus Christ of Latter-day Saints. They want to send any children they have on the two-year missions. That could cost around $12,000 apiece.
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Kara and Brigham Cook feel they're in a position to invest. But they don't know how. She has checked out investment books from the library. "They all contradict each other," she laments.
"What are the differences between a Roth IRA and a traditional IRA, and which would be right for us to open up?" she asked.
They'd like to set aside nonretirement investments and build an emergency account. They would like to know if they should pay off their mortgage faster.
"We kind of don't know where to go from here," Kara Cook said.
What the planners say:
The Cooks have limited options for Brigham's Mustang, Mike Basso notes. They have 2-1/2 years. So they can't stand to lose principal, Basso, a certified financial planner with Lincoln Financial Advisors in Lincoln, Ill., said.
He suggests they open a money-market account with a local bank or a mutual fund company. Mutual funds pay a percentage point or so better than banks, as much as 6 percent. But they aren't insured, and banks are, Basso noted.
The Cooks could then set aside savings monthly for the car, Basso said. Saving $505 a month would give them $20,000. But that may not be possible on their budget. The closer they can get to that rate, the better, to keep any payments down, he said.
Once they've saved $1,000, they might want to check interest rates on a one-year Treasury bill, Basso said. But they may well find money markets or certificates of deposit paying the same, he said.
Stash emergency money away slowly
Basso also recommends a money-market account for emergency funds. They need three to six months' expenses, he said. If the rate makes sense, they could also put half the emergency money into a short-term, three-month CD, he said.
"Don't think that you need to do all of this at once," Basso said. The Cooks can slowly save their reserves over time. They should balance with their other needs, he said.
For instance, they're wise to pay down their student loans fast, according to the planner. Adding $50 a month to the minimum means they will knock nearly two years off the payments, finishing them in around 3-1/2 years.
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Since Brigham isn't getting a 401(k) match, Will Hays, a certified financial planer in Collierville, Tenn., advises the Cooks to fully fund a Roth IRA. Then they can fund the 401(k).
His thinking: They will be in a higher tax bracket when they withdraw the money. A $2,000 investment in his 401(k) will grow to $34,899 in 30 years, assuming an average 10 percent return. Hays predicts they'll pay around 28 percent federal tax, leaving them $25,127.
Roth contributions are after-tax. At their current 15 percent federal tax rate, that leaves them $1,700 on the same $2,000.
But assuming the same return, it will be worth $29,664, tax free, in 30 years, Hays calculates. That's 18 percent better than the 401(k). If they contribute $2,000 each into a Roth every year, they will have $279,640 apiece, tax-free, after 30 years and assuming a 10 percent return.
If Brigham Cook's employer starts a 401(k) match, it may be better to pay into the 401(k) first, Hays said.
Roth vs. regular IRA
While Roth IRA contributions are post-tax, payments into a regular IRA may be tax-deductible. But that depends on your adjusted gross income and whether you're covered by a 401(k) plan, Basso noted.
For a married couple with a 401(k), like the Cooks, they can deduct $2,000 in contributions to a regular IRA as long as their adjusted income remains below $52,000.
Roth money has to sit in the account until you're 59-1/2, or five years, whichever is longer. At that point, though, withdrawals are tax-free. Regular IRA money starts coming out at 59-1/2, too, but it's taxed as ordinary income.
For a married couple, Roth eligibility phases out at $150,000 and stops at $160,000. So the Cooks don't need to worry about that yet.
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The Cooks ask how they should save for their son's education. Hays thinks they're right to keep the money in their names, and he's even seen children's education money put in a grandparent's name, for tax purposes.
Most states offer prepaid tuition programs, Basso pointed out. Residents pay either a lump sum or a monthly amount. The state guarantees in-state public tuition.
Most states also offer 529 education accounts. Again, parents pay either a lump sum or monthly, and the money goes into mutual funds, Basso said. The blend typically depends on the child's age.
In 529 accounts, the investment grows until the student goes to college. Withdrawals are then taxed at the student's income rate. That can mean a child doesn't qualify for student aid. But at the Cook's income level, it doesn't look like they'll qualify for aid anyway, Basso said.
The Cooks can also pay into an education IRA. They can only contribute $500 a year, though. Like 529 plans, the money grows tax-free, then counts as income for the student.
Save for college in a Roth?
Basso said the Cooks could consider saving in their Roth IRA instead. Assuming a 10 percent return, $4,000 a year between them will grow to just over $200,000 by the time their son hits college age, Basso noted.
At that point, the Cooks could withdraw the $72,000 they contributed. They would pay ordinary income tax but not a penalty on however much else they need to withdraw for college. The downside? The money can't be paid back in. Assuming 6 percent inflation, a $10,000-a-year college education would cost around $124,000, Basso said.
The Cooks could save the rest of the Roth for retirement. But the strategy depends on their tax situation, so Basso tells them to talk with their accountant first.
Hays thinks the Cooks are better off investing than paying their mortgage down quickly. Typically, investing in growth stocks will yield a higher return than the rate of interest on the mortgage, he said.
When it comes to investing, don't automatically pick the funds with the highest returns, Basso said. Brigham is putting his 401(k) into the Fidelity Growth Company fund (FDGRX). It's a good choice as a large-cap growth fund, Basso said.
At their age, Basso recommends they stay 100 percent in stock funds. But the Vanguard Index fund in their IRA will have many of the same stocks as the Fidelity fund.
They need to select some international, small-cap and mid-cap funds in their 401(k), to give them diversity, the planner states. "You don't want to put all your eggs in one fund or asset class."
* Disclaimer
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