Investing in peace of mind

(Money Magazine) -- On paper, at least, Tracy Combs is the very picture of financial efficiency. The 40-year-old paralegal faithfully sinks 10 percent of her $53,000 salary into her 401(k) and, with help from an inheritance, has amassed a $349,000 portfolio. (That puts her in the top 3 percent of Americans her age, measured by investable wealth.)

She shops at Sam's Club, tries to minimize credit card usage and keeps a written budget, which surely puts her in the top 3 percent for financial good intentions. "I'm a little obsessive when it comes to money," she says.

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But Combs feels barely in control. It's easier to write a budget, she's learned, than to stick to one. Plus, she just can't get out from under a credit card balance, now around $1,500, no matter how much she obsesses over it.

She tracks her seesaw battle with the debt on 4x6 index cards and tapes her credit cards to the refrigerator so she can't use them for impulse buys. But too often she runs out of cash between paychecks, and the cards get used.

Combs's portfolio is impressively large, but managing it intimidates her, and it presents risks she hasn't focused on. More than half was left to her by her father; almost all of that money (now worth about $195,000) remains in the stock of his employer, Procter & Gamble (Charts, Fortune 500).

Combs knows she ought to diversify, but, except for making a couple of disastrous forays into mutual funds during the tech bubble, she hasn't touched her inheritance. "I don't want to lose what my father took 50 years to accumulate," she says.

Besides, she's come to rely on the dividends from the stock (about $4,000 a year) for spending money, although at her age she should be reinvesting.

For all her worries, Combs is actually in an enviable position. Assuming a historically modest 6 percent rate of return, she'll reach age 65 with about $1.5 million even if she doesn't save another dime.

All she needs, says Cincinnati financial planner Ronda Koehler, is to unload the P&G, wipe out the debt and budget more realistically. Then perhaps she can just relax.

Create a new spending plan - Obviously, Combs's budget isn't working, so Koehler recommends that she track her money for a few months to see where it really goes. (It might be a much better use of those 4x6 cards.)

Combs blames unexpected outlays, like car repairs and friends' baby showers, as budget busters. Koehler, for her part, suspects unrealistic budget entries. Combs's allotment of $100 a week for food and entertainment, for instance, strikes Koehler as unreasonably low.

And Combs could spend smarter. Buying in bulk at Sam's Club isn't necessarily a bad idea, Koehler says, but she points out that warehouse stores are designed to spur impulse buys. Combs ruefully recalls a recent visit during which she went in for groceries and left with a rug, a pair of walking shoes and a megapack of vitamins as well.

"She might spend less if she buys necessities at Kroger's," says Koehler.

Another suggestion: Rather than give cash to her church - the bulk of her $2,000 annual charity outlay - Combs should donate shares of P&G. That will add $167 a month back to her budget, help trim her stake in P&G and wipe out any capital gains tax liability in those shares.

Unload dad's stock - No single stock should ever account for 56 percent of a portfolio. Koehler recommends that Combs sell off her P&G gradually, say, in $20,000 installments on a set date every year. A fixed schedule should take some of the emotion out of whittling down her dad's bequest as well as help wean her off P&G dividends.

Combs can also use proceeds from the first sale to wipe out that credit card balance once and for all. Since P&G is a blue-chip stock, she should direct other proceeds into funds from non-blue-chip sectors - for example, international and small-caps like Royce Opportunity (RYPNX (Charts) and Artisan International (ARTIX (Charts). She will owe capital gains taxes, but she'll end up with a safer, more diverse portfolio.

Simplify - Atlanta financial planner Mary Claire Allvine, a budgeting expert, advises Combs to throw out her budget and give herself an impulse-spending allowance. She should start by stashing enough in her bank account to cover fixed expenses along with $200 a month for unscheduled outlays.

Then once a month she should take whatever is left as cash, put it in an envelope and spend it however she likes, keeping in mind that the cash is all she has to play with.

That strategy, Allvine says, should help keep Combs from resorting to plastic and still let her enjoy life. "It doesn't matter if she's out of cash at month's end," Allvine says. "If she's covering her fixed expenses, funding her 401(k) and not touching her investments, what's wrong with that?"