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Newlywed balancing act
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June 28, 2001: 1:27 p.m. ET
Create emergency fund and pay off credit cards first
By Staff Writer Shelly K. Schwartz
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NEW YORK (CNNfn) - Like most young newlyweds, Myron and Leslie Mykyta are anxious to get started with the next chapter of their lives.
The high school sweethearts met seven years ago while working for a minor league baseball team in Phoenix. They tied the knot last fall, took up residence in Southern California and have since set their sights on starting a family.
To the Mykytas, financial freedom means saving enough for a down payment on a house. But there's the small matter of debt to contend with first.
"Our primary goal is to get ready for a home," said Myron Mykyta, a 25-year-old acquisitions specialist for California State University at Long Beach. "The first thing we'll try to do is get rid of all our consumer debt and that should make it a lot easier."
Myron, who makes $33,700 per year, completed his undergraduate degree at Arizona State University last year. His wife, 23, graduates at the end of the summer as an elementary school teacher and expects to make $40,000 when she lands her first job.
They'll need it. With $30,000 in Leslie's student loans, $18,000 in combined credit card debt and $1,500 left to pay on another short-term loan, the Mykytas are facing some hefty bills.
"We were caught by the student credit card people," Myron admits. "In the immediate future, our income will more than double, so I know we'll be able to afford a house. It's just qualifying for it and coming up with the down payment (that's going to be difficult)."
Condos in Long Beach, Calif. where they live start at $150,000 and small 2- and 3-bedroom single family homes cost a minimum of $200,000.
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At present, the Mykyta's monthly bills are manageable. They pay $875 in rent for a two bedroom apartment, plus $120 for utilities. Their car, a 1999 Nissan Sentra, costs another $420 per month in loan payments, insurance and gas. And their minimum credit card payments are $400.
They do what they can to keep costs down, including renting their truck to an uncle for $205 per month and spending just $150 per month for food with the help of coupons. They will need a new refrigerator in the months ahead and may need a second car, depending on where Leslie works and whether Myron decides to attend grad school – the cost of which would be reimbursed by his employer.
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Experts say Myron and Leslie Mykyta should prioritize their financial goals. | |
They may also be looking at a small windfall.
"I know I have some money that my grandparents have been holding for me, Myron said. "If I came up with a sudden $10,000, should it all go immediately to credit card debt?"
Lastly, the Mykytas are unsure how best to tackle Leslie's student loans. The first monthly payments of $250 will be due this time next year. They're not sure how much to contribute to a retirement account. And they can't seem to determine whether emergency savings accounts, as recommended by most financial planners, should contain three months worth of living expenses or three months worth of income.
"I have my finances organized at this point, but have difficulty in planning for the future," Myron Mykyta writes. "I would appreciate any help that can be offered."
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Our experts' advice
"Ah, to be young and in love, in Southern California," said Cal Brown, a certified financial planner and vice president of planning for The Monitor Group.
He notes the Mykytas have a few things going for them.
"Mr. Mykyta is financially organized," Brown said. "This is an absolutely necessary beginning point; you must know where you are before anyone can give you directions to where you want to go!"
The secret, he said, is to prioritize.
"Mr. Mykyta listed several admirable goals: pay off debt; buy a refrigerator and a second car; buy a house; have a child (and presumably fund his/her college education); start saving for retirement; start an emergency fund," he said. "There is absolutely nothing wrong with any of these goals – the problem is, you can't do them all at once!"
Brown suggests the couple sit down with pen and paper and assign to each of these goals a number based on its priority – 1 being the highest priority and 10 being the lowest. It may be possible to tackle more than one at a time, but he stresses the Mykytas should not put pressure on their new marriage by being in too much of a rush.
"You should be aware that several of the goals will interact with each other," he said. "If you want to buy a house, you probably will first have to pay down your debts because lenders look at the ratio of your debt payments to your income. In addition, they will obviously check your credit to make sure you are making timely payments on your current debts."
As for paying off their debt, Brown said the Mykytas should again sit down and categorize those bills using the following columns: Name of creditor, interest rate, amount owed, minimum monthly payment, and number of months until it's paid off.
Next, they should rank their debts in order from the smallest amount owed to the largest, decide how much to allocate each month for debt reduction and make the minimum payments on all but the smallest amount owed. They should pay as much as they can on the smallest debt until it disappears. Then, they can add the amount they had been paying to the next smallest debt and continue until it's paid off.
"This creates a kind of snowball effect in that you keep increasing the amount that you pay on the debt that is next on the list, and each subsequent debt gets paid off faster," Brown said.
In the meantime, the Mykytas should be careful not to accumulate any additional debt. If they do get that $10,000 gift from their grandparents, it's wise to put it in a savings account so they'll have a cushion in case an unexpected expense crops up – including car repairs.
Kim Dignum, a certified financial planner in Ft. Worth, Texas, agrees.
"Currently, they have a negative cash flow of about $44 per month (until Leslie starts working)," she said. "This is with them paying only the minimums on their credit cards and loan debt. They should continue at this rate and make sure that they do not add to their debt, i.e. DO NOT USE THEIR CREDIT CARDS!"
If they do, in fact, receive the $10,000 from Myron's grandparents, she said, they should immediately set aside $6,000 for an emergency fund, $1,000 for the new refrigerator and use the remaining $3,000 to pay down their debt.
The auto loan and most student loans charge low interest rates and therefore should be tackled last, once the plastic is paid off.
After Leslie begins working, however, Dignum said they should have discretionary income on the order of $2,000 per month. That money should be used to knock out their high-interest credit card debt first, paying $1,000 monthly in addition to the minimum amount they pay now.
The Mykytas should then contribute $500 per month towards a retirement plan and $500 per month into a fully liquid money market account, which are paying in the 5 percent range today.
"This would act as a "sinking fund" to be used for either the purchase of a new automobile or house," Dignum writes. "Overall, it sounds as though they are on the right track. They realize their credit card debt is high, realize they should plan for the future and their financial situation will put them in a good position to accomplish these goals."
Lastly, Brown clarified for the Mykytas the 3-month rule for rainy day funds, saying it pertains to three months worth of living expenses – not gross income.
His final piece of advice: "Don't be so financially frugal that you miss the joys of loving each other!"
* Disclaimer
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