By George Erb
The Seattle Times.
Joel and Lisa Hamilton have steady jobs, a suburban home and three lively daughters that they worked very hard to bring into the world.
But their desire to pay for their children’s college educations, save for retirement and maybe fix up the house collided with financial realities.
With the help of a volunteer financial planner, the Hamiltons made some hard choices that reduce the odds of them running out of money in their old age. To do so, however, they had to give up something dear for the time being, paying for their daughters’ college degrees.
“We would like to put money away for our kids’ college, but it’s just not possible,” Lisa Hamilton said.
The couple’s story underscores the challenges that face many middle-class families. Parents must manage the expenses of raising children, saving for college and paying off mortgages while still socking away money for retirement. It doesn’t always pencil out, no matter how hard they try.
Joel Hamilton, 42, earns $60,000 a year before taxes as customer-service manager at Full Circle Farm, a Seattle company that provides local, organic produce to customers in five western states.
Lisa Hamilton, 39, is a part-time, third-grade teacher. Last year she earned about $37,000 before taxes, although she expects to earn about $50,000 in the current school year by working more hours.
They both have retirement accounts. Lisa Hamilton has about $72,000 in her teachers pension and a 403(b) retirement savings plan. Joel Hamilton has about $86,000 in a 401(k) account. The Hamiltons also have about $7,000 in savings and no credit-card debt.
Debt is a larger issue. Like many others, the Hamiltons were swept up in the housing bubble and the problematic lending of the previous decade.
In 2006, near the peak of the housing bubble in the Seattle area, the Hamiltons sold their house and bought a home for $361,000, property records show. The couple were ready to start a family, and they wanted a larger home in a community with good schools.
The new house fit the bill, and the Hamiltons took out an additional home equity line of credit to replace the roof and windows, along with other projects.
Seattle-area home prices began collapsing the following year, however, and in 2008 a lender persuaded the Hamiltons to refinance with an interest-only loan.
They made only interest payments for nearly two years, until a friend in the mortgage business urged them to switch to a conventional 30-year mortgage.
They now owe about $369,000 on their mortgage and the line of credit. Zillow currently estimates the home’s value at $382,823, which would put the Hamiltons’ equity in the property at about $13,800.
In addition to the housing debt, the Hamiltons have about $20,000 outstanding on a car loan. Payments on the home and car loans add up to about $26,270 a year.
Money is tight. They sometimes raid their savings account to make ends meet.
“It’s a constant struggle,” Joel Hamilton said. “You think you get ahead, and the car breaks down.”
Rachele Bouchand, director of financial planning at Seattle-area accounting firm Clark Nuber, volunteered to examine the Hamiltons’ finances and offer advice.
Her cash-flow projections, based on the family’s finances and plans, showed that the Hamiltons could finish three out of the next five years in the red. More worrisome, Bouchand’s projections also showed that the couple could run out of cash in their early 80s, or sooner, although they would still have their home.
Clearly, the Hamiltons had to make some hard decisions.
Bouchand first urged the couple to begin tracking their expenses.
“If you know where you’re spending the money, you can make choices about whether you want to spend or not,” she said.
She also suggested ways for the Hamiltons to cut expenses, such as buying a car every nine years instead of every seven years.
Bouchand then focused on the couple’s retirements. The Hamiltons are eligible for full Social Security benefits when they turn 67. Bouchand advised each of them to work until he or she is 68. That would give them more time to save and increase their Social Security benefits.
To protect the Hamiltons’ retirements, Bouchand told the couple that they shouldn’t try to pay for their daughters’ college educations, although that could change if their financial picture brightens.
The Hamiltons, who put a priority on college for their kids, are still coming to terms with that scenario.
In the meantime, the couple plan to begin itemizing all of their expenses and, as Lisa Hamilton said, “face the truth of what we’re spending our money on.”
Despite the sobering advice, the Hamiltons say they are more confident about their household finances.
“We might as well do what we can today,” Joel Hamilton said. “It’s nice to have that road map.”
Keeping it simple
Personal finance can seem complicated, but Rachele Bouchand keeps it simple. She tells her clients to know where their money goes.
“You can’t make any changes until you know where the spending is,” said Bouchand, director of financial planning at Clark Nuber, a Seattle-area accounting firm.
Families that get a handle on their expenses can more readily identify their discretionary spending and make concrete decisions about what they’re spending their money on. As a result, they are more likely to change their spending habits, Bouchand said.
Fortunately for families, technology is making it easier to keep track of household income and expenses. The drudgery of handwritten spending logs has long since given way to online and desktop money-management programs.
Bouchand suggests the personal-finance products offered by Quicken and mint.com. Increasingly, she said, banks are adding personal-finance tools to their online banking sites.
“I don’t care if it’s pencil or paper as long as they do it,” she said.