Tracking the middle class' missing cash

None of the three families profiled in Gut Check America’s coverage of the middle class was asking for advice when they wrote to msnbc.com about their financial struggles. But they all consented to having some of their budget information shared with Freiburger, who calculated their monthly cash flows and offered these observations on their situations.

The Brennans of Mountlake Terrace, Wash.
Freiburger gives Dale and Darby high marks for their clear goal of saving for a down payment on a house. Given their current income and expenses, they should be able to accomplish it, she says. First, however, they need to establish some emergency savings. She points to the apparent surplus in their monthly budget, along with their categories for "miscellaneous" and "spending money" as the likeliest sources from which to squirrel something away.

After that, “If the family would like $20,000 to $30,000 in five years to put down on a house, the goal is accomplished with $333 to $500 a month. Set up an automatic monthly savings amount to accomplish this goal. If it is not seen, it is not spent. ING Direct makes it simple to have these monthly amounts brought over to a 4.5% savings account for forced savings.”

On retirement savings, Freiburger’s advice is to do something, even if it’s a small start: “It is encouraged that they at least find out if a ‘free’ match is being left behind.  If not willing to participate in a 401(k), we would strongly encourage a Roth IRA using Vanguard Funds. If we assume someone’s salary is $40,000, contributing 3 percent of pay is $1,200 a year. At an 8 percent return on investment now through age 62, that’s $224,000. Up the annual contribution to $1,600 and it’s nearly $300,000 at age 62.”

Freiburger says that even though the couple’s $17,000 in college loans is a burden, “it’s still pretty small. I have seen several hundred thousand in some cases.” With the interest on the loans averaging 9.5 percent and the payment at $263 a month, “the loan remains open for another 7.5 years. Make sure each loan gets a minimum payment but leverage the amounts so the highest interest loan can be paid off first. Simply increasing the overall payment to $350 from $263 would reduce the schedule by two years and save about $3,000 in interest.” 

The Hamakers of Hayden, Ala.
While financial planners are generally not fans of financing expenses with credit card debt, Freiburger applauds the family’s decision to help pay for Olga’s education this way. Freiburger sees very little discretionary income in the family’s budget. “The good news is that based on rate, amount, payment, all of the loans will be gone within three years.  Unfortunately, Ken’s just going to need to take a deep breath and know it shouldn’t get worse and hopefully get significantly better if his wife can also bring in some additional income.”

On retirement savings, Freiburger says, “It’s never good to have an open loan in a 401(k) account that represents this large a percentage of the balance. However, it will probably be paid off in three years. But the amount in the 401(k) and currently not contributing is not good. I strongly encourage he still try to add $50 to $100 a month to principle just to keep this growing. Start with a little now, and then as soon as any loan is paid off, redirect that amount to the 401(k). As things stand, the current $23,000 balance will be only $168,000 in 25 years if it grows at 8 percent.”

Like the Brennans, Freiburger says, the Hamakers should make their top priority to establish an emergency fund.

The Suarezes of Sweetwater, Fla.
Freiburger finds Olga’s situation “very, very difficult.” Simply put, “her income with that size and age of a family is not enough” for all she’s trying to do. “Once we look at the fixed costs, there’s not that much truly left over.”

To Freiburger, Olga is “making the right choice. … It’s wonderful that she prioritized the better school district and putting the kids first. But there’s only so much the income can go toward and if it goes toward the better school and higher rent, that’s the decision. … These aren’t the parents’ faults when that’s what’s going on in our country. It’s a whole big picture situation that’s got to change.”

In the meantime, however, Freiburger says Olga might take a look at the high-interest loans she’s carrying on her car and furniture and see if there’s any way to refinance them to lower rates.

And, as with the other families, Freiburger strongly urges Olga to figure out some way to start a rainy-day fund, even though her monthly budget appears to be running at a deficit.

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