Putting survival mode in the rearview mirror

McClatchy-Tribune Information Services

October 13, 2014

Jason and Rhionna Watson are very good at making their money go a long way. They have to be.

On a modest combined income the couple have raised three children, earned college degrees, started careers and remained steadfast contributors to their church.

But the Watsons also found themselves beginning their 40s with a negative net worth and facing questions about shrinking their debts, building their savings and laying the groundwork for their retirements.

With their three children approaching adulthood — the oldest is a community college student — the Watsons are ready to put their years of "survival mode" behind them and create a more secure financial future.

They also saw an opportunity to change when Rhionna Watson began working full time in June, increasing the couple’s combined annual income 32 percent to about $90,000 a year before taxes and withholding.

"The way we’ve always lived before is survival. How we can do the most with the least?" Rhionna Watson said. Now that they have more take-home pay, the Watsons want to use the additional money wisely.

So the Seattle-area couple asked for a free money makeover from a financial planner with their local chapter of the Financial Planning Association. The chapter connected the Watsons with financial advisor Trish Howe.

Howe examined the Watsons’ finances and found the family was just scraping by, even though both parents have steady, full-time jobs.

Jason Watson is a certified technician who makes artificial limbs. Rhionna Watson is a case manager at a rehabilitation center.

The two bring home about $6,321 a month after taxes. But they also spend about $5,300 a month, Howe estimated, leaving the family with a weekly surplus of about $255.

"For a family of five, that’s not much," she said.

The Watsons also have about $44,800 in debt from a student loan, a car loan and credit card purchases. They have about $750 in savings.

Howe’s immediate goals for the family were to help them reduce their debt, live within their means and support their children in college.

The couple’s credit cards were at the top of Howe’s hit list. She urged the Watsons to stop digging a deeper hole by ending all credit card purchases except for emergencies. Howe also advised the couple to use debit cards instead, because the cards make spending more transparent by withdrawing money directly from the household checking account.

Next, Howe advised the Watsons to pay down their debt, starting with a $1,807 credit card balance at a variable interest rate that is currently 13.24 percent. The Watsons figure they can pay $400 a month on the card by tapping their weekly surplus and also diverting some money earmarked for savings. At that rate, the balance would be paid off by April.

That’s fine by them. "I hate having that debt over my head," Jason Watson said.

As the Watsons reduce their debt payments, they will have more money available for savings, Howe said.

Neither of the Watsons’ employers offered matching contributions with their 401(k) programs. So Howe advised the Watsons to open individual Roth IRA accounts at a discount brokerage that doesn’t have annual fees.

The Watsons and Howe even discussed the couple’s longstanding commitment to charitable giving, chiefly in the form of tithing 10 percent of their gross income to the Seventh-day Adventist Church. The contribution is one of their largest monthly expenses.

Howe suggested temporarily reducing the contribution until the couple pays down their debts. Another alternative was contributing time instead of cash.

But charity and the church are among the couple’s core values, and the Watsons did not want to reduce their annual giving. "It wouldn’t feel like we were walking in faith," Jason Watson said.

"We want to do well with the money, but we also want to do good things with the money, too," Rhionna Watson said.

For the Watsons, one of the biggest takeaways from talking with Howe was pretty simple: "Start saving," Jason Watson said.

After years of living paycheck to paycheck, the Watsons believe they may be turning the corner, chiefly because of their higher income and Howe’s guidance.

"I feel a little more hopeful," Jason Watson said. "Once we get a few things paid off, we’ll be able to breathe again.

"I’m looking forward to that."