gmtoday_small.gif

 


How establishing an emergency fund could help manage debts, boost saving

McClathcy-Tribune Information Services

Feb. 6, 2017


SEATTLE — Seattle’s soaring home prices drove renters Kathryn Jacoby and Jeff Whitehill to a sobering conclusion last summer: If they didn’t buy a house before prices rose higher, they could never afford to own a home in the city.

So the young couple lined up financing, raised a down payment and started house hunting. In July they bought a 72-year-old house for $550,000.

Then things got even more interesting.

Their monthly expenses now included a $2,478 mortgage bill. Jacoby wasn’t sure how to pay back a $30,000 loan from her parents for buying the house. And Whitehill’s repayments on his $60,000 student loan are expected to reset this year, jumping from about $100 a month to between $500 and $600.

"There were so many things to think about," Jacoby said. "It was overwhelming."

Jacoby and Whitehill are among the members of the millennial generation who are wrestling with such big-ticket items as costly housing and student loans before they have reached their peak earning years.

In the Seattle area, home prices have jumped 59 percent since 2012, when the market hit bottom during the housing bust.

Meanwhile, about 57 percent of Washington state’s college seniors graduated with student-loan debt in 2015, according to The Institute for College Access and Success. Their average student debt that year was $24,600. Graduate students typically accumulate even more debt.

Dana Twight, a Seattle financial planner who volunteered to help Jacoby and Whitehill, said the couple "have a common problem, a problem that many millennials have."

"Young couples like them are between a rock and a hard place."

The unmarried couple decided to start their careers in the area after they earned graduate degrees from the University of Washington.

Jacoby, 30, earns about $45,000 a year as an operations coordinator for Imagine Housing, a developer of affordable housing.

Whitehill, 32, makes about $65,000 a year as a research associate at The BERC Group, an education research and consulting firm.

Their combined pretax earnings of about $110,000 is above Seattle’s median household income of $80,349 in 2015. Still, Twight noted that $100,000 doesn’t go as far as it used to because of such costly items as housing.

Jacoby and Whitehill lack an emergency fund, although they have about $19,000 in savings and an additional $7,900 in checking accounts.

Both of them are using their employers’ 401(k) plans to save for retirement. Jacoby has about $1,500 in her retirement account, while Whitehill has about $14,000.

Both of their cars are paid for, and they pay off their credit cards every month.

The household’s big bill is the mortgage. Jacoby and Whitehill owe about $437,900 at a favorable interest rate of 3.625 percent. The home’s estimated market value is $604,600, according to Zillow, giving the couple about $166,700 in equity.

Jacoby and Whitehill reached out for help when they realized they needed more savvy with money management, budgeting and planning ahead.

The Financial Planning Association of Puget Sound connected the couple with Twight, who advised them for free.

She said Jacoby and Whitehill are in better shape than they realize. The couple made a smart move, Twight said, when they decided to boost their income by renting a room.

At first Jacoby and Whitehill rented the room to travelers through online rental site Airbnb. The experiment ended two months later.

"It turned out to be a lot more work than we anticipated," Whitehill said. The monthly income — about $200 — wasn’t worth the trouble.

So the couple instead rented the room to a steady tenant for $800 a month. The predictable revenue stream "makes things feel more doable," Jacoby said.

Thanks in part to their rental income, Jacoby and Whitehill are sufficiently in the black to continue making monthly contributions to their workplace retirement plans despite their costly mortgage.

Whether they are saving enough for retirement is another matter, however.

Twight got the couple’s attention when her projections showed that they would run out of money in retirement at their current savings rate.

Sitting side by side, Jacoby and Whitehill looked at Twight’s projection on a laptop at their kitchen table. The projected red ink appears in their early 70s and progressively deepens.

"It’s pretty eye-opening," Whitehill said.

Their options are to work into their 70s, cut their annual retirement spending by as much as $30,000 a year or save an additional $11,000 a year for retirement.

"We’re probably going to increase our savings," Whitehill said.

Twight urged the couple to establish an emergency fund so that if one of them is thrown out of work, the couple has enough money to stay current on their house payments.

Although Jacoby and Whitehill have about $27,000 in checking and savings accounts, some of that money is already earmarked for monthly expenses and home improvement. Jacoby also may tap those accounts to help pay back the loan from her parents.

The couple also like the idea of establishing an emergency fund that they would use only in emergencies, such as for major home repairs, a job loss or a health crisis.

Twight urged the couple to establish such a fund and to do so before paying back the $30,000 loan from Jacoby’s parents.

She suggested an emergency fund large enough to cover three mortgage payments, or a little more than $7,400. That way, if one of them is thrown out of work, the couple have enough money to stay current on their house payments.

Jacoby and Whitehill were pleasantly surprised by Twight’s focus on the long view. It’s critical, Jacoby said, "but something that I never had the energy to think about."

When asked what advice they would give to other young couples, Whitehill quipped: "Get engaged to a saver." Jacoby let out a hearty laugh.

Her advice was different. She urged young adults to push back against the high cost of housing and college by telling public officials to address the problems.

"It’s totally unfair that young people are in the positions they are in," she said.

———