Money Magazine: Money Makeover

I love money makeover stories.  If someone wrote a whole book of them, I would read it.  Twice.  If someone started a cable channel called than ran all money makeovers, all the time, I would watch it.  All the time.

Money magazine's latest issue has some interesting article, such as What to do with $5,000, and the 50 Best Jobs in America.  I went straight to the money makeover.

Here's the background.

Ryan, 30, and Jen, 32, of Colorado Springs, married five years, and desperately want to have children.  Desperately, probably being the operative word here.  He is a Group Operations Leader for Target, making $80,000, and she is a pre-school teacher making $32,500.

After five years of trying to become preggers the natural way, they accepted that there was probably something wrong.  Jen had undergone numerous medical procedures beginning at the age of 16 due to complications related to her premature birth.  Unfortunately, the scarring due to the surgeries had left her with an "inhospitable environment."  However, all hope was not lost.  She was still a good candidate for in vitro fertilization (IVF).  The problem, however, is that it is very expensive.

In a move that seemed to be a little rushed, they put the $11,650 cost of the IVF on a credit card.  The card carries a low 1.9% rate for the next six months.  Their plans at the end of the six months are yet undetermined.

To make matters more complicated, Ryan was just reassigned to Tempe, Arizona for a new position.  The upside is that it pays $10,000 per year more.  The downside is that they will have to go through a potentially costly and emotionally draining move at a difficult time.

Here are their financials:

Here's the spreadsheet , in case you can't read the graphics.

According to the article, the credit card balance does not include the $11,650 for the IVF.

I have my own thoughts, questions and advice, but let's see what the adviser that Money Magazine provided had to say.

First, he recommended using a 401(k) loan to pay for the IVF, not credit cards.  He reasons that the interest is paid back to the account, and as a loan, he won't get hit with taxes or penalties.

Second, he advised that they "beef up their emergency fund."  He feels that $8500 in savings is inadequate given the possibility of a discontinuance in her income should she become pregnant.  He recommends holding off on buying the house in Tempe, and stash the $20k proceeds expected from the sale of the Colorado Spring house.

Third, he recommends that they max out their insurance coverage.

Okay, not bad.  I wouldn't recommend the 401(k) loan, and I wouldn't recommend the beefing up of emergency fund.  Maxing out the insurance I completely sign off on.

Before I began with any recommendations, I have a few more questions that I would need to ask.

1.  How did you amass $19,100 in credit card debt on a six figure income and a mortgage payment of only $1000?  There's your first problem.

2.  What kind of cars are they driving?  Their cars are currently worth almost half of their annual income.  It's not clear whether they are brand new, or a couple of years old.  I'm going to guess that they bought themselves some pretty expensive cars.  It looks like they at least are not upside down on them, so they could sell one or both and pay cash for cheaper cars.

3.  How is it that their savings account only has $8,500 if they are putting $7,900 towards that every year?  They are in their thirties.  Did they just start this?  If so, where was the money going before?  Often people tell themselves, "okay, we'll put $500 per month into this account" when they never have.  They make a budget that proudly states that they deposit $6,000 per year into a savings account.  Maybe they will, maybe they won't.  But this family has not shown to be very effective savers.

4.  How is it that they expect $20k proceeds from a $200,000 house on which they owe $155,000.  Realtor commissions are one thing, but that sounds like a big haircut!

5.  What happens from a fertility standpoint if you wait one year?  Is this the window of opportunity that will be closed in six months?  Or could they wait one year, maybe 18 months?  By the sound of things, they could wait.

Okay, so, my advice depends on the answers to my follow up questions, which I realize I will not get.  But here goes.

Paying for the IVF.  My advice is to wait a year.  Using the $7,900 that they are putting towards savings, and some of the money that is currently in savings, they'll have enough.  Pay cash for this.  The odds of getting pregnant is only 50/50.  It would be terrible to spend all that money and not have a child at the end of it.  It would be worse to not have a child and still be paying for the procedure three years from now.  I would not encourage taking a 401(k) loan.  Leave that money where it is.  They are clearly consumers, and once the money comes out, it will be difficult to get it back in.

The low interest credit card is a little bit of the balance transfer arbitrage that we PFBloggers have been engaging in, however, they are in over their heads.

Regarding the adviser's recommendation to beef up their emergency fund, I disagree.  They need to pay down their debts.  They need to feel a little bit desperate, like they can't spend any money.  Paying down their debts, of course, is the more conservative recommendation.

I agree with the recommendation not to buy a house right away.  Two reasons.  One, they need the money.  They should count their blessings that they have equity and put it to good use.  Second, his job requires occasional relocations, and another one within a couple of years would not be unexpected.  Given the state of the real estate market, I would not recommend that anyone buy a house with that short a potential time horizon.  The couple rejects this advice, noting that they have bought and sold three houses and haven't lost money yet.  I'm sorry, but what fools.  That's like someone saying in early 2000 that they should buy more tech funds because they haven't lost in them yet!

Looking at their financials, I would recommend ditching the more expensive car, and get something cheaper.  This will help their cash flow, and allow them to save faster to pay for the IVF in cash.  I would also recommend using all of the proceeds from the sale of the Colorado Springs house to pay off the credit cards.  All of it.  This also changes their cash flow, by allowing the $5000 annual allocation to credit cards to go to savings.

I would also go through their budget more closely.  I assure you this couple is wasting money.  It's just not evident where, because the article chose to focus on a single $11k expense.

Think about that.  They probably wasted money by buying expensive cars.  They are about to buy a house in a bubble market where they may only stay for a couple of years.  They have almost $20k in credit card debt, more than double the national average.  And the article chooses to make them into a sympathy case by focusing on the $11 tab for the IVF.  I'm sorry.  They're adults in their thirties.  With a little planning and saving, their emergency fund should already have enough to cover this.

Comments

[Medicated Money]

After reading your post, I actually laughed out loud. Not because I thought your post is humorous, rather I thought the exact same thing 2 days ago while reading this article in Money. I seem to find that the financial advisors that Money uses are many times completely off base. 'Borrow from your 401(k) to pay off the IVF debt.' Come on, is that really the best idea this guy has!

These two need to get serious fast about the situation they are in, the actual results of IVF, and put the horse back in front of the carriage before they end up not being able to have the financial means to support any children, by IVF or adoption.

[financial freedumb]

Holy crap, where is all their money going? I see the amount being saved as good, but where's the savings to show...You're right, they must be wasting money some place...a lot of places actually...considering they're making a pretty good living...

I bet you they feel comfortable knowing that they have money in their retirement accounts...Thinking they can use that if they have to and spending whatever else is available...