Lulubelle lives in the Pacific Northwest, and she's a thirty-something residential and commercial property manager. Lulubelle got a late start on saving, but one of her personal finance goals is to buy a home of her own. Here's her current net worth:
As you can see, Lulubelle's retirement savings consists of a 401(k) worth $1000, plus a traditional IRA that's currently stored in a certificate of deposit valued at $9200. She also has $8400 in passbook savings and coins. Beyond this $18,000 in savings and investments, Lulubelle's net worth consists of a car and household items.
Now, let's look at Lulubelle's income and budget for July:
Lulubelle's total income for July is $2698, and her annual income is $39,780 per year. (I'm assuming that that's pre-tax.) Her job doesn't provide medical insurance or a 401(k) plan. Lulubelle doesn't have private medical insurance, but she does have a minor chronic medical condition that requires two prescription drugs to manage. She has a roommate to offset half of her rent and utility costs, and she has a cell phone but no land line.
Lulubelle's July savings rate is very high relative to her income, but since her budget for July doesn't cover periodic costs like travel, car and renter's insurance, or household items like detergent, it's probably safe to assume that some months, her savings rate is somewhat lower. Her target savings goal for 2009 is $15,000, which is 37.8% of her gross salary.
This, by the way, is a most impressive percentage, so two thumbs up for Lulubelle!
Lulubelle buys most of her food and household supplies at Costco, but she has two spending priorities: A gym membership and expensive shampoo for her fine, thin hair. Those two items are important in what looks like an otherwise spare budget, so let's consider them non-negotiable.
I checked salary.com to get an idea of what the normal income curve looks like for property managers in the Pacific Northwest. In a relatively small town that I picked at random, here's what came up:
As you can see, Lulubelle's salary falls in the bottom tenth percentile of the curve, so there appears to be fairly significant growth potential for her income in future. Given the aftermath of the real estate bubble, however, I think short term growth is unlikely.
I reviewed Lulubelle's budget from two perspectives: First, for general feedback; and second, to see what she can do to get her into home ownership. Here's what I came up with:
- I think that more granular budgeting would give Lulubelle a clearer picture of where her money goes and how to plan ahead for periodic expenses like travel and car insurance. If she has a sense of how often and in what general intervals she needs to have a little extra cash on hand, Lulubelle can set aside money each month so that she doesn't need to tap into savings when one of these expenses comes up.
- I don't like to see anyone without health insurance in general, but if Lulubelle gets a serious illness or into a bad accident, she'll be wiped out. For that reason, even if she can't stretch her budget to cover regular medical insurance, I strongly recommend that she at least pick up catastrophic insurance.
- If Lulubelle's two medications are available in generic form and she's not already taking generics, it's absolutely worthwhile unless her doctor feels otherwise. Walgreen's, CVS, and several other big-box pharmacies have plans for generic medications that keep drug costs as low as $4 per month or $9.99 for a three-month supply.
- Lulubelle's IRA is in a CD, which is as safe as safe can be. With nearly thirty years left until retirement, however, I think Lulubelle can afford to take a little risk. Target retirement IRAs are designed to modify holdings to become more conservative and less risky as investors near retirement, and that's a simple rollover choice if Lulubelle doesn't want to get involved in tracking her investments closely. Alternatively, a total stock market index fund will give her average performance at low cost, although she'll need to remember to adjust to something more conservative as she nears retirement age.
- Today, Lulubelle's IRA is a traditional deductible IRA. Rolling it into a Roth may be a good choice, but it may not. The Roth IRA is flexible in that Lulubelle can take out up to $10,000 penalty-free for a down payment as a first-time homebuyer. In addition, the growth on a Roth IRA isn't taxed, so if Lulubelle can afford to pay taxes on that income today, she won't have as much to pay in the future. That's great if she expects to have a higher income in retirement than she has today. If her outlook is more modest and she doesn't intend to pull out any money for a down payment, however, she might do better sticking with the traditional.
- Small is beautiful, and that's how I think Lulubelle should start. By that, I mean a condo instead of a private home. In the past couple of years, we've seen what happens when people get overextended on mortgages. The conventional wisdom is that a mortgage should never be more than three times one's gross income. Personally, I think that for most people, two to two and a half times is generally more appropriate. Two and a half times Lulubelle's gross income is just shy of $100,000. I don't know the real estate costs in her specific area, but I think she'd generally find much more selection in the condo market anyway. Since Lulubelle should plan on setting aside about 5% of her home's value every year for regular maintenance and upkeep, without a major change in her income, there's even more incentive to buy a condo instead of a house.
- On the whole, I think it's going to be tough for Lulubelle to stretch her income to fund both retirement and down payment savings adequately unless she either spends less or earns more. There isn't much room to cut her budget any further, so I think Lulubelle should consider what she can do to increase her income. As the graph above shows, Lulubelle has potential growth in her salary, so she might consider negotiating for a raise or jumping to a new employer. She should be somewhat cautious, though, given that real estate in general has been hit so hard.
Another alternative Lulubelle can consider is adding on a part time job to bolster her savings. The job market is bleak right now, though, so I think she'll need to think creatively. Hobbies can often be turned into a source of cash; alternatively, if she has flexibility in her schedule and either the patience to tutor or babysit or the ability to help other people look after their property (e.g. mowing lawns, odd jobs, and the like), she could leverage her talents to make a few extra bucks.
As it turns out, Lulubelle has already thought through all of these suggestions on her own and is working on putting some of them into place. She'd like to hear from f.z. readers to see what other ideas are out there, so don't be shy! If you have some additional thoughts, please drop a comment or send me an email and I'll make sure Lulubelle gets it.
Two caveats: First, I warned Lulubelle to consider any suggestions strictly amateur, and mine in particular to be the ravings of a drunken madwoman.
Second, the only rule that applies around here is the usual one: Treat Lulubelle the way you would want to be treated. She was generous enough to share her backstory, so please phrase your feedback in a courteous and constructive manner.
Can't wait to hear your brilliant thoughts. In the meantime, if anyone else wants me to bust his or her budget, feel free to shoot me an email at frugal (dot) zeitgeist (at) gmail (dot) com. Thanks!