Financial Makovers:
An AM Northwest Special Feature
The first law of finance according to Petillo is as follows: "inevitably, something will go wrong". This does not make a believer in this principle a pessimist. Instead, it makes one just a little more cautious and that caution is at the core of any great long-term plan.

I recently had two thoroughly delightful conversations with Cheryl and Haley (speaking on behalf of her husband Jake) both of whom were willing to allow us a look at their finances. What I found were two examples of what its like to live on the edge.

For Haley and Jake, that edge is a wide-open future and the chance to leave their financial mark. For Cheryl, it is finding enough money to protect her from the inevitability of something unforeseen that might waylay all of her plans.

Haley admitted to me that she and her husband actually seem to have enough money to do whatever they want to do. Haley is fortunate enough to graduate from the University of Oregon this year without any collegiate debt. It is this type of financial freedom that doesnıt come along often and she should be thankful for this financial head-start.

These two were married this past winter and have yet to make any serious financial decisions. Because of their youth, they have some unique opportunities. Jake is just out of the service and is working as a mason for his uncle. Haley foresees promotions in his future even as he plans to get a degree of his own. She also plans on plying her journalism degree after graduation in June.

Prudently, they have decided to wait on buying a house but they want to set themselves up so that when the desire arises, they can make the move from renter to homeowner with enough cash.

The Haley and Jake Household
Assets	Income (Jake, gross)......$33,600 Income (Haley)......... ......8,400 (From a college mutual fundthe balance in the fund is roughly $8k) Total.........................$42,000 Taxes (28%, estimated)......9,408 $32,592/$2716 month
Liabilities	Rent................$640 Phones........ .....100 Car..................405 Utilities.............200 Gas.................300 Groceries..........300 Total $1945
Plans	Jake goes to college, works part-time Haley begins her career after graduation Begin saving for a house, family, retirement.

While that looks to be a healthy spread between liabilities and assets, Haley admitted that they always have the cash to do whatever they need to do. But trouble looms on the horizon. That $192 a week these two newlyweds are spending may be going away come June 16th.

That mutual fund her father set her up with was designed to help get her through school. Haley expects it to go away come graduation, which means that flush with cash feeling will disappear in a hurry.

Haley and Jake need to set the ground rules for their financial union now. Although they share a joint savings account, there is only enough to keep them afloat without outside help for about a month, They need to set an allowance for each other, a time when the two of them can discuss their finances, and designate one or the other as the one who signs the checks.

They are looking at a shifting financial future in the near term and may have to face it with little financial help from their parents. Right now, Haley's father is paying for their car insurance.

This is not as uncommon as you may think. While there are numerous references to the high cost of bringing a child from birth to eighteen, it is only now coming to light how much actual subsidizing parents do on a regular basis. Haley's father's help is financial so it would only be right to discuss their plans with him as well. He may also be a good financial mentor for the young couple and someone they should use when making big financial decisions.

Time is on their side and right now so is their income. When Haley graduates, I'm sure she will land a job and begin to contribute to the household finances. Instead of regarding that money as a sudden windfall, they should begin to save as much as possible first building a rainy day account, then beginning a disciplined approach to their own retirement with an IRA or a 401(k) - these are the golden years for amassing great retirement wealth. Haley tells me that Jake will be returning to school using the G.I bill and they need to plan for not only the lost income but the future tuition payments.

Haley and Jake are on the edge of something very good as long as they keep planning for something to go wrong.

Cheryl on the other hand has a slightly different financial picture. She is on the edge of something and although the numbers portray a rather bleak picture, her desire to save for a possible rainy day is not as difficult as it may appear on paper.

Cheryl is a single mother, 42, with two teenage daughters (Heather is in college attending both University of Portland and Portland State, Katie is a junior in high school) working for a major media company in Portland.

She owns a home, earns an average of $60,000 a year (vagaries in the commission-based advertising business), puts away 15% of her income in her company's 401(k) (although she has been doing this a relatively short time and her company doesnıt match) and has no credit card debt.

Congrats to her for funding her 401(k). Too often, people in her position will place this move further down the list of importance. Using her 401(k), a pre-tax retirement plan, she is taking care of herself first.

She has little or no equity in her home because of some real estate market changes. At one point she was making two house payments. Cheryl is currently financing her eldest daughter Heatherıs college education ­ at least the first two years and she hopes to do the same in a couple of years for Katie.

Heather works in an attempt to fund her final two years of college. Katie hopes to be working soon as well. Both girls have a car with all insurance, gas and upkeep maintained by Cheryl. Cheryl also has a car payment.

Three girls, one income, college, clothes and any number of miscellaneous other expenses that come with life eat up most of Cherylıs income. She, like so many other people her age, realize that there may come a time when her parents may need her help. Her mother recently suffered a medical setback and although she is doing fine now, Cheryl worries abut the long-term financial implications. She would like to be prepared to help them should they ever need her assistance.

Cheryl's Household
Assets	Income (Cheryl, gross)......$60,000 Less 15% - 401(k)...............9,000 Taxes (22%, estimated).......11,220 Plus Child Support...............300 $43,380/$3615 month
Liabilities	Mortgage................$1200 Taxes................. .....300 Insurance (house,car)....375 College (Heather).........700 Gas, auto upkeep.........700 Groceries...................600 Car payment...............425 Miscellaneous.............500 Total $4800
Plans	Create a rainy day account Prepare for aging parents Fully fund retirement

A quick glance at these numbers suggests that the ends don't exactly meet. While some of the expenses listed above are estimates and change periodically, many do not and some are expected to increase over time as gas prices rise and her daughterıs two cars continue to age.

Cheryl would like to do better. She understands that she has no real back-up plan in the event of an emergency. As the head of the household, she is the sole provider. Standing so close to the edge has Cheryl worried that she has no real savings to tap in the event ­ or the inevitability that "something could go wrong". She needs to find cash to build her savings up to adequately cover that possibility.

A couple of things stood out during our conversation that would provide a good deal of extra cash to apply to her savings goals. If I was Cheryl, this is what I would do.

Cheryl needs to examine her taxes. The nature of her job provides for numerous deductions and write-offs that she is not currently taking. Clothes, cars, mileage, meals, cell phone and miscellaneous other expenses may be partially if not totally deductible providing her with a substantially smaller tax bill.

She also mentioned a portfolio of tech stocks that have done little since they tanked back in 2000. She could liquidate this account, which she estimates at about $8-9000. Not only would this give her an instant rainy day account, it would provide her with some losses (you can deduct up to $3,000 a year for three years). Both of these tax issues need to be examined by a CPA.

I was concerned by the fact that Cheryl seemed focused on paying cash for her children's college education. Households with incomes less than $80,000 ­ and Cheryl qualifies here ­ should be borrowing as much as money as possible after all of the scholarships and grants have been exhausted.

While this simply defers the cost of college to the student and doesn't usually require repayment until after college is completed, her household income combined with two students (at some point in the near future) in college makes her a favorable borrower to some lenders such as Sallie Mae. Further down the road, after graduation, she can help the girls with the deferred payments if she so desires. Right now, she is not in a position to give her daughters this kind of a head start.

Cheryl needs to involve each of her children in the budgeting process and explain her real life financial situation in plain terms. Once that is done, she either needs to set an allowance for not only her girls, but herself as well.

While Cheryl deserves kudos for her aggressive contributions to her 401(k), it might be too much for her right now ­ unless she adjusts some of her spending. A visit to a CPA will also help her to determine if a reduction in her aggressive 401(k) deduction can be "tweaked" to make room for some of that much needed extra cash.

She is relatively young with more than twenty years of potential contributions ahead of her. She may be able to lower her 401(k) deduction to 5-7% in the short-term and become more aggressive once her daughters are off on their own.

Cheryl is the primary breadwinner for more than just her kids and I think this weighs on her savings goals. Freeing up a little extra cash might provide her with more than just a rainy day account. She might be able to finance a disability policy that covers her in the event that something unforeseen happens to that paycheck. This is a much greater possibility than death and can go a long way at protecting what she has accumulated.

She has health insurance through her employer. She has a life insurance policy for $250,000 but she could probably double that coverage for several dollars more per month giving not only her daughterıs additional coverage but also a little peace of mind.

Cheryl has a generous heart that is bigger than her paycheck. Using a CPA to find all of the hidden tax deductions, switching her daughterıs higher education bills to them, and finding the right balance for her 401(k) plan should allow her the much needed cash to give her a little more cushion in her finances so that when the inevitable happens, she will be ready.