Hauling In Bad Habits : LAPD Couple’s Impulse Buying Put Their Finances Off-Track

Sometimes when police Sgt. Jim Antenucci is on patrol, he finds himself worrying about his family’s finances. His wife, Sue, a detective-in-training, also worries.

From all appearances, the couple would seem to have little to be concerned about.

Both have well-paying, stable jobs with the Los Angeles Police Department. Jim, 28, recently got a raise, and Sue, 29, will be up for one soon. They gross $115,000 a year and take home more than $8,000 each month.

But the Antenuccis, like many people, have a bad financial habit, and it’s one that threatens what could otherwise be a rosy future. The problem? They are impulse buyers.

“We’ll just [be] sitting there and it pops into our minds that we need a new computer, and we’ll jump in the car and go buy it,” said Sue. “I buy things for myself, things for Jim, clothes for the kids, videos. We don’t know where it goes.”

As a result, the Antenuccis haven’t been saving as much as they know they should. Monthly bills, including payments on $25,000 in consumer debt, additional loans for two cars, plus the costs of running a household that includes two children--Alexandra, 17 months, and Michael, 3--eat up most of their paychecks. Each is putting aside money in a deferred-compensation plan--together they have accumulated nearly $26,000 so far--but that’s about the extent of their savings. They have only $150 in the bank.

The family has no cash reserve, no net worth to speak of, a lot of consumer debt and there’s a “big black hole” somewhere in their monthly budget, said certified financial planner Robert E. Wacker of San Luis Obispo.

“They have too much impromptu spending,” Wacker said. “They knock down a lot of money each year, but they’ve got to commit to fiscal responsibility and disciplined saving.”

The Antenuccis want to be in a position to retire by the time they are in their early 50s, and they want to be able to send their children to college.

If the couple change their spending habits now, Wacker said, they should have little trouble reaching their goals. Fortunately, the Antenuccis have several things going for them that will make that possible:

* Through their jobs, the couple have very good earning power. This is by far their biggest asset, and it must be protected with adequate life insurance.

* They have set some goals for both college and retirement funding, and they seem to be willing to do what is needed to accomplish them.

* The LAPD pension plan is extraordinarily generous--it’s the envy of millions, Wacker said. The couple can look forward to receiving 70% of their income after completing 30 years of service, regardless of age. Retirement plans for state employees in other professions pale in comparison, Wacker said, as does almost any corporate plan. For the Antenuccis, it means they need not save as much for retirement as a couple who can’t count on such a pension. That’s no small consideration at a time when employers are shifting more of the retirement-funding burden to their employees.

* In their Section 457 deferred-compensation plan, they have an excellent tax-deductible, tax-deferred way to save, Wacker said. And they can draw on this money before age 59 1/2 without tax penalties, an advantage that figures nicely into the Antenuccis’ retirement plans, Wacker said.

* They are young. Even though they don’t have a lot saved for college and retirement expenses, those events are at least 15 years away.

“You’re in good shape for the long term,” Wacker told the couple. “It’s just getting through the short term.”

First, Wacker said, they need to make and stick to a budget so they can identify where their money is going. This will require diligence in recording their expenses.

Right now, the predictable monthly expenses include a $2,000 mortgage payment, $800 for child care, more than $800 on two car payments and about $400 on a $20,000 line of credit at 13% interest. That leaves them with about $4,000 each month. They estimate they spend $400 a month on food, $200 on clothes, $300 on gas, $150 on gifts, $140 on the phone bill, $80 on the cellular phone, $225 on utilities, $143 on life insurance, $135 on homeowners association dues, $50 on cable television and $120 on maid service and other living costs.

They say the rest of their money is used for impromptu spending. To help stop that habit, the couple might want to take a symbolic step and put their credit cards in the freezer, Wacker said. More important, though, they need to support each other in their efforts to stop spending. Jim and Sue say they will start carrying notebooks with them so they can write down how they’re spending their money every day.

Because the couple often work shifts that don’t overlap--one working mornings, the other, nights--their schedules are not conducive to family meals in the dining room. Several meals a day are eaten on the run.

“When you come home and you’re the only one with the kids, you lean toward going out,” said Sue, who said the couple find themselves eating a lot of fast food. For dinners, the family will eat out at Chuck E. Cheese, Mimi’s or the Olive Garden.

“That’s what is really killing us--outside food,” Sue said.

This is a common problem for two-career couples, especially those with high-stress jobs or whose work schedules don’t mesh, Wacker said. “But eating out all the time won’t get them where they need to be,” he said. He advised them to make one trip to the grocery store each week and eat nearly all meals at home.

Jim and Sue, who met before either had joined the police force and have been married seven years, are determined to start living within their means.

One important part of that, Wacker said, is not taking on any more consumer debt unless it’s an emergency. They should increase what they’re paying on their $20,000 line of credit to at least $600 a month. After making the minimum payments on their other debts, they should make additional payments against the highest-interest liability. If they follow this plan of attack, they should have their consumer debts paid off within five years.

Given their income, they could cut their expenses further and pay off debts faster, but Wacker advises against that course.

“To do it faster than that would be too discouraging,” Wacker said. “They might feel as if they are denying themselves too much and there could be a debt backlash.”

After they’ve paid down a significant amount of their debt, Wacker said, the Antenuccis need to build up a cash reserve of at least $10,000.

Along the way, any pay raises should go into their deferred-compensation plans.

The couple currently have $15,220 of their deferred-comp funds in the Fidelity Magellan Fund (five-year average annual return: 15.1%) and $10,680 in the Fidelity Contra Fund (five-year average return: 18%).

Wacker recommends that those allocations be changed. He advises that 40% of their portfolio be in large-company stocks, and recommends the Vanguard Index Trust 500 Fund (five-year average return: 15.6%); 30% in smaller-company stocks (Wacker recommends they stay in the Fidelity Contra Fund for that portion); and 30% in international stocks. For that portion, he recommends the T. Rowe Price International Stock Fund (five-year average return: 11.1%).

Wacker advises the Antenuccis to get out of Magellan for several reasons.

For one, he points out that the Vanguard index fund has much lower management fees, with an annual expense ratio of 0.2%, whereas Magellan has an expense ratio of 0.92%.

In addition, Wacker believes the Antenuccis need the permanent large-company exposure they’ll be assured in the Vanguard index fund (which mirrors the Standard & Poor’s 500-stock index) because they are not the kind of investors who watch their funds closely for management or philosophy changes.

Magellan, while mainly a growth stock fund, was hit by turmoil last year when its former manager made a surprisingly heavy bet on bonds.

In Wacker’s recommended portfolio, the greater diversification, coupled with low expenses in the Vanguard fund, should give the Antenuccis a better opportunity for good growth over time. Each year, the Antenuccis should review these allocations and rebalance their portfolio if necessary, Wacker said.

Once their basic portfolio is set, the couple can turn their attention to the college question. To pay for 50% to 75% of their children’s education at a California state university, most of which now cost about $10,000 a year, including fees, books, room and board, the couple would need to have available $6,500 a year in today’s dollars for each child.

To achieve that goal, Jim and Sue will need to start putting aside about $3,000 a year for the next 20 years, increasing the amount they contribute each year by 5%, Wacker said.

However, there are other ways to finance college, Wacker said. The couple’s mortgage will be paid off the year before Michael would start college, so Jim and Sue could save an extra $2,000 a month that year. They could also borrow against their home to pay college costs at that time.

Because their jobs are dangerous and stressful, the couple need to rethink their life insurance situation. They each have $350,000 term policies, but Wacker suggests that possibly both, but especially Jim because he makes more and plans to work longer, should replace those with the lowest-cost $450,000 term insurance policies they can find.

As part of the package deal they got on their life insurance, the couple have been making contributions to individual retirement accounts. Wacker said that because those contributions are not tax-deductible and because the Antenuccis have such a great deferred-compensation plan at work, whatever funds they can save for retirement should be put there.

And because the Antenuccis want to retire early on 90% of their current income, they will need to save more for retirement. They’ll need $1.1 million in their deferred-comp plan when they retire, considering annual inflation of 3.3%. (They will get no Social Security benefits.) To reach that, they must contribute $13,000 a year for the next 24 years, or $500 per biweekly pay period, and get at least an 8.5% annual return.

As for their home, it has dropped in value to $206,000, and they owe $196,000 on it, leaving them with very little home equity. But the couple hope to stay there for several more years, and they are counting on values increasing.

So what do the Antenuccis get from their make-over?

A plan that should put them on the road to financial health and a nudge toward ending the impulse-buying habit.

Closely watched spending, a disciplined savings plan and making the most of their on-the-job retirement and savings benefits should put them in good shape for the years ahead.

“This is very encouraging,” said Jim. “It seemed like our situation was overwhelming, but now I think we can really do something to change things and make it better.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

This Week’s Make-Over

Investors: Jim and Sue Antenucci

Ages: 28 and 29

Occupations: Jim is a sergeant and Sue is a detective-in-training with the Los Angeles Police Department.

Combined gross annual income: $115,000

Financial goals: Get out of debt; save more for early retirement and for college for children Michael, now 3, and Alexandra, 17 months.

CURRENT STATUS:

The couple have about $26,000 in their deferred-compensation plans. But they are carrying $25,000 in consumer debt plus what they owe on two cars, and they have no cash reserve. The family eats out frequently, and Jim and Sue often buy things on impulse, so the couple have a hard time tracking where a significant portion of their money goes.

RECOMMENDATIONS:

* Begin tracking every penny as it is spent. Support each other in efforts to stop impromptu spending.

* Save by eating most meals at home, and plan for that by shopping for groceries once a week.

* Stop using credit cards, unless there is an emergency.

* Once they’ve made a significant dent in their debts, start putting money toward a cash reserve of $10,000.

* Reallocate assets in deferred-compensation accounts. The couple now have $15,220, or 59%, in the Fidelity Magellan mutual fund and $10,680, or 41%, in the Fidelity Contra mutual fund. Those allocations should change to 40% in Vanguard Index Trust 500 Portfolio ([800] 662-7447), 30% in Fidelity Contra Fund ([800] 544-8888) and 30% in the T. Rowe Price International Stock Fund ([800] 638-5660).

* Put more of their pay into deferred-compensation accounts. To retire early on 90% of their current income, the couple will have to save $13,000 a year for the next 24 years.

Meet the Planner

Robert E. Wacker is a fee-only certified financial planner in San Luis Obispo who provides comprehensive financial planning services. He specializes in services for professionals and retirees. His firm, R. E. Wacker Associates, manages more then $35 million in client investment assets. He is a graduate of Arizona State University and of the College for Financial Planning.