Back on Her Feet

When Rhoni Smith graduated from Howard University in Washington four years ago, she never imagined she’d find herself on welfare.

Yet several months after getting her degree in psychology, she was.

After graduation, she returned to her native California to find work after discovering she was pregnant. Instead of jobs, she found employers handing out pink slips and encouraging early retirement.

“I had heard there was a recession in California, but I didn’t know how bad it was,” said Smith, now 28. “When I left in the summer of 1986, everybody had a job.”

She began patching together a living, spending half her day as a bank teller, the other half floating among jobs she obtained through a temporary agency.

Although there was no health insurance or chance for advancement, she at least could pay the bills--until her son, Baraka, was born five weeks early. Suddenly she was a single mom without steady employment who couldn’t afford child care or visits to a pediatrician.

“From the moment he was born, I needed to be on welfare,” Smith said. “You do what you have to do.”

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Now, three years after Baraka’s arrival, Smith is more than a year off public assistance and slowly getting her finances back in order.

* She has a full-time, although not permanent, job as a data specialist for UCLA, making $31,800 a year.

* She is paying off debts left over from her college years and the 18 months she was on welfare.

* And she is once again planning for the future--this time including Baraka. “Saving for a house is probably No. 1 on my list,” Smith said. “By the time Baraka is 6, we are going to be in a house.”

Despite Smith’s sometimes precarious financial past, she has done a lot of things right, making a house a realistic goal, says Kathleen Stepp, a fee-only certified financial planner based in Overland Park, Kan.

One of Smith’s biggest accomplishments is that she has nearly eliminated a sizable credit card debt. In the last few years, even as she encountered unemployment, single motherhood and other challenges, the balance steadily shrunk--from $5,600 to about $600.

“I am amazed at how you paid off the credit cards,” Stepp told Smith.

With the data entry job, although it doesn’t offer full benefits, she is able to cover her basic bills and even put away some money each month for retirement and other needs. Family members have also assisted her along the way, notably her mother, who bought her a car and clothes for Baraka.

Smith has also worked hard to cut expenses.

Dry cleaning, cable TV, even pantyhose are luxuries she has given up. When she didn’t have the money to buy a mattress, she slept on the floor. To save on rent, she lives with her brother in Los Angeles, splitting the $900 monthly rent and the utility bills.

Despite those efforts, there were times when she couldn’t afford to pay anything on the credit card accounts and creditors were calling and threatening lawsuits.

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But as bleak as things looked at times, she avoided filing for bankruptcy--a smart move, Stepp said, because the small amount of debt would not have been worth the consequences. Still, Smith worries that her credit record will haunt her--particularly when it comes to applying for a home loan.

Sonia Delgado Villa of Consumer Credit Counseling Services in San Francisco had some suggestions.

“It is a good idea for her to pay off the remaining $600 and start rebuilding good credit,” Delgado Villa said. “She could look into getting a secured credit card.” Such a card requires the holder to deposit money in the bank equal to the credit limit on the card. It would allow her to begin making small purchases and paying them off each month, thereby starting to reestablish her creditworthiness, Delgado Villa said.

Smith admits that financial discipline is not something that comes easily. She grew up spoiled in an upper-middle-class family, she said. When she liked something, she simply asked her parents for it and she got it. She shopped at Nordstrom and went to private schools.

“I never wanted for anything,” Smith said. “It makes it hard for me now to live on a budget.”

Living on a budget, however, is just what most single mothers have to do, said Andrea Engber, director and founder of the National Organization of Single Mothers and co-author of “The Complete Single Mother.”

Engber offered some general advice for women rearing children on their own: “Usually the first thing I tell single mothers is, ‘Don’t try to imitate a lifestyle of a two-income family that you can’t afford. Have your own style.’ ”

To devise a budget, start by tracking your income and your expenses for a month and then look for ways cut back, Engber said. If there’s a shortfall, think about alternatives to your usual way of doing things. More money isn’t always the answer. For instance, “if you have a talent, barter with someone else for something you need,” Engber said. “You don’t have to pay for every service.”

Single-mother groups are another good resource, she said. Many times members will trade used toys and clothing, for example.

Engber said parents should keep in mind that there are many free or low-cost activities for children and that they should not feel guilty about having to say no to something their children want.

“The $5 you save here and there really adds up,” Engber said.

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That’s something Smith has proved several times over. Her nickel-and-dime approach to savings helped her not only reduce her debt, but even tuck some money away.

Since being hired by UCLA early last year, she has started placing 10% of her monthly earnings into a 403(b) retirement account, a tax-deferred plan similar to a 401(k) for employees of nonprofit organizations. The account now has a balance of $925. She also is enrolled in a pension plan for which 7% of her earnings are automatically deducted. Smith has $2,548 in that account.

To cover Baraka’s preschool tuition, Smith takes advantage of an automatically deducted pretax child-care savings plan offered by her employer, which has helped her exercise that much more discipline over her finances while also saving on income taxes.

All great steps that she should continue, Stepp said. However, the planner did suggest some fine-tuning.

In addition to paying off the $600 balance on her credit cards, Smith should tackle her other main source of debt--$3,800 in student loans. Stepp advised increasing the monthly payment on those to $100 from $55. Once both these debts are paid off, she will have about $250 a month she can put to other uses.

In addressing Smith’s other goals, Stepp proceeded by assuming that her employment picture won’t be changing significantly.

Because Smith would like to buy a house in the next few years, and because she needs a safety net, Stepp told her to put her new savings in a short-term investment vehicle that will offer decent returns with minimal risk.

“You don’t want to use stocks for this purpose, because it is too risky,” Stepp told Smith. “If the market goes back down and you are ready to buy, you will be in trouble.”

Vanguard Fixed-Income Securities Short-Term Corporate Portfolio (five-year average annual return: 6.38%), a bond fund that has a top five-star performance rating from fund tracker Morningstar Inc., is a great choice for short-term savings, Stepp said. “We often recommend Vanguard because it is known for its low costs,” she said. “It gets a better return by keeping their costs low.”

However, this fund has a $3,000 minimum investment. Or Smith could consider instead Strong Advantage Fund (five-year average annual return: 6.62%). This bond fund is also a solid performer, and Smith can get around the $2,500 minimum initial investment if she signs up for the automatic monthly plan, whose minimum is $50 a month.

Once Smith pays off her credit cards, she should be able to save about $3,000 in a little over a year, putting her well on her way to a home down payment. In the meantime, that money can act as an emergency fund for unexpected expenses.

To start saving for Baraka’s college education, Stepp suggested a more aggressive approach. She calculated that Smith will need to start saving $125 per month as soon as she can manage that comfortably if she wants to be able to defray some of Baraka’s college costs.

She recommended that this money go into Janus Worldwide Fund (five-year average annual return: 21.1%). Because college is further away than Smith’s hoped-for date for buying a house, she can afford to invest in more risky kinds of funds.

“It is a great-performing fund invested in companies all over the world and is no-load,” Stepp said.

The initial-purchase minimum of $2,500 will be lowered to $500 if Smith agrees to continue making automatic monthly investments of at least $100 per month.

Many mutual funds lower the minimum initial investment for customers who agree to have monthly payments automatically deducted. This is a good way for people without much money to get started investing.

Because Smith has many years before retirement, Stepp encouraged her to put her retirement moneys into growth-oriented mutual funds, with 60% going into domestic-stock funds and 40% going into foreign-stock funds. Smith said she hasn’t thoroughly investigated the investment choices within her retirement plan and intends to do a little more research.

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Stepp also urged Smith to look into long-term disability insurance policies, draw up a will and get her estate documents in order.

“It is the kind of thing you need to do and get it over with,” Stepp told Smith. “When it is done, you can feel better that your wishes will be carried out.”

Smith has a $100,000 life insurance policy, which Stepp agreed offers sufficient coverage.

In the meantime, Smith is busy researching first-time home-buyer programs. She has found one that might be a good fit for her--it requires a minimum amount down on a house in exchange for doing work on it.

“I don’t want Baraka growing up in an apartment,” she said. “He needs a backyard to have a doggy. Every kid wants a dog.”

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Lynda Natali is a regular contributor to The Times. To participate in Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.

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This Week’s Make-Over

* Investor: Rhoni Smith

* Age: 28

* Occupation: Data specialist

* Gross annual income: $31,800

* Financial goals: Save for down payment on a house; for college education for son, now 3; and for retirement.

Current Polio

* $925 in 403(b) retirement account

* $2,548 in pension account

Recommendations

* Pay off revolving debt.

* Increase payments on student loans to $100 per month.

* Establish investments for savings to buy a home; can double as emergency fund.

* As soon as feasible, establish college savings account for son, at $125 per month, to be invested in global mutual fund.

* Put current and future contributions to 403(b) account into foreign and domestic growth-stock funds.

* Look into buying long-term disability insurance.

* Draw up will and make sure other estate plans are in place.

Recommended Mutual Fund Purchases

* Janus Worldwide (800) 525-8983

* Vanguard Fixed-Income Securities

Short-term Corporate Portfolio (800) 662-7447

* Strong Advantage (800) 368-1030

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Meet the Planner

Kathleen Stepp, a fee-only certified financial planner, is the president and founder of Stepp & Garrett Inc., based in Overland Park, Kan. She advises individuals in all phases of personal finance planning and serves as vice president of education for the national board of the National Assn. of Personal Financial Advisors.