Create a Budget, Build a Nest Egg

Sam and Myrna Cadelinia earned about $360,000 a year at the height of the real estate bubble. Most of their income came from the Prudential real estate agency Sam runs with a partner. But they have other sources of income as well: He brought in $35,000 as a bank director and as a real estate instructor at City College of San Francisco. Myrna, who works part-time as a teacher's aide in a parochial school, brings in $25,000 a year. Another $13,000 in interest rounded out a family income that left a lot of room for both frills and necessities — including college expenses for their three children, who have now all graduated.

Last year, however, the crash of the real estate market clobbered Sam’s business and reduced his take to $61,000. That drop would have been a much more serious blow without the income from their part-time jobs, including the health insurance Myrna receives that, Sam says, would otherwise cost them about $700 a month.

Before the bubble popped, the Cadelinias spent freely. In 2007, for example, the couple took themselves, their children — and their children’s friends — on trips to Hawaii and New York City, which cost them about $29,000. Sam spent $17,000 acquiring old U.S. paper notes, silver certificates and other currency for a numismatic collection (which he keeps in a vault) now worth about $1.1 million. Buys for his wine cellar ran about $16,000, and the couple ate out five to six nights a week. “We love to try different cuisines,” says Sam. Even while indulging, however, they managed to set aside about $30,000 a year for the past 10 years. They had planned to double that amount this year, but then along came the recession.

Since the bad times started to roll, the Cadelinias have cut out the extras with a vengeance. Vacations have been restricted to “little trips” to Las Vegas or Seattle. Wine purchases have dribbled out, and Sam has put no money into his numismatic collection this year. They now go out to dinner only once or twice a week. “We’ve really come to enjoy it,” says Sam, who does most of the cooking. Myrna does the prep work and cleanup, but says she misses the luxuries of dinners out. “Even before the kids, 40 years ago, we ate at restaurants three times a week,”she says.

Even without the splurging, the Cadelinias’ expenses are high. Although they bought their house 22 years ago, they took out a line of credit to do some home improvements. They now owe $198,000, and their two mortgage payments run $48,000 a year. They also pay about $21,000 a year for a whole life insurance policy with a current cash-in value of $28,000 and nursing home insurance that provides extensive coverage — $450 a day with an inflation rider — for both. To meet expenses, the Cadelinias drew about $100,000 out of savings last year, leaving them with $350,000 in cash “for emergencies,” says Sam. Much of the money went for one-time costs: $22,000 for their daughter’s college tuition; a $33,000 down payment on their elder son’s condo and $3,700 to pay off their Prius. About $80,000 came out of their annuity to pay taxes and to buy four time-shares.

The Cadelinias don’t want to rob their savings to pay the bills, but they are not sure how to cut expenditures further. “I always tell commission-based small business owners that they must be far more vigilant savers than their friends who collect paychecks,” says MoneyWatch.com editor-at-large Jill Schlesinger, a certified financial planner. “When you have a variable income, you have to save even more during the high times because you will pay a steep price during the lean times. While Sam and Myrna didn’t purchase a fancy car or boat on the most recent upswing, neither did they sock away enough to weather this downturn. Now they’re left with some tough choices.”

Here’s what Schlesinger recommends:

Take Care of Yourself First

“If I had been Sam’s and Myrna’s adviser last year, they would have hated me because I would have begged them not to spend a penny on their kids, either for tuition or for the condo down payment,” says Schlesinger. Her admonition may sound harsh, but Schlesinger says it raises an issue all parents need consider: For most families, she says, there’s only so much money to go around, and parents need to allocate enough to cover their own needs first. As the oft-repeated saying goes, no one offers scholarships to cover the cost of retirement. “The Cadelinias’ generosity to their children has put them in harm’s way,” says Schlesinger. “Their daughter could have taken a loan, and their son probably shouldn’t have bought a condo until he himself had saved up a down payment.”

Bear Down on the Budget

Sure, several expenses this year were one-offs that won’t occur again. Still, in future, the Cadelinias will have to go through their budget with more discretion, maybe even doing without those “little trips,” wine purchases and some dining out. Other budget items, Schlesinger advises, should stay. “They should not cut their long-term care policies,” she says. “While they are expensive, Sam and Myrna would be in a precarious situation if one of them were to require care.”

Set Aside Reserves

Once the Cadelinias determine how much they need to live on, they should segregate a portion of their savings to cover any shortfalls for the next three years. For planning purposes, Schlesinger estimated they would need $50,000 a year to cover their budget gap. To earn at least a little interest on the money, they could invest the $150,000 but create a CD ladder stretching for three years. In other words, they could put, say, $25,000 in a CD maturing in six months, another $25,000 in one maturing after a year, and so on up to three years. If they don’t spend all the money, they can recycle the surplus back into another CD, all of which should become part of the Cadelinias’ retirement fund. Schlesinger also recommends that they keep another $50,000 available for emergencies. They could put that in a longer-term CD or a money-market fund.

Sam’s Response

“For Myrna and me not to have shared our money with our kids would have broken our hearts,” he said. “The kids were straight-A students in high school and never in trouble. Besides, all three are now taking out student loans for graduate school. We have cut expenses drastically, but Jill is right: We shouldn’t tap into our remaining reserves. And if we place the money in CDs, we are less likely to tamper with it.”

More on MoneyWatch:

• Your 50s: Saving Money, Reviving Your Business
• Rebuilding a Small Business
• Beef Up Retirement Savings

Disclaimer: The copyright of this article belongs to the original author. Reposting this article is solely for the purpose of information dissemination and does not constitute any investment advice. If there is any infringement, please contact us immediately. We will make corrections or deletions as necessary. Thank you.