ULTIMATE SAVINGS GUIDE


Stretch a Small Income

It's tough enough to make ends meet in a pricey city like San Francisco. It's even tougher when you're a grad student and a budding actress, and neither of you makes more than $27,000 a year.

So if anyone knows how to stretch an income, it's Mickey Pentecost, 25, and Tina Huang, 24, who married last June after dating since they were students at LaGuardia High School of Music & Art and Performing Arts, in New York City. A PhD student in microbiology at Stanford, Mickey gets an annual stipend of about $27,000 plus health insurance. Tina earns favorable reviews, but not a lot of money, for her work with two theater companies. To help pay the bills, she takes on extra work -- for example, in the box office at an arts center and with a company that uses live theater to train corporate employees. "You have to be creative and flexible," says Tina.

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Thrifty by nature, the couple saved money on their wedding by getting married at a friend's house on a farm. Instead of registering for gifts, they encouraged family members to give cash or gift certificates, which they used to pay for the wedding.

Once in San Francisco, they hewed to a rent budget of $1,300 to $1,350 a month, scouring newspaper and online ads and visiting endless open houses (but "avoiding the trendiest parts of the city"). Through an ad on Craigslist.org (see Shop Smart), they finally found an apartment on legendary Haight Street for $1,295, and they saved money by dealing directly with the owner.

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Tina and Mickey make the most of their digs, by cooking in rather than eating out. A fireplace helps lower their heating bills during the winter. They buy in bulk at Costco and use discount cards at other stores.

The couple's only debt is Tina's $13,000 in student loans, and she can save on interest charges by consolidating her loans at 5.3% before the rate rises in July. She and Mickey share one car -- a used 2001 Honda Civic they bought for its decent gas mileage and good repair record. They also rely on public transit.

With day-to-day expenses such a big challenge, Tina and Mickey haven't thought much about long-term savings or retirement. But they have a $10,000 stash in savings bonds -- a gift from Mickey's grandmother when he was a child -- that they could use to build an emergency fund and jump-start retirement savings.

After checking the value of the bonds at www.savingsbonds.gov, Mickey could cash in bonds that have matured and put emergency money in Vanguard Prime Money Market fund, which is yielding more than 4%. Mickey may owe taxes on the bond interest, but the couple's 15% tax bracket is probably much lower than it will be in a few years, so they'll save on taxes.

Because Mickey and Tina have earned income, they could also use the proceeds from the bonds to fund a Roth IRA. They can each contribute up to $4,000 this year, and with $1,000 they can invest in T. Rowe Price Retirement 2045, a life-cycle fund designed for people who will be retiring in 40 years. They can withdraw their Roth contributions at any time if they need the money, and can each withdraw $10,000 in earnings tax- and penalty-free to buy their first house.

Tina is in a great position to write off business expenses connected with her self-employment income. She could, for instance, deduct phone calls, travel and mailing expenses, and a screen-acting class she'd like to take in Los Angeles.

It would cost about $300 a month to add Tina to Mickey's health insurance policy. But because she's young, healthy and living in California -- a state with a competitive health insurance market -- Tina could probably find a better deal on her own (she can shop at www.ehealthinsurance.com). She'll save money with a high-deductible medical policy, paired with a health savings account to which she can contribute pretax money to cover out-of-pocket medical expenses or build a tax-free kitty for the future.


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