Solutions for a Large Household

A father of five slices a $100,000 cake.

By Jeffrey R. Kosnett, Senior Editor

From Kiplinger's Personal Finance magazine, December 2005

When Frank McKearn was young and single, his pals splurged on new cars. Not Frank. He invested in vacant land in his hometown of Beloit, Wis. "I'm a civil engineer," he says, "so by nature I've always been conservative with finances."

Years later, Frank's patience and foresight paid off. With Beloit real estate catching a tailwind from rising prices in the ever-encroaching Chicago suburbs, Frank, now 39, recently sold the parcel to a retail chain. How to divvy up the $100,000 he expects to net from the sale is uppermost on his mind.

The cash will certainly come in handy. Frank and his wife, Jean Marie, 37, have four sons and a daughter, ages 1 to 7. The two eldest are in Catholic school, and the rest will follow. Frank would like to boost his retirement kitty, but he also has five youngsters to educate and a home that seems cramped. "We're open to just about anything," he says. The McKearns have little in savings, beyond the $150,000 they hold in retirement accounts. Their only debt is a $189,000 mortgage. And Frank was just promoted to partner in his engineering firm.

Big-family plan. With a full house, think defensively, says Everette Orr, a financial planner in McLean, Va., who has six kids. Big families, says Orr, tend to wear out cars and appliances. Medical and school bills can sting. Parents are often tempted to stretch for a large, expensive home.

So a major chunk of the $100,000 should be in low-risk investments. Frank should set aside $35,000, or enough for about six months of living expenses, in a ladder of certificates of deposit extending out five years and a high-yield savings account. This combo should yield about 4% at current interest rates.

The next priority is funding the kids' education. Because several children will likely be in college at the same time, the family should qualify for financial aid. But Frank can open a $3,000 account for each child in Wisconsin's 529 college-savings plan. Residents can deduct up to $3,000 in contributions per child from their state taxable income each year.

Frank and Jean Marie can use the remaining $50,000 to build their retirement savings. Both have rollover IRAs, and Frank has a SARSEP, which is similar to a 401(k), at work. But Frank and Jean Marie, who earns a small income from part-time work, should each put $4,000 into a Roth IRA for 2005 and 2006, for a total of $16,000. They can invest what's left in regular mutual funds or exchange-traded funds in taxable accounts.

The McKearns' current holdings are top-heavy with funds that specialize in large, fast-growing companies. They should use their new investments to plug holes in their portfolio. That means investing in a small-company fund; a large-company value or dividend-oriented fund; and a natural-resources fund, such as T. Rowe Price New Era, or a commodity fund, such as Pimco Commodity Real Return Strategy.

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