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For Raffi and Elaine Boloyan, both 32, stretching their income became doubly challenging when they chose to cut their income by nearly half. Two years ago, Elaine left her $67,000-a-year job in human resources to stay home with daughter Ava. To make this kind of transition, the Boloyans have three words of advice for other families: "Plan, plan, plan."
Their own preparation began in 2002, when they bought a house in a less-expensive area, moving from Marin County to American Canyon, Cal. That meant a longer commute for Raffi, a city planner in San Rafael, but if they had stayed in Marin County, "both of us would have had to work full-time to pay the mortgage," says Raffi.
To avoid private mortgage insurance, they put 10% down and took out a loan for the rest of the down payment. That saved them several thousand dollars on PMI, which is generally required when you make a down payment of less than 20%. A year later, when interest rates fell and home values increased enough to give the Boloyans more than 20% equity in their home, they refinanced their mortgage and locked in a 5.5% fixed rate.
Elaine's mother passed away soon after Elaine left her job, and the couple used the inheritance to pay off all debts other than the mortgage. Eliminating their car loan and the balance on their home-equity line of credit "increased our monthly cash flow significantly," says Elaine.
They also used some of their inheritance to fully fund their Roth IRAs. Even though Elaine is a stay-at-home mom with no income, she can have her own spousal IRA because Raffi is employed. In 2006, they can each contribute $4,000 to their accounts. Their Roth contributions aren't tax-deductible, but their withdrawals will be tax-free in retirement.
The Boloyans are wise to take advantage of a Roth for another reason. When the two of them were working, their combined income was nudging the $150,000 ceiling at which Roth eligibility begins to phase out.
Elaine and Raffi opened their IRAs in a low-cost brokerage account (see the box in Low Costs Mean Higher Returns), and they plan to gradually shift more money from individual stocks to mutual funds so they don't have to monitor their investments as closely. Kiplinger's long-term portfolio would be perfect for their retirement savings. Or they could shift 90% of their money to the T. Rowe Price Retirement 2035 fund and 10% to Masters' Select Smaller Companies for a bigger stake in small-company stocks.
Elaine and Raffi had been paying about $250 per month for a universal life-insurance policy. But they lowered their premiums to a mere $68 when they switched to 20-year term insurance -- a $350,000 policy on Raffi and $250,000 on Elaine. They cut the cost of homeowners coverage by electing a $2,000 deductible, and they could save 10% or more on their auto insurance by raising the deductibles on their two cars from $500 to at least $1,000.
By contributing $4,500 to a flexible spending account through Raffi's employer, the Boloyans gave themselves a pot of tax-free money to pay for deductibles, co-payments, prescription drugs and other medical expenses that aren't covered by insurance. Deposits to a flexible spending account are not taxed. So the Boloyans, who fall into the 25% tax bracket, paid only $3,375 out of pocket for the $4,500 contribution.
Elaine and Raffi opened a college-savings account for Ava in California's state-sponsored 529 plan, to which they add money whenever they have spare cash from work bonuses or holiday gifts. Ava already has $3,500, and Mom and Dad should open a separate account for Ava's little brother, five-month-old Roman. The Boloyans also belong to the Upromise program, which kicks in additional cash to college savings whenever they make certain purchases through participating retailers.
In the end, Elaine and Raffi say, the secret to boosting cash flow is to figure out which expenses you can cut. "Sometimes it's really hard to separate necessities from extras."
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