Financial makeover | Small changes, big difference

This is the latest in a series of monthly "financial makeovers."

Every member of the Crosby family heads back to school this week.

Bob teaches world history at Henry Jackson High School in Mill Creek. Kathy is a substitute teacher who also helps in her children's elementary school. Nine-year-old Morgan starts fourth grade. And Ian, 6, is ready to take on kindergarten with his new rolling backpack.

Kathy has been a stay-at-home mom since their daughter was born. Now, with both kids in school full time, she's able to accept more substitute-teaching jobs and could make about $1,200 per month.

"I don't want to be like a kid in a candy store with any extra money coming in," Kathy said.

"Extra money" is a phrase Kathy was surprised to hear herself say. They're living paycheck to paycheck and worry about whether they'll have enough money to send their children to college and retire.

"I don't mind working hard, but I don't want to work forever," Bob said.

What they want

While Bob's high-school students know him as "Mr. Crosby," he's chief petty officer selectee Crosby with the Navy Reserve. He joined the Reserve several years ago "so we would have two nickels to rub together," he said.

Bob and Kathy, who are both 46, are concerned about having enough money for their retirement years. They also plan to pay for at least half of their kids' college expenses. But how can they save for the future, while paying for food, utilities and all the other stuff their family needs today? That's what they want to know.

Vacations for the Crosby family usually involve camping trips or visiting relatives in Oregon. Kathy thinks it would be nice to have a family vacation in Paris, or take a trip for two to Hawaii.

Back to reality. They'll probably have to replace their old vehicles in the next three or four years.

What they have

The Crosbys are a frugal couple.

They pay off their credit cards each month and have an emergency fund to cover three months of living expenses. Their only debt is the $135,000 remaining on their mortgage — a monthly cost of $882.

Bob's teaching salary and military earnings amount to $63,000 a year. Kathy is the family bookkeeper who pays the bills and diverts about 14 percent of Bob's gross income to investments. Money set aside in two 403(b)s, two Navy Thrift Savings Plans, teachers' retirement accounts and a couple of Roth IRAs adds up to almost $90,000.

Diane Jochimsen, president of White Raven Financial Services in Arlington, analyzed the Crosbys' spending and saving habits. Their financial situation works, she said, because "they have excellent trust and communication."

Jochimsen, a member of the Financial Planning Association, said they feel like they're short of cash because much of Bob's income is automatically deducted for retirement.

That's not the worst problem to have.

The Crosbys should have a comfortable retirement, beginning at age 67, if they keep saving at the current level. To check off their other concerns — the kids' college funds and lack of cash flow — they need to make a few changes.

What they need

Morgan and Ian have college-savings plans — known as 529 accounts — worth about $600 each. Most states offer 529 college-investment plans that have tax benefits similar to an IRA.

"We tell family members if they want to contribute to the 529 accounts for birthdays or Christmas they're welcome to," Kathy said. "We haven't been able to add to them on a regular basis."

But they need to.

Jochimsen suggested adding $240 each month to their 9-year-old's 529 and $190 to their 6-year-old's plan. That's probably the most useful way to spend Kathy's "extra" income from substitute teaching this school year.

Another option for college would be to use one of the Roth IRAs. The Crosbys will be 59 when their youngest is in his first year of college, and at that age they would be able to take a distribution from the IRA without penalty.

There are a couple of things the Crosbys can do so they won't feel cash-strapped.

Their life-insurance policies were written in 2003. Jochimsen said life-insurance rates have fallen since then. She found some options with reputable companies that could save them 30 percent a month. They could also save by dropping the collision insurance in their vehicles, which have low value because of their age and high mileage.

"Pennies saved add up to dollars, and dollars eventually make a difference," Jochimsen said. "They'll notice the biggest difference when Kathy starts substituting and adding to the family income."

What they think

"We're not as far behind as I thought we were," Bob said. "I won't have to work until I'm 85!"

Kathy said she's "relieved" and knows how much her substitute-teaching income could help them get ahead.

Last month Bob watched the hydro races on Lake Washington and wondered how other spectators can afford boats that cost "as much as my house if I tripled its size" when he struggled sometimes just to keep food on the table.

"I realize with our income I'm not going to have a million-dollar yacht someday, but we're going to be able to take care of the kids and retire," he said, "and that's worth more to me."

Information in this story, originally published on September 2, 2007, was corrected on September 4, 2007. The monthly "financial makeover" story incorrectly identified Bob Crosby as a chief petty officer with the Navy Reserve. His correct title is chief petty officer selectee, with a promotion to chief petty officer expected Sept. 21.