Better late than never on savings

Sarah Auclair wants to retire eight years from now at age 65, but, for now, that will have to remain a dream.

Auclair has nothing saved for retirement, so reaching her goal will require a concerted effort on her part -- starting with making regular contributions to her employer's 401(k) plan.

"She's got an awfully late start," said certified financial planner Michael Busch.

Busch, president of Vogel Financial Advisors LLC in Dallas, and fellow planner Melissa Brennan drew up a financial plan for Auclair as part of a Money Makeover sponsored by The Dallas Morning News and the Financial Planning Association.

Auclair, an executive assistant, is aware of the value of the 401(k), especially since her employer matches employee contributions dollar for dollar, up to 6 percent of salary.

But she says she needs every cent of her paycheck to pay her bills.

"Although I have access to my company's 401(k), I have been hesitant to enroll," Auclair said. "How much is that going to take out of my income that I take home to pay my bills? I'm afraid to shave anything off my take-home pay."

Busch said Auclair needs to make saving a priority.

"If Sarah waits to save until she feels like she has her bills covered, she likely will never begin to save," he said. "It's a mind-set change, not a circumstance change, that is needed. If you are going to be an effective saver, you have to view your savings goal as the first 'bill' that gets paid each month."

By putting her retirement savings on automatic pilot, Auclair would be less likely to feel the absence of funds available for spending, Busch said.

"If the money comes out of Sarah's check before it ever hits her bank account, she will hardly feel it," he said. "If she wants to literally not feel it at all, she could commit to defer all of her next raise to the 401(k) plan and simply continue living on the same income she is used to living on."

Auclair earns about $58,000 at her job and receives royalty income from an East Texas oil well owned by her and her family.

Busch said Auclair is "blessed with a very respectable income via salary and royalties," but said she still faces some significant challenges.

Her debts consume more than half of her net monthly income. And Brennan said she would be in serious financial trouble if her royalty income were to dry up.

"Sarah is reliant upon her royalty income to meet her obligations, and should that diminish, she would likely be a candidate for bankruptcy," she said.

Auclair has $17,000 in credit card debt, $5,000 in debt she incurred to pay her property taxes and is on a payment plan with the Internal Revenue Service for about $4,000 in back taxes.

Auclair said health ailments and medical bills were a major cause of her debt accumulation.

"I had to have dental implants that cost $3,600, plus some teeth being pulled that my dental plan didn't pay for," she said. "And not having the cash to pay for it, I had to use my credit cards."

Auclair said she's always been an optimist, especially when it comes to her finances.

"Unfortunately, my philosophy on money is that it would always come from somewhere," she said.

But her optimism has worked against her, Busch and Brennan said.

"Ironically, Sarah's 'live rich' upbringing and 'it will work out' optimism are the very attitudes that are creating Sarah's ongoing fear of not having sufficient cash flow to meet her monthly obligations," Brennan said.

In reality, Auclair has enough money to pay her monthly bills, Brennan and Busch said.

"Sarah's own recap of her expenses indicates that her monthly income is $800 greater than her monthly expenses," Busch said. "However, since she hasn't saved anything, it is apparent that there is about $800 of unidentified expenses per month."

By tracking her spending for a few months, Auclair should be able to identify the unknown expenses, which would help her determine where she can cut back, he said.

Since she feels squeezed at the beginning of the month, Auclair also should plot out her paychecks, royalty payments and bill due dates to determine the best payment schedule "to even out her cash flow," Brennan said.

To help her get motivated, Brennan suggests Auclair consider paying off smaller debts first.

"She should also focus on paying down those debts that carry the highest interest rates," she said. "Once the debt is paid off, she should build an emergency fund of three to six months of living expenses, which means she should build her cash savings to at least $15,000."

Auclair has already taken the planners' advice to heart and paid off a $90 balance on her Neiman Marcus credit card.

Auclair said the planners have given her hope that she can improve her situation.

"When they described my state of financial disrepair, they didn't tell me anything I didn't already know, but it was very enlightening to hear it from sensible, logical people," she said.

"I always knew there was a way out of my mess, but I couldn't see the forest for the trees. They made me realize that I am in much better shape than I believed, and there is a light at the end of the tunnel, however distant."