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How To Survive on $25,000

Big dreams, big debts, and an insufficient paycheck

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Twenty-five thousand dollars can seem like a sizable salary--until taxes, union dues, pension payments, and other unavoidables chew off their considerable portions. What's left must somehow subsidize everything from rent and food to entertainment and savings. Whether it's your first year teaching or fifth, creating a workable financial strategy may be one of the most challenging lesson plans you'll have to come up with.

Dawn Carmel is one young teacher who is finding out that wise money management is difficult, but not impossible. By setting realistic goals, establishing a budget, and carefully handling her money the 25-year-old is learning to not only survive, but also to thrive on a total income of $25,000.

Like most people, thought, Dawn's financial plan could benefit from fine tuning. Teacher Magazine asked Laura Adams, a certified financial planner and former teacher in Princeton, N.J., to meet with Dawn to review her budget and lifestyle. As Adams writes below, she found a smart, sensible woman who knows the things she wants in life--and who is doing almost everything right to get them. Her story and Adams's financial recommendations follow.

Most of Dawn Carmel's day-today financial decisions are based on a simple principle: Don't spend what you don't have. And after her first two major career decisions, it's clear that, for a while at least, she won't have as much to spend as other young professionals. "People tried to discourage me from going into teaching because of the money and the hard work," says Dawn. "But I'd rather be happy in what I'm doing, and I love working with kids."

Her decision to teach 3rd grade at Hurffville Elementary School in Washington Township, N.J., also affected her financial status: The school district pays beginning teachers $5,000 less than does a neighboring district she could have picked. But Dawn believes that "when you're making a long-term commitment to a school, you want to be sure it's a good fit." She loved Hurffville because the staff seemed supportive and friendly, and the small-town atmosphere reminded her of her hometown, Linwood, N.J. Hurffville's proximity to both Philadelphia and Atlantic City, N.J., was also appealing.

Because she worked for several years before putting herself through college, Dawn is a little older than the average beginning teacher. Those factors made her better prepared to manage her salary than most recent graduates. Still, Dawn has had to make some hard choices this year.

Her starting annual salary is $22,000. She tutors a 5th grader in spelling to bring in an additional $20 a week, and, based on previous experience, she plans to earn about $2,400 next summer as a waitress in Atlantic City, bringing her total annual income to $25,000. She nets $795 in her biweekly paycheck from a gross of $1,100. Taxes take about 21 percent of her pay, while insurance, union dues, and a mandatory pension contribution make up most of the remaining deductions.

Her only elected deduction is a $25 contribution to a tax-sheltered annuity. Not only will this $500 annual contribution save her $75 or more on income taxes, but it also shows that Dawn realizes the need to save for retirement, even at her age. (She picked a Great Western annuity, splitting her contributions between a money market and a fixed-income fund. Because the annuity is a long-term investment with tax penalties for early withdrawal, Dawn should consider investing most of her contributions in the stock fund within the annuity, which over her career could outperform the fixed-income choices.)

Despite the frugality she has learned from years of living on a limited budget, Dawn, like most young professionals, is living from paycheck to paycheck. In her case, $11,000 of student-loan and credit-card debt has piled up, and getting this debt paid off has become her top priority. "People think that because I have so much debt I can't handle money," Dawn says, "but I had no choice because I wanted to go to college."

The sixth of seven children, only Dawn and her older sister, who is also a teacher, are college graduates. Both women had little financial help throughout. Dawn received only a $2,000 student loan and a $3,000 loan from her stepfather, both of which she is still paying off. Her $6,000 of credit-card debt was amassed not through clothing or recreation sprees, but from covering books and other college expenses. She's proud that she hasn't used her cards in a year and won't until all her debts are paid.

Despite the monetary toll of her undergraduate degree, Dawn plans to return this summer to Glassboro State College to start earning a master's degree in special education. She knows that the extra credentials are crucial for advancing up the district's salary schedule. Because she hopes to one day work with deaf children, she has also begun taking a sign-language class.

Dawn has other professional goals, including achieving tenure in her district, and perhaps one day opening a summer day-care center. But her financial story is also influenced by her personal goals: getting married, buying a home, and raising a family.

On April 11, one of Dawn's dreams will be realized when she marries Charles Heil of the United States Navy. Chuck, assigned to the U.S.S. Ainsworth in Norfolk, Va., will be at sea for months at a time. The couple's wedding plans show how smart financial decisions can also be creative and fun: Because Dawn and Chuck can't afford to invite their large families and many friends to their wedding, they'll elope (with their parents' knowledge) to Jamaica and will be married on the beach--complete with champagne, flowers, and videotaped "album."

Dawn's summer plans include joining Chuck in a Caribbean port at a cost of about $600, spending about eight weeks waitressing to earn the $2,400 her budget requires, and taking one course toward her master's degree.

The couple's finances will change after their wedding, with Chuck away at sea beginning in June. While they will have his pay of about $25,000 to rely on for the next year, they know that when he is released from the Navy in April 1991, he may not find a suitable job for some time. Dawn is prepared to support him during that period since he helped her finish school.

Last month, Dawn moved to a less expensive apartment to free up $25 per month. Since Chuck spends most weekends with Dawn, he shares expenses the way a full-time roommate would. This helps keep her housing costs to only about 16 percent of her budget. Chuck had been paying half the previous monthly rent of $490 on a one-bedroom apartment and half the utilities, which run about another $130 for electricity and the long-distance calls they exchange.

General living expenses run about 26 percent of Dawn's pay. Since she sees Chuck only on weekends, entertainment costs are fairly low. The two visit friends, watch cable TV or videos, and go out to dinner about once a month if they can afford it. They split the monthly entertainment tabs.

Food and consumables run another $200. Dawn has started to pack a lunch, saving about $10 a week over lunching in the school cafeteria.

Her clothing budget, Dawn laments, is never enough. Even though she has spent more than $1,000 since September on a professional wardrobe, supplemented by borrowing clothes from her sister, she needs spring dresses and shoes for her job. With that in mind, she recently attended a clothing party (akin to a Tupperware party) and, while she didn't find work clothes, she did come away with a $30 cotton dress for her honeymoon. A veteran shopper, Dawn can always find a bargain.

Since her job is an eight-minute drive away, Dawn spends only about $30 a month on gas and practically nothing on maintenance for her 1981 Honda Civic. When it dies, Dawn matter-of-factly says that she'll find a good used car and cut back on other things. She has kept her yearly auto insurance to $675, in a state with some of the nation's highest rates, by selecting high deductibles. However, her liability coverage is only $50,000, less than the recommended $300,000. She'd have to spend another $85 a year to raise her liability limit.

Insurance coverage plays a big role in providing financial security. As part of her benefits package at work, Dawn receives medical insurance. She selected an HMO costing $2 per visit, with a prescription plan and dental and vision coverage.

Her life insurance, at one-and-a-half times her salary, is sufficient to pay off her debts and leave her husband with a nest egg. But when Dawn and Chuck have children and own a home, they will want to have enough insurance to pay off the mortgage and establish a college fund.

Dawn is missing two important insurance coverages: long-term income protection in the event she is disabled during her career (a higher probability than premature death), and contents and liability coverage on the apartment. This insurance would cost an additional $300 per year. As it is, her insurance, retirement, and education expenses take 12 percent of her pay.

Her student loans and credit-card debts are a constant worry. She tries to double the minimum payments every month in hopes of paying them off faster. These bills take about 24 percent of Dawn's income. To resolve the problem, she needs to borrow $6,000 from her district's credit union or a local bank to pay off her credit-card debt, which comes with a ball-and-chain interest rate averaging 20 percent. A three-year bank loan with a 14 percent interest rate will save her hundreds of dollars in interest a year.

Since Dawn's school loan is at 8 percent and stretched out over 10 years, she'll keep that rather than fold it into a 14 percent consumer loan. The $3,000 loan from her stepfather may be paid back whenever possible with no interest.

Dawn expects a $500 tax refund this year, which she'll put toward her credit-card debt. After their wedding, Dawn and Chuck should adjust their tax withholdings since they will jump from a 15 percent to a 28 percent tax bracket on their combined income. They'll probably owe nearly $200 per month more in taxes. The couple should also write wills to be sure they have protected each other in the event of premature death and provided for a smooth estate settlement.

Dawn hopes that, with the education reform movement that's sweeping the country, she'll one day be able to count on greater professional status and a fatter paycheck. Add to that her master's degree and a few years of experience, and she can expect to earn in the mid-$30's or more.

But that's one day. Right now, she looks back on all she has accomplished and admits that it has been tough. "In college," she says, "some of my friends' parents paid all their expenses, even unlimited credit cards. I've had to work for everything that I have." But because of her hard work, determination, and practicality, Dawn Carmel should do just fine.

--Laura Adams

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