WALL STREET, CALIFORNIA : MONEY MAKE-OVER: Southern Californians Learning How to Succeed in Personal Finances : Spending Less Is Key to Their Dream of a Home

At a time when many people their age are just settling into their first apartment or still living in a college dormitory, Bonnie and Lucas Lanthier are aiming to buy a home.

Tackling major responsibilities early is nothing new for the couple, both 22.

As high school seniors they had a son, Sebastian, who is now 4. Shortly after graduating, they married. While friends were heading to college, Bonnie and Lucas were getting a crash course in issues such as health insurance and child care.

“We’re about five years ahead of people our age, out of necessity,� said Bonnie, whose college plans were shelved when her son arrived.

Despite a difficult start, the Lanthiers have solid financial prospects. They are debt-free and have money left over each month after paying bills. Both have jobs that offer advancement opportunities.

Lucas is in his fourth year at a paper factory, where he started as a machine operator before advancing to industrial electrician. Earlier this year, Bonnie traded in part-time work to take a full-time position as an accounting manager at a small cosmetics company. Together they earn about $70,000 annually and expect promotions to increase that figure by about 10% in the next year.

While they like their jobs, the Lanthiers are not as happy with their housing situation. They are fed up with their Camarillo apartment, which they rent for $885 a month. They want a yard where their son can play and that has space for Lucas’ rock band to practice. They also believe a house would provide other, less tangible benefits.

“I really don’t like living in an apartment, and I’d love to be in a house which would really be ‘our’ place,� Bonnie said.

The couple is eyeing half of a nearby duplex owned by Bonnie’s mother. They believe she would sell the property, which is currently rented out, for about $170,000. They aim to make the move in about 18 months--an ambitious plan considering they haven’t yet saved a penny toward a down payment.

To map a path to their goal, the couple met with Ronnie A. Kahn, a Woodland Hills financial planner who reviewed the Lanthiers’ situation for The Times.

First Priority: Find a Way to Save

It soon became obvious to Kahn that discussing mortgages, monthly payments and interest rates would be pointless unless the Lanthiers first overcome a much more significant hurdle: Bonnie’s spending habits.

“For Bonnie, shopping is almost like a narcotic,� Kahn said.

Bonnie admits that her spending has prevented the Lanthiers from accumulating savings. While their monthly income exceeds expenses by about $320, that money never stays in the bank long.

“I spend whatever we have left over on clothes, makeup, jewelry or shoes,� she said. “I go to vintage stores or malls and just buy stuff. It makes me happy.�

Fortunately, Lucas does not share his wife’s shopping hobby. “I’m pretty frugal and still wear some of the stuff I had in eighth grade,� he said. Importantly, the Lanthiers do not use credit cards, recognizing that they could be a quick way to slide into serious debt.

But Bonnie does not hesitate to drain their checking account every month. “We’ve talked about how difficult it is to save money with those kind of spending habits,� Lucas said. So far, the talk has not changed her behavior.

Bonnie traced her free-spending ways to what she describes as a financially comfortable childhood. “Whenever I asked for something, I got it,� she said. “I never heard that we can’t afford it or that we’d have to put it off for a week. At Christmas time, I’d write out a three-page list of the things I wanted, and I’d pretty much get everything on the list.�

In addition, she said her parents continually acquired new things. “We always had a lot of stuff around--three cars, a boat, jet skis,� she said. “I guess that I never learned about self-control when it came to buying things.�

Kahn noted that Bonnie’s experience could be a lesson for dealing with her own children. Understanding trade-offs and setting priorities for spending should be learned as early as possible.

The Lanthiers can’t really expect to own a home without some spending control, Kahn said. “If you are unable to save for the future, you’re not going to be in control of your destiny,� he told them. “I think you really need to delve into why you’re doing this spending.�

If Bonnie is willing to rein in her spending, several techniques could help, Kahn said. These include:

* Put a 24-hour hold on purchases. Waiting a day after seeing something she likes in a store would give Bonnie time to reconsider a purchase, or she may simply get too busy to return to the store.

Bonnie said she tried this approach for a short period once before abandoning it. “It was very hard to do, and I really don’t have the patience to wait.�

* Make savings automatic. Rather than depositing their wages into their checking account, the couple should automatically funnel part of their pay into a separate account--perhaps through a mutual fund company--that is not immediately accessible. This approach would remove some of Bonnie’s temptation to spend.

Bonnie sees potential in this approach. After all, she can’t spend what she doesn’t have. “If it’s not in my hands or in my checking account then I can’t buy things,� she said.

* Track expenses. The Lanthiers should use their computer to keep track of every expense for the next few months. The exercise would make them more mindful of their expenditures and enable them to monitor where their money is being spent. The exercise would also require more openness from Bonnie, who admits that she occasionally hides purchases from Lucas.

“You can see exactly where everything is going,� Kahn said. “And that ought to make you more conscious about it.�

* Create a reward system. “Set a goal for savings each month together and agree on a reward--such as going out to dinner or seeing a movie--if you achieve that goal,� Kahn said. “That way you’ll be working together, and you’ll put some fun into it.�

Waiting a Little Longer Would Pay Off

Pulling together a nest egg for something as important as a home should be fulfilling rather than a grind. “I don’t want you to make yourself miserable while you’re saving money,� Kahn said.

To help the Lanthiers get into the saving habit, Kahn provides some target figures to shoot for in accumulating a down payment. Given their income and short time frame, the Lanthiers would have to shop around for a mortgage that requires a low down payment. Consequently, their target amount would be a 3% down payment, about $7,000 including closing costs.

To reach that figure, they would have to set aside about $380 a month. The Lanthiers consider this manageable, given the $320 that Bonnie spends monthly on binge shopping and other expenses that could be trimmed. They could sell one of the three vehicles on which they are making payments or slice the $300 they spend monthly on entertainment and dining out.

Kahn recommended a money market account for the down-payment savings, because interest rates are higher than in a regular savings account. A bank certificate of deposit may also have a higher interest rate and, because of the early-withdrawal penalty, might be less likely to be tapped for other purposes.

With a low down payment, however, the Lanthiers would be facing monthly payments of more than $1,500, including insurance, taxes and the private mortgage insurance a lender would require.

An alternate strategy, Kahn suggested, would be to buy a house in five years instead of 18 months. In that time, they could accumulate something closer to a more conventional 20% down payment, or about $38,000. This would require higher monthly savings--about $520 a month--which would be funded through cuts in their monthly budget and through future raises.

With a longer time horizon, the Lanthiers could save using a mutual fund that includes some stocks, bonds and money market instruments such as the Vanguard Asset Allocation (5-year average annual return: 20.59%).

There are several benefits to waiting five years. Assuming 2% inflation in the real estate market, Kahn figured monthly payments would be reduced to about $1,200, thanks to the smaller down payment and the elimination of private mortgage insurance.

If the Lanthiers wait five years to buy a home, they would be just 27 at time of purchase, still relatively young to become homeowners by today’s standards.

Waiting to buy a home always carries the risk that interest rates can change or real estate prices will rise more than expected. But prices also can fall.

“It makes sense to wait, but I’m not sure that I can,� Bonnie said. “I really want a house of our own.�

In addition to homeownership, the Lanthiers should be thinking about several other issues, Kahn said. These include buying term life insurance, starting a college fund for Sebastian and starting a retirement account for themselves.

“You have some big advantages because of your age,� he said. “If you can save money, you’ve got many years ahead of you to let it grow with compound interest. Starting to save can be like standing on the top of a hill trying to move a boulder. Once you get it rolling, it just keeps going and going.�

All of their plans, of course, are contingent on Bonnie getting her spending under control.

“Maturity must come into play eventually,� Kahn said. “Bonnie needs to get control of this or it could go on and on and prevent them from reaching their goals.�

Graham Witherall is a regular contributor to The Times. To be considered for a published Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053 or to [email protected]. You can save a step and print or download the questionnaire at http://ukobiw.net/HOME/BUSINESS/FINPLAN/make-over.htm.

Information on choosing a financial planner is available at The Times’ Web site at http://ukobiw.net/finplan. The site offers stories, phone numbers, addresses and links to related sites.

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This Week’s Make-Over

* Investors: Bonnie and Lucas Lanthier

* Income: About $70,000 a year

* Goal: Purchase a home within 18 months

Recommendations

* Reduce unnecessary spending.

* Consider extending time period for home purchase.

* Purchase term life insurance.

Meet the Planner

Ronnie A. Kahn is a certified financial planner and a registered investment advisor in Woodland Hills. He specializes in wealth management and a psychospiritual approach to money.