For years, Rachel Hopper and Josh Williams had hoped for a sibling for their son, Espen, who was born in 2005. So the Minneapolis couple were thrilled when they learned that Espen would have two sisters: twins Elsa and Rory, now 1.
"It's wonderful -- and it's very hard," admits Josh.
The couple's income of $110,000 (Josh is a city planner; Rachel works for Minnesota's Department of Natural Resources) is stretched to capacity. They struggle to cover all their costs, including day care for the kids -- $376 a week -- and a loan for a car that comfortably fits the whole family.
No longer saving for retirement, they have also depleted their cash stash and racked up $7,800 in credit card debt. "We're smart people with good jobs," says Josh, "but we're living paycheck to paycheck."
Time for a new game plan, says Indianapolis financial planner Elaine Bedel: "What may have worked for their family of three isn't working for their family of five."
Squeeze the budget. Over the next two and a half years, Josh and Rachel must focus on eliminating credit card debt and creating an emergency fund -- even at the price of delaying other savings, says Bedel. "They're in a precarious situation," she adds.
They now put $575 a month toward their card debt. Though their budget is tight, the couple should be able to pay down an extra $300 by utilizing Rachel's upcoming raise and trimming some discretionary spending. That would erase the balance in 10 months.
Create a cushion. Once the credit card is zeroed out, that $875 should go toward emergency savings.
Bedel recommends three months of living expenses, or $18,000, knowing that Espen's 529 plan could also be tapped if needed (though they'd incur taxes and a 10% penalty on earnings). This will take about 20 months to build.
Catch up on retirement. In 2016, Josh and Rachel should redirect the $875 to their retirement plans, for annual savings of roughly $13,000 pretax; they should also up their total contribution 2% annually. Combined with Social Security, that should give them $50,000 in annual after-tax income (in today's dollars), provided they retire at 70.
A wildcard: If they stay with their employers, their pensions could provide significant income. But Bedel hopes they will find new jobs. Josh could earn 15% more in the private sector, which would seriously ease the family's budget.