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Originally published Saturday, December 11, 2010 at 10:00 PM

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Money Makeover

They give a lot, learn how to save more

A desire to donate a significant amount to charity is pinching a young family's ability to save for the future.

Special to The Seattle Times

Would you like some free financial planning?

IF YOU WOULD BE INTERESTED in a free financial makeover in exchange for having your story and photo published in The Seattle Times, answer a few questions at seattletimes.com/ yourmoneysurvey.

About this series

THIS IS THE LATEST in a series of monthly "financial makeovers" by The Seattle Times for readers who want to get real about their money.

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For many, 'tis the season of giving. Joy and Nathan Orona, on the other hand, practice philanthropy year-round.

"Charitable donations are really a huge part of who we are," said Joy, a stay-at-home mom.

Each month, $1,000 of Nathan's salary is funneled directly to nonprofits, an amount that's matched by his employer, Microsoft.

While Nathan's job has helped the couple establish a financially stable and comfortable life, they are not strangers to struggling.

"We both grew up in poor families with multiple bankruptcies, and have understood the importance of not accumulating consumer debt," Joy wrote in an online survey to participate in a free financial makeover. "Thus, we have always lived within our means."

When they graduated from college, the couple, both now 35, say they made less than $60,000 a year combined and owed more than $70,000 in student loans.

Over the 11 years Nathan has worked for Microsoft, his salary has more than doubled to $109,000 a year plus a $5,000 bonus and stock awards, and they've managed to whittle down the student-loan balances to less than $6,000.

They live with their two boys and Nathan's mother in a Renton home on which they owe about $384,000.

But even though their means have significantly increased, Joy says they don't seem to be saving.

"When (Nathan) gets a bonus, sometimes they evaporate and sometimes they get spent on something useful," Joy said. "He would want to buy something nice, I would want to give it away and in the the end, we'll compromise and pay off debt."

The Oronas have already taken a class on budgeting, but in order to be more strategic with their money, they want to learn more about how best to save and invest.

"It's all Latin," Nathan said.

Financial plan created

To help demystify how to maximize their resources, the Oronas met with Robin Tan, a certified financial planner at KMS Financial Services in Kirkland.

Tan, who is on the board of directors of the Financial Planning Association's Puget Sound Chapter, spent more than eight hours with the couple to help them prioritize their goals and analyze their financial situation.

Then, he created a financial plan with recommendations to help them get where they wanted to go.

First, Tan suggested the Oronas take further advantage of some of the benefits offered by Microsoft, including the Employee Stock Purchase Program (ESPP).

Tan said employees can put up to 15 percent of their base salary and bonus into the ESPP. Then, every three months, their contributions are used to buy Microsoft stock at a 10 percent discount.

"Currently Nathan is contributing just 2 percent of his base salary — about $180 a month or $2,160 per year," Tan said.

In a simplified calculation, Tan said Nathan's current contribution rate would allow him to make a pretax profit of more than $200 each year, assuming no change in the share price between the end of each period and when he sells the stock.

But Nathan could count on making more than $1,500 if he participates closer to the maximum level and contributes about $17,000 of his $114,000 annual base salary plus bonus.

"This strategy alone will allow him to gain tens of thousands of dollars over his working years at Microsoft, and maximize his earnings potential," Tan wrote in their plan. There is, of course, some planning and discipline involved in this strategy and Nathan will need to keep on top of selling the ESPP shares each quarter."

Tan said the Oronas could lessen the blow of reduced take-home pay, if need be, by selling some of the $34,000 in older shares Nathan has already accumulated.

"He should only need to sell about $4,300 ... for the initial three months that he does this," Tan said.

"Furthermore, Nathan can take advantage of selling his older Microsoft ESPP shares at the lower, long-term capital gains rate."

Pumping up the 401(k)

Another move that may reduce Nathan's take-home pay, but help in the long run, is Tan's advice that Nathan contribute more to his Microsoft 401(k).

Nathan has been diverting 6 percent — or about $6,500 — of his annual pay to his 401(k).

Microsoft matches 50 cents to every dollar that an employee contributes up to the first 6 percent.

At Nathan's age, Tan said he could actually be contributing up to the maximum of $16,500 — an action that would put the Oranas on a much more secure track for a successful retirement.

"In a lot of people's minds, they'll put in whatever the company is matching, but they can put in a lot more," Tan said.

"The strange thing is, people always save that 6 percent and then they spend everything else," Tan said.

While the Oronas' aren't necessarily overspending, Tan said, what comes across is how much they really give away.

"He put $6,500 in his 401(k) this year, but they gave away $12,000," Tan said. "So if you think about it as a percentage of what they are able to save, they're saving a third and giving two-thirds away. It's very generous."

Tan said the Oronas are aware that their philanthropy really affects their ability to save and determines when they can retire.

"It's part of their core value system and that's important — people have to do what's important to them," Tan said. "That's why all these little things that they can do — taking full advantage of the ESPP and the 401(k) — are also important."

Balancing the portfolio

Within Nathan's 401(k), which has a balance of about $97,000, Tan's analysis found an overall mix of 80 percent stocks and 20 percent bonds.

While Tan said that's a reasonable balance for their time frame and risk tolerance, the assets are not as diversified as they should be.

"A lot of people just look at what funds have been doing the best the last few years and pick those for their 401(k)s," Tan said. "Almost every selection the Microsoft 401(k) program has covers one asset class. Basically, if you just chose one selection from each asset class, you've covered the whole area, but (the Oronas) had very few selections."

Tan helped them put together a more balanced portfolio, which he said should be monitored at least once a year to rebalance or move funds around according to the economic climate.

Another of the couple's goals was to start saving for college for their sons, who are 7 and 5. Tan said the cost of tuition, room and board at a public university now is about $22,000 a year.

Using this figure as a base and assuming it would increase by 5 percent per year, Tan calculated that the couple would need to save $870 a month for the 7-year-old and $740 a month for the 5-year-old to completely cover their college tuition, room and board.

Though the amounts are significant, Tan told the couple they can certainly start with lower amounts and increase the savings as their income goes up.

He also suggested Nathan purchase additional life insurance outside of the $546,000 coverage he has through work — a low-cost, 20-year term policy for $250,000 more in coverage — and stressed the importance of the Oronas having a will done so there is no ambiguity about who will look after their children or who will be in charge of the finances if something were to happen to them.

Month by month

Nathan and Joy said they've made a chart of all of Tan's recommendations, assigning each task a month in which to accomplish it.

"For us, the big pieces were how to manage our 401(k) better, a better way to make use of the ESPP benefit and the education for the kids," Nathan said.

Seeing how much their goal to further boost their charitable donations — as their income increases — affects their retirement age was a big eye-opener for Joy.

But she said it won't change their philanthropy, especially knowing that she can go back to work if she needs to."

"(Tan) kept saying to us, 'You guys are very generous; you need to make sure you take care of yourselves too,' " Joy said.

"For us, we've realized that it's a gamble we're willing to take to live by that life value."

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