By February 2011, they started eliminating credit cards with the smallest balance while continuing to pay the minimum on other debts. Once paid, they applied that money to the next debt and continued the process until all outstanding bills had been paid off–”the snowball plan†advised by Ramsey. The couple says the “quick wins†gave them a sense of accomplishment and the motivation to press forward.
The Brookses first tackled consumer debt by taking $5,000 in savings to pay off their four store card balances. In March, they paid almost half of their Discover Card balance; their tax refunds wiped out the remaining balance in April.
They applied the leftover from their refund to Jammie’s student loan. After making two payments in May, the couple was able to rid themselves of that debt.
Next were their car loans. Cornell used a home equity line of credit to pay off the first car in May 2011. The HELOC allowed them to lower monthly payments and interest rates from $378 per month at 7.24% to $163 per month at 4%. After five payments they were able to fully repay the line of credit. They started paying the debt on their second car using the same method in January 2012 and paid that vehicle off in March of this year. Once all debts had been eliminated, they applied the additional money to their emergency fund with a goal of saving $15,000 by this June. They currently have $7,000 in that account. Now debt free, they realize there are other areas that require their focus: retirement savings, financial education, insurance needs, and financing their children’s education.
THE ADVICE
Black Enterprise and Chris Long, registered financial adviser and CFP of Long Financial Planning in Chicago, helped the couple devise a plan.
Emergency fund: Long recommends they use the $2,000 from the Financial Fitness contest to reach their goal of $15,000. “This will help them cover about eight months of living expenses should anything happen,†he says.
Retirement: Cornell and Jammie both want to retire at 55, which Long says is achievable if they don’t deviate from the plan. Cornell currently has $1,078 in his deferred compensation plan. He also has a PEHP-Z 501(c)(9) plan, which can only be used for healthcare expenses once he retires, with a balance of $4,489. He currently contributes $412 a month to his pension plan, which has a current balance of $15,956. Jammie’s company offers a profit-sharing plan and trust that the company contributes to when it is performing well. She has $4,479 in that account, and $2,687 is vested. Employees are not allowed to contribute to the plan.
They would need to save about $25,000 a year in order to hit their retirement goals,†says Long. “Right now, they are saving $2,500 a month, or $30,000 a year.†Out of that $30,000 a year, Long recommends they both open Roth IRAs and put the maximum $5,000 in each. He then says Cornell should put $7,500 into his deferred comp and $7,500 into a low-cost mutual fund such as Fidelity or Vanguard. He suggests an asset allocation mix of 80% in stocks (domestic and international) and 20% in bonds. “It’s better he split it in two places versus putting everything in his deferred comp plan, because it has more than 1% in fees while a low-cost mutual fund can be as low as .18%. Another potential advantage is that capital gains taxes are at a 15% rate and they’ll be taxed at a lower rate than ordinary income.
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