While on their honeymoon 12 years ago, Tamela and Omar Martin mapped out their lives together. They talked openly about their goals, just as they had done as college sweethearts while attending Chicago’s Loyola University. “On our honeymoon we talked about what we both saw for the future,†recalls Tamela. After years of marriage, however, the Martins aren’t seeing eye-to-eye when it comes to their finances.
These days, the Martins (whose family has grown to include three children, Nathaniel, 9; Tariel, 7; and, Tyler, 4), sit down twice a month to discuss bills, payments, and future plans, but they are butting heads more than usual “like what we spend the money on,†the two agree. There also is an issue concerning paying bills. Tamela is strict about paying on time, while Omar is a little more carefree. When it comes to spending money, Tamela accuses Omar of frivolous buying. Meanwhile, Omar says the same about Tamela. A quick tally of the Martins’ savings and debt suggests they’re both right.
The Martins’ money habits have weakened the family’s financial health. They have high levels of debt and low savings. Between the two, there is $1,000 in their bank accounts. They are saddled with about $45,000 in credit card balances, student loans, and other unsecured consumer debt. ($23,000 of that belongs to Tamela and $22,000 to Omar). The Martins explain that a portion of these debts are the result of home repairs and medical costs for their daughter Tariel, who is a special needs child. In addition, they have two properties with mortgages totaling $282,640.
On paper the Martins, who are both 38, appear to have sufficient income to cover all of their debts and living expenses. Tamela is a manager for a government agency. Omar is a quality assurance auditor at a pharmaceutical company. Their total household income, including revenue from their rental property is $161,800. The Martins’ main issue: monthly debt payments of $5,618 are eating away 67% of their $8,370 net income. Factor in food costs and other household expenses, and it’s easy to see how they are living beyond their means.
To be fair, the Martins are not unlike many married couples struggling with enormous debt and learning to manage their finances as a cohesive unit. More than 40% of U.S. families spend more than they earn. According to the Federal Reserve, U.S. household debt, including mortgages and credit-card balances, stands at $11.7 trillion.
(Continued on next page)
It’s obvious to the Martins that they need to change. According to financial experts, money issues are the source of most disputes among married couples. “There is a commonly held perception that we don’t talk about money; actually, we talk about it all the time–we are just having the wrong conversation,†says Jacquette M. Timmons, author of Financial Intimacy: How to Create a Healthy Relationship With Your Money and Your Mate
(Chicago Review Press; $14.95). Timmons, who is also the president of Sterling Financial Management, believes couples like the Martins need to have proactive discussions and plan actionable steps. “They have to see and make the connection between how their day-to-day actions affect the family’s long-term financial goals,†she adds.Timmons suggests that the Martins not view the adjustments as “giving up†something, but more as a reallocation of their money.
The Advice
The Martins must agree on their financial priorities, reduce their spending, and focus on debt reduction and elimination. black enterprise formulated some steps to help the couple get back on track.
– Cut up your credit cards, create a budget, and stick to it. Many of their debts are carrying high interest rates as a result of late payments and poor credit history. Currently, the Martins have 17 accounts with rates as high as 29.99%. It is imperative that they work hard to pay their bills on time to help improve their credit scores, says Danny Freeman, principal adviser with Darda Financial Services in Winston-Salem, North Carolina. In doing so, the Martins may eventually get the opportunity to refinance their mortgage or shift balances to debt obligations that have lower rates.
– Build an emergency fund. Put the $2,000 contest winnings into a one-year
– Pay off debts in four years. Freeman says the Martins can eliminate all debt (outside of mortgages) in four years. Here’s how: The Martins should continue making minimum required payments but find $237 each month in the budget to pay off the Roamans and Lane Bryant accounts, which have the highest interest rates. This will free up another $40 per month. From there, apply $237 per month for three months to pay off the next highest interest rate: Fingerhut. In 120 days, the couple will have eliminated three accounts with interest rates in excess of 24%. At that point, the Martins should be able to apply $600 a month toward their Beneficial credit card. They can pay this card off in 21 months. Then, take that $600 plus $77 minimum
required for Wells Fargo, and pay it off in four months. Later, apply that $677 plus another $70 to Capital One, paying it off in two months. Take the $747 previously paid on Capital One and apply it to the Home Depot account, paying it off in one month. Finally, take the roughly $805 that is now freed up by eliminating the aforementioned debts–which will take 28 months in total–and apply that money to pay off the remaining consumer debts.– Focus on retirement savings. If they stick to the prescribed debt plan over the next four years, the Martins can free up $1,389 in monthly cash flow to put toward their children’s education. In four years, the couple can apply $689 per month toward the 529 plans and a regular taxable investment account in their names. If the boys end up qualifying for scholarships and financial aid they can shift these funds to be used for their retirement. Assuming a retirement age of 62, the Martins should put the remaining $700 per month in Roth IRAs. Also, contribute to their 401(k) plans at work at a level high enough to get any company match. The Martins should be able to accumulate about $493,606, assuming an 8% annual return rate. This will generate a monthly income of $1,851 to $2,468 in addition to any amounts received from Social Security.