When a couple says “i do” on their wedding day, it’s not just two hearts that become one but also two household finances. In September, Eric E. Worley and his fiancée, Kimberly Palmer, will walk down the aisle, taking a major step in life — marriage. The Philadelphia couple doesn’t want to wait long after their nuptials to discuss money matters. As unromantic as the topic may seem, they are reviewing their financial situations now.
Together, the couple has a household income of $90,000. He grosses $55,000 a year working two jobs: a high-school counselor and a case manager for a juvenile home detention program. Her salary as a director of a daycare center is $35,000. During his college days, Worley managed to run up $15,000 in credit card debt mostly from living expenses, books, and car repairs. Looking to consolidate his debts into one payment, he took out a loan from a credit union. Since graduating in 1998 he has whittled down that debt to about $7,000. Meanwhile, he owes $8,000 in student loans, $3,000 on his car note, and $2,500 on an American Express Card. To his credit, last year Worley purchased the $64,000, three-bedroom home the couple lives in along with Palmer’s 9-year-old daughter, Diannah. While she has no credit card or personal debts, Palmer does have an outstanding $50,000 balance in undergraduate and graduate school loans.
The upcoming wedding is eating into the couple’s savings, making it a challenge to put aside money for the future. Even though her parents plan to chip in about half of the $10,000 bill for the wedding and reception, there are still the costs of the rings and the Jamaica honeymoon they’re fantasizing about — totaling another $5,000. However, they have less than $3,000 combined in their checking and savings accounts; they also have a little less than $8,000 total in their retirement accounts.
Worley, 27, and Palmer, 28, have developed their own financial styles and money habits over the years. Neither are big spenders. Worley, a Philadelphia 76ers fanatic, spends more money on social outings than Palmer, who might be tempted to shop once in awhile. Since the duo wants the marriage to start off on the right foot, they have set some priorities: pay off debt; save for the short-term; and invest for the long haul.
They are optimistic about reaching their financial goals. “I’ve learned hard lessons from my experience with credit cards. I don’t want to repeat my mistakes,” says Worley.
THE ADVICE
Worley and Palmer have lived together for nearly two years,
“Kim and Eric are to be applauded for already having some investments in place. Many people their age haven’t done even as much as they have,” says Clark. The following are Clark’s recommendations:
CONSOLIDATE DEBT
Clark says Worley should consider getting a home equity loan to pay off his existing debts. “Since their goal is to get out of debt, if they consolidate and pay less interest, they’ll get out sooner,” Clark explains. Assuming there is home appreciation, he could get a loan from 80% to 125% of the loan-to-value ratio, which is what lenders use to determine your home equity line. With loan rates in the neighborhood of 4.5% to 6%, now is a good time to strike. Clark adds that the other advantage of consolidating with a home equity loan is that “he could get a tax deduction for the interest and reduce monthly payments by half, if not more.” If he can’t do that, the priority should be knocking off the existing consolidation loan carrying a 16% interest rate, the 12% car loan, and then the 14% charge card.
CONSIDER REFINANCING THE MORTGAGE
If he hasn’t accumulated enough equity in his home, another option is to refinance his mortgage, which is $600 per month at 7% interest. A rate of 5.78% to 6% is quite attainable for a 30-year fixed mortgage. Even at 6%, he could save around $50 a month on the mortgage. Clark advises against refinancing and taking cash out of the home to pay off debts, because that would increase his mortgage by another $25,000.
STEP UP SAVINGS AND INVESTMENTS
The $3,000 in checking and savings accounts won’t last long if the couple faces an emergency. In fact, they should have at least three months’ worth of living expenses in a money market. His Roth IRA should be invested in growth mutual funds (midcaps and large caps). At age 27, says Clark, a Roth provides him with a long-time frame for his money to grow tax-free. As for the $2,000 contest winnings, put that money into either his or her IRA. Or, they could open a Traditional IRA. If they were in the 28% tax bracket, a $2,000 contribution would produce a $560 refund at tax time, which could then be used toward their emergency fund.
REVISIT LIFE INSURANCE POLICY
Worley should eliminate the $50 a month he pays on a $150,000 variable life insurance policy. Instead, Palmer can get $250,000 in term insurance for around $17 a month. Again, the savings could be applied toward cash reserves or investments. Clark notes that debts incurred before the marriage generally have no bearing on the spouse (although your spouse’s financial behavior definitely can impact your credit rating if he or she doesn’t pay bills promptly). Of course, in the event of someone’s death, the spouse would assume that person’s liabilities. This highlights the importance of having adequate life insurance if you want to be protected against your spouse’s previous debts.
REASSESS HONEYMOON
Assuming the honeymoon expenses are substantial, “they should evaluate where they are debt-wise a couple of months before the wedding. If they find they haven’t been able to pay down their debt as much as they would have liked, they should think twice about going on a trip for now,” says Clark. Once they are done saving for the wedding, Worley estimates that he and Palmer could begin putting aside $500 a month or more on a regular basis.
Winner No. 39 EricWorley
Financial Snapshot:
| HOUSEHOLD INCOME | |
| Gross Income | $90,000 |
| ASSETS | |
| Other (Eric’s car, jewelry, household furnishings, etc.) | 20,000 |
| Joint Savings Account | 1,000 |
| Eric’s Savings Account | 1,000 |
| Joint Checking Account | 950 |
| Kimberly’s Roth IRA | 2,000 |
| Eric’s Roth IRA | 2,500 |
| Kimberly’s 403(b) Account | 2,500 |
| Eric’s Stock Investment | 300 |
| Kimberly’s Stock Investment | 300 |
| Total | $94,550 |
| LIABILITIES | |
| Mortgage | $60,000 |
| Kimberly’s Student Loans | 50,000 |
| Eric’s Student Loans | 8,000 |
| Eric’s Credit Card | 2,500 |
| Eric’s Car | 3,000 |
| Eric’s Consolidated Loan | 7,000 |
| Total | $130,500 |
| Net Worth | -$35,950 |