The Smiths' goal: Get out of debt
Ken Smith, 33, copier-equipment salesman, and Shelby Smith, 32, a King County prosecuting attorney, of Seattle. Two kids, Sadie, 3, and Cameron, 7. Income: about $110,000 between the two of them, but they carry a debt load of almost $200,000.
WHAT THEY HAVE
Biggest lump of debt: just over $120,000 in student-loan debt that the couple pays $1,200 a month to service. It's mostly Shelby's law-school tab from Seattle University. Ken got a bachelor's in sociology from Washington State University.
Other debts include: $5,000 on their car, $26,000 on credit cards, and $44,400 for the down payment on their home. Making minimum payments on that debt costs them another $1,300 a month. Whew.
One ray of hope: As a prosecutor, Shelby qualifies for a pension though it's a little early to tell how much it will be worth at retirement.
Get out of debt to free up money for retirement savings and college funds for their daughters.
Their planner, Sally McCray of Financial Advisory Partners in Bellevue, gave these tips:
Don't sweat student loans: Though the totals owed seem onerous, because of the low interest rates on these the Smiths should make minimum payments and not worry about paying them off. In general, the couple's investments in their home and their education will pay off in the long run.
Tackle higher-interest debts first: Make eliminating the car, house down-payment and credit-card debt their top priority for a few years, before embarking on serious retirement or college planning. "Sometimes a traveler cannot see the highest peak, due to a hill that is in the way," McCray says. "That's my feeling about their situation."
Tighten the belt: By cutting back on discretionary spending, the couple should be able to put at least an additional $400 a month toward retiring their other debts, growing that amount as they cut back on spending. Within four years, they should be able to retire all their higher-interest debt. To get there, though, they must stop piling on more debt by buying new cars or taking vacations with money they don't have. "Never borrow to purchase a depreciating asset," McCray says.
Debt strategies: Establish minimum amounts to be paid on the debts each month and pay those first, before any other spending. Set target dates for each credit card or loan, by which they will be paid in full. Then, have a celebration of some kind when each piece of debt is paid off.
Remove overdraft protection: Having this protection on their checking account may be doing more harm than good, McCray says, as without the fear of bouncing checks it's easy to lose track of how much is left and let the account drain dry. The Smiths also plan to cut up their debit cards to help manage their checking-account spending.
Mad money: To keep them from feeling too deprived or arguing about spending, McCray's budget for the Smiths includes setting aside a joint $600-a-month budget for spending money that they don't have to account for to each other. Says McCray: "It derails the process if you get focused on little things."
When their mad money's gone, it's no more splurging on gourmet-takeout food or movies until next month.
Map success: Keep a thermometer-style chart to help keep them motivated and on track as they pay off their debt.
"This way we can see our progress," Shelby says.
Double down: Though the Smiths' primary goal is paying down debt, Ken should also increase the amount he puts in his 401(k) to 15 percent of his base salary, from 7 percent in 2005. Because pre-tax dollars can be used to make 401(k) deposits and the deposits reduce taxable income, it costs him only $1,600 more to double the $2,300 he contributed to the plan last year. Bottom line: That extra $1,600 means they'll put away almost $5,600 this year with company matching money, instead of the $3,300 that went into the 401(k) last year.
|New, improved spending plan|
|GROSS MONTHLY INCOME||$9,031|
|Education (if applicable)||$1,400|
Where that savings should go:
|$415 to 401(k), plus at least $400-$600 to additional debt payment|
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