Financial Challenge

Single mom Sophonia Hardaway attempts to balance �competing goals

Hardaway would like to be debt free and considers working full-time to meet that goal. “That would add an extra 20% to my pay for an extra day’s work,” she concedes. “My biggest concern is: am I overzealous about the things I want to do?”

THE ADVICE

Black Enterprise drew up a blueprint for Hardaway to follow:

Put the side business on hold and work full time. The annual $1,500 franchise fee is cutting into Hardaway’s profits. Since her business is grossing only $6,000 a year, that leaves her with just $4,500. Working full time would mean a 20% increase in pay, according to Hardaway. That’s an additional $23,200 a year. This would go a long way toward helping her meet her goals.

Build up cash reserves. Hardaway must attack her financial challenges in the following order: Build an emergency cushion, pay down debt, build retirement savings, and help her daughter with college expenses. Hardaway doesn’t have the cash reserves she’d need to cover unexpected expenses, putting her at risk, says Danny Freeman, principal adviser of Darda Wealth Management in Winston-Salem, North Carolina. She should establish an emergency fund equal to six months of household expenses. Hardaway nets about $7,300 a month and household expenses equal about $6,000, including the money she’s saving for Zoë’s college expenses. So, she can put aside $200 each month toward emergency savings and add it to the $2,000 contest winnings.

Reduce unsecured note and credit card debt. Hardaway has $45,000 in unsecured debt. While the interest rate on the $29,000 note is a very competitive 2.99%, it is nonetheless variable. She needs to aggressively bring that balance down. Instead of making interest-only payments of $74 per month, she should take $150 monthly from the college savings and add it to the $74. To pay off the credit card debt, Hardaway must immediately stop using the card, pay more than the minimum amount due, and pay on time each month.

Readjust retirement portfolio. The balances in her retirement plans are adequate given her age. But she needs to readjust her asset allocation. Because of her steep losses in the market and her general caution, Hardaway has become too conservative. She needs a balanced portfolio: 65% equity (52% U.S. stock and 13% international) and 35% fixed-income. Reallocating the assets will help her realize greater investment gains without increasing her contributions.

Re-evaluate college savings. Hardaway will need about $60,000 to pay for her daughter’s education (in-state tuition, fees, and room and board at a public college, as of 2010). She can actually cut back and still reach that goal by contributing $600 per month and earning 4% per year on average for the next 4 1/2 years, says Freeman. Also, she should factor in options such as scholarships, low-interest student loans, and grants to help foot the bill for Zoë’s education.

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