From Debt Do You Part

Aleas Hammett and her husband, David, are beginning the long, hard process of eliminating the debt that clouds their future

In doing so, they would save $153 a month on their original mortgage payment of $1,495. They would, however, have to come up with about $2,000 to $3,000 to pay for closing on the refinanced mortgage loan.

RENEGOTIATE DEBT CONSOLIDATION LOAN
In addition to the $70,000 consolidated loan at 12.75% interest, the couple has $10,000 in credit card debt at 11.5%. They should renegotiate the loan with their credit union to get a lower rate, 9% or less, and include the credit card balance in order to eliminate that payment. Getting a longer term on the loans would reduce their monthly payment amount, but they can opt to pay more each month to help accelerate the pay off of that debt.

SET UP COLLEGE SAVINGS FUNDS
Aleas should discontinue investing $50 a month in Series E Savings Bonds and discontinue investing $50 a month in a savings account earning 3% interest. She should instead put that money, along with the $3,000 already accumulated, into an automatic investment plan as part of a Uniform Gift to Minors custodial account or 529 College Savings Plan in 7-year-old Julian’s name. In addition, they should begin contributing $50 a month to a growth mutual fund through the 529 College Savings Plan, in 2-year-old Alexander’s name. Since financial markets are at historic lows, she should invest in a growth mutual fund or unit investment trust (UIT), which operates like a mutual fund, but purchases a fixed portfolio of diverse securities. UITs are held until maturity (anywhere from one to five years) and they offer protection against short-term capital gains. Generally they require a minimum investment of $1,000.

CONTRIBUTE MORE TO EMPLOYEE PLANS
Aleas needs to maximize her 401(k) account by contributing 15% of her salary instead of 6%. As soon as the Air Force makes available thrift savings plans, David should contribute a percentage of his pay–whatever is the maximum allowed–to that tax-deferred program.

INVEST CONTEST WINNINGS IN ROTH IRAS
The couple has saved $200 each in two traditional IRAs. Because their incomes are above the limits of a traditional IRA, they should convert those to Roth IRAs (his and hers), and place $1,000 from the BE contest winnings into each account. The Roth IRA allows them tax-free growth potential and tax-free withdrawals of earnings. With a Roth IRA, the modified adjusted gross income for joint filers is $150,000 as opposed to the $53,000 limit on traditional IRAs. With an income of $108,000, they don’t currently qualify for a tax-deductible contribution on their traditional IRA.

HOUSEHOLD INCOME
Gross Income $108,000
ASSETS
Savings $2,500
IRAs 400
Bonds 3,000
401(k) 6,000
Investment Club
(%) of total assets)
4.000
Total $15,900
LIABILITIES
Mortgage $187,000
Consolidated loan 70,000
Credit card balance 10,000
Total $267,000
Net Worth - $251,100
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