Learning To Live Through A Layoff

The Williams family must make major adjustments to keep their financial dreams within reach

them. Williams’ early assessment is, “Because Mr. Williams is pursuing self-employment, the couple’s current income level does not fit their prior lifestyle. In order for them to live more comfortably at this time, they need to make major economic adjustments.

“Their expenses leave them with little room to breathe. They also aren’t prepared for emergencies.” To give them more cash to work with, she recommends that Diane, whose contribution of 16% of her salary to her 401(k) is laudable, reduce her contributions to 10% until all debts, excluding the mortgage, are paid off.

Make tough cuts and reduce debt. Unfortunately, Diane and Whitney will have to make a major sacrifice: “Temporarily stop private school [for the kids] until debt is eliminated, an emergency fund is established, and Whitney’s business improves with time,” says the financial adviser. The couple should then concentrate on refinancing at least $10,000 of their revolving debt through a new 15-year mortgage. Unfortunately, most of their revolving debt is from department store credit cards, which generally do not negotiate lower interest rates. They should look for a company that will refinance at no more than 5.13%, which is their current interest rate. “This will save them a tremendous amount of interest. Their current mortgage is a 30-year mortgage. The interest on the credit cards range from 19.9% to 27%. However, they should not refinance this debt if they are unable to stop using the credit cards,” adds Williams.

They should also tackle debt by using the $2,000 contest winnings to pay off two debts totaling $1,671. The remainder should be used to establish a money market account that will serve as an emergency fund.

Reallocate savings from old debt. Making these moves will produce monthly savings of roughly $1,300 from discontinued private school; $476 from the lowered 401(k) contribution; $45 from the refinanced mortgage payment; and $226 from paying off debts with contest winnings. The resulting $2,047 a month in savings should then be applied as follows: $1,000 toward the emergency fund, $560 toward high-interest debt, $125 toward a 529 college savings plan, $200 toward an IRA for Whitney, and $162 toward life and disability insurance for Whitney.

Williams says that the couple should build an emergency fund that contains at least four to six months of expenses. As they eliminate debt, they can increase their contributions to the children’s 529 plan.

Improve insurance coverage. Since Diane and Whitney want their family to live well if either of them were to die, they must purchase additional term life insurance to provide 80% of their joint income, repay all debt, pay college expenses, and provide immediate emergency funds. Right now, each has life insurance worth more than $400,000, but they will need additional coverage until their 2-year-old finishes college. Diane should purchase an additional $412,000 and Whitney should purchase an additional $44,000, says Williams.

“Diane should have more because she earns more income at this time. The family relies on her income the most. However, if they want their lifestyle to remain the same,

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