Five years ago, Jai and Peggy Hill af Montgomery, Alabama, embarked on a journey to reduce their debt. A financial advisor told them that in order to pay off their debt faster, they should pay more than the minimum due on their monthly bills. This way, more of the payment would go toward the principal balance and not just toward the interest. The Hills tackled their smallest balances first. As each debt was paid off, they turned their financial attention toward the next creditor.
“As we paid down our debts, we were coming up with an extra $2,000 to $3,000 every month,” says Jai, an assistant principal at Greenville High School. Too often people make the mistake of paying off a creditor only to contribute more to their “discretionary income” spending — in other words, running out to buy the latest gadget or a new pair of Manolo Blahnik shoes!
The Hills, however, stuck to their game plan and managed to eliminate $40,000 in arrears, including two car notes and about seven credit card balances. “Now we are just down to the mortgage ($94,000) and my wife’s student loans ($12,500),” says Jai, a second-year doctorate student. The Hills, married for six years, know that using credit wisely is a key part of principle No. 5 of the BLACK ENTERPRISE Declaration of Financial Empowerment (DOFE): to engage in sound budget, credit, and tax management practices.
Unlike many couples who go into marriage ill prepared to manage their household income, the Hills were blessed to have received marriage counseling through their church. “We each know every [dollar] coming in and going out of the house,” says Peggy, a Social Security claims representative. The Hills’ goal is to become totally debt-free.
Jai, 30, and Peggy, 28, are great savers and conservative spenders, which bodes well for the young couple says Cheryl Creuzot, president and CEO of Houston-based Wealth Development Strategies L.P. However, Jai is a little too debt-averse, Creuzot explains. There is both bad debt and good debt. Huge credit card balances carrying high interest rates are an example of the former, whereas a mortgage on property that you own applies to the latter, she says. Instead of accelerating his low-interest mortgage payments, Jai needs to focus on beefing up the family’s cash reserve. Once you subtract their annual household expenses from their household income, the Hills have a $21,161 surplus. BE had the Hills work with Creuzot to formulate a financial plan that fits their circumstances. She offers the following advice:
STOP ACCELERATED MORTGAGE PAYMENTS
Even if the Hills were to refinance their mortgage at a lower rate (6% vs. 7%), they get to write off the interest paid on their home on their tax returns. The after-tax interest rate would actually be 4%. Instead of paying more toward a debt that is only costing about 4%, the Hills should take the money they would have used to increase their mortgage payments and invest it into a vehicle that has more growth potential and possibly greater tax