Organizing A Life Together

Eric Worley and his fiancée, Kimberly Palmer, are crafting common financial goals for their future

Clark. The following are Clark’s recommendations:

CONSOLIDATE DEBT
Clark says Worley should consider getting a home equity loan to pay off his existing debts. “Since their goal is to get out of debt, if they consolidate and pay less interest, they’ll get out sooner,” Clark explains. Assuming there is home appreciation, he could get a loan from 80% to 125% of the loan-to-value ratio, which is what lenders use to determine your home equity line. With loan rates in the neighborhood of 4.5% to 6%, now is a good time to strike. Clark adds that the other advantage of consolidating with a home equity loan is that “he could get a tax deduction for the interest and reduce monthly payments by half, if not more.” If he can’t do that, the priority should be knocking off the existing consolidation loan carrying a 16% interest rate, the 12% car loan, and then the 14% charge card.

CONSIDER REFINANCING THE MORTGAGE
If he hasn’t accumulated enough equity in his home, another option is to refinance his mortgage, which is $600 per month at 7% interest. A rate of 5.78% to 6% is quite attainable for a 30-year fixed mortgage. Even at 6%, he could save around $50 a month on the mortgage. Clark advises against refinancing and taking cash out of the home to pay off debts, because that would increase his mortgage by another $25,000.

STEP UP SAVINGS AND INVESTMENTS
The $3,000 in checking and savings accounts won’t last long if the couple faces an emergency. In fact, they should have at least three months’ worth of living expenses in a money market. His Roth IRA should be invested in growth mutual funds (midcaps and large caps). At age 27, says Clark, a Roth provides him with a long-time frame for his money to grow tax-free. As for the $2,000 contest winnings, put that money into either his or her IRA. Or, they could open a Traditional IRA. If they were in the 28% tax bracket, a $2,000 contribution would produce a $560 refund at tax time, which could then be used toward their emergency fund.

REVISIT LIFE INSURANCE POLICY
Worley should eliminate the $50 a month he pays on a $150,000 variable life insurance policy. Instead, Palmer can get $250,000 in term insurance for around $17 a month. Again, the savings could be applied toward cash reserves or investments. Clark notes that debts incurred before the marriage generally have no bearing on the spouse (although your spouse’s financial behavior definitely can impact your credit rating if he or she doesn’t pay bills promptly). Of course, in the event of someone’s death, the spouse would assume that person’s liabilities. This highlights the importance of having adequate life insurance if you want to be protected against your spouse’s previous debts.

REASSESS HONEYMOON
Assuming the honeymoon expenses are substantial, “they should evaluate where they are debt-wise a couple of months before the wedding. If they find they haven’t been able to pay down their debt as much as they would have liked,

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