year for his post-graduate education, thanks to his employer’s tuition assistance program. “Once I have my master’s,” he says, “I’ll have better career opportunities. I’ll be eligible for promotions, and I might be able to move into management.”
In the long run, obtaining a master’s degree will be a step toward a professional engineering license for Henri. “With that license,” he says, “I’ll be on track toward my ultimate goals. I’d like to become a consultant or start a manufacturing company.”
Such long-term goals are commendable, but the Hammonds need to build a firm foundation in the short-term, says Cheryl Creuzot, president and CEO of Wealth Development Strategies L.P. in Houston. “Counting the payments they’re making on their credit cards, the Hammonds are spending more than their after-tax income,” says Creuzot. “They need a realistic budget, and they need to take certain steps to get their finances on a firm footing.”
Pay Down The Debt
Of the $2,000 cash prize from BE, Creuzot suggest the Hammonds use $1,000 to reduce the balance of the credit card with the highest interest rate. “If they can sell their investment property, that money can be used to pay down those balances, too,” Creuzot says.
“Some of their credit cards have interest rates [of] over 20%. Therefore, paying off those debts is the same as earning 20% plus, after-tax, risk-free. I don’t think they can count on that kind of a return from their real estate, so they might as well sell it.”
Trim The Budget
The Hammonds currently spend more than $90,000 per year, which is more than $7,500 per month. “They’re not really living extravagantly,” says Creuzot. “Most of their expenses are in housing, transportation, education, and church contributions. Still, by spending a little less here and there, I think they could save $175 per month. For example, they might cut down on long-distance phone calls.”
Put Henri’s 401(k) On Hold
Ordinarily, contributing to a 401(k) plan makes sense. “For now, though, they just can’t afford it,” says Creuzot. She estimates that Henri’s take-home pay would increase by about $250 per month if he stopped his 401(k) contributions.
“By taking that $250 per month, along with another $175 per month in savings, they could have an additional $425 per month to pay down their credit card balances,” Creuzot says. “I project those debts could be retired by the end of 2003.”
Put The Plastic Away
In the meantime, the Hammonds should live on a “cash basis,” Creuzot says. They should not put new charges on their cards while paying down the current balances and they should call up to cancel the cards once they are paid off (cutting them up is not enough). They only need one major credit card (mastercard or Visa) or charge card (e.g. American Express) for emergencies.
Prepare For A Rainy Day
If $1,000 of the $2,000 cash prize from BE goes toward paying down debt, the other $1,000 can go into a reserve fund. “You need something in case of an emergency,” Creuzot says, “especially if you have young