“It is more blessed to give than to receive.” But there’s something to be said for keeping that philosophy in perspective. Just ask Kimberly Burney.
“I’m always rescuing people,” says Burney, 45. She has a big heart, but her generosity has led to a cardiac arrest of sorts for her finances. And now she’s kicking herself. “I’ve made some bad decisions,” says the single mother who resides in Waldorf, Maryland.
Last year, she footed the $11,000 bill for a seven-day Royal Caribbean cruise that she took with her sister and sons, Jovan, 14, and Antoine, 23. She also recently borrowed $12,000 from her 401(k), giving $4,000 of it to her sister for a car down payment and using the rest for home improvements. The list of “good deeds” is extensive, and she suspects that the damage amounts to at least $30,000. “I have to make better choices,” says Burney. “I can’t blow it–I’ve come too far.”
Indeed she has. Though she now earns an income of more than $95,000–a combination of her salary as a human resources specialist with the federal government and her pension from the Army–her financial picture wasn’t always so rosy. Burney filed chapter 13 bankruptcy in 1999. The story is complicated but, simply put, while Burney was serving overseas in the Army, she says her second husband ran up numerous bills. The financial struggle led to the couple’s divorce in 1998, after which creditors came after her; she filed bankruptcy a year later. Burney would eventually pay $18,000, or half of the marital debt, through the bankruptcy.
Burney stayed in the Army until 2002, when she retired after 20 years of service. But she began her financial recovery long before leaving. She and her younger son moved to a cheap, pest-infested apartment in a not-so-nice neighborhood in Temple Hills, Maryland, enabling her to save $10,000 in military housing allowance in just nine months. What’s more, in an effort to raise her credit score–which had fallen below 600 after the bankruptcy–Burney wrote creditors, telling them her story and explaining how her divorce was a factor that led to the bankruptcy.
Eventually Burney found a loan officer who was willing to work with her; she drafted letters to lenders and wound up getting preapproved for a $200,000 mortgage. She says that though her credit score was still low, the letters helped and she was able to get a 5.5% 30-year adjustable rate mortgage. In 2003, Burney bought a three-bedroom, three-bath home for $179,000.
Burney’s biggest debts are her mortgage–which she has since refinanced to secure a 30-year fixed-rate loan of $230,000 at 6.75%–and a $20,000 personal line of credit. Complicating matters, her ex-husband is in arrears on his court-ordered child support payments.
“It was tough for me after the bankruptcy. I went from being broke to having money. I went a little crazy,” she admits. Furthermore, “After two divorces, I was feeling sorry for myself. I bought a BMW, which was really just a Band-Aid. However, I did pay it off when I refinanced my mortgage.”
Now, she’s determined to keep moving forward. Burney wants to pay off her remaining debt, save and invest more, and see if she can pay off her mortgage in 15 years, instead of 30. She’s determined to learn to say “no,” to herself and to others. The spending party is officially over.
The Advice
Danny Freeman, a financial adviser with Darda Wealth Management in Winston-Salem, North Carolina, says Burney’s experience offers many lessons because her history includes bankruptcy, borrowing against a 401(k), and rolling consumer debt into mortgage debt. Here’s what Freeman suggests:
Make
up for mistakes. “Rolling a car purchase into a mortgage can be a very expensive transaction,” says Freeman. “Essentially, since her refinanced mortgage has a term of 30 years, it also means that she is financing that car for 30 years.” Burney is already making biweekly payments (26 each year, rather than 12), on her mortgage, so Freeman recommends that she increase each payment by $327 for the next five years–the increase will wipe out the car portion of her mortgage and leave her with an estimated balance of about $150,000. This should save her at least $15,000 in interest, over the next 15 years, says Freeman.The $12,000 she took out of her 401(k) was also pricey. “Taking out the loan potentially cost her about $971 in earnings so far,” says Freeman. Add the loss of any future compounding of earnings, and this is the cost that many don’t consider when borrowing against their 401(k), he adds.
Concentrate on debt. Burney has a good start on achieving her goal of paying off her mortgage in 15 years, instead of 30. By making biweekly payments she will reduce her term to about 24 years , representing potential interest savings of more than $73,000. With increases in her pay and other adjustments in her financial situation, Burney should be able to kiss her mortgage goodbye in 15 years, Freeman believes.
Rethink savings strategies. Currently, Burney is putting $100 a month into savings bonds that pay just 3.6% annually. Freeman suggests targeting higher returns by investing in a mutual fund. He likes Excelsior Value & Restructuring (UMBIX), a large-cap value fund that focuses on companies believed to be undervalued but that offer significant price appreciation potential due to restructuring, merger, or buyout. Last year, the fund posted returns of 14.9%.
What’s more, he says Burney should use the $2,000 contest winnings to open a brokerage account and build a portfolio of dividend-paying stocks. To start, he recommends National Retail Properties (NNN), a real estate investment trust that acquires, owns, manages, and develops retail properties in the U.S., which he believes is undervalued. It has a current dividend yield of 5.8%. Another stock that he believes is undervalued is AT&T (T). It has excellent financials and a 3.6% dividend yield. Says Freeman, “With additional investments and her home paid off early, she will have enough assets to have a rock-solid retirement.”