a lot of subsidies (e.g., living on base rent free). Their problem is impulsive spending and a lack of discipline in using credit, says Michael Smith, a certified financial planner and president/CEO of ProFocus Inc. in Phoenix. BLACK ENTERPRISE had the Parkses consult with Smith to help the couple realize their three-year financial plan. The following are his recommendations:
ADJUST TAX WITHHOLDING
James is not claiming any exemptions, not even himself, on his income tax returns. He should increase his personal exemptions from 0 to 3 (which would include mortgage interest and property taxes on the house in Georgia). This will give him a $1,125 tax savings. That money, Smith says, should be applied toward the couple’s debt reduction. Since James has a $350 child support obligation to a daughter from a previous relationship, the couple should continue to file separately. Doing so allows Beverly to receive a $3,900 tax income credit for filing single head of household.
ACCELERATE DEBT PAYMENTS
The Parkses have a deferred payment plan (revolving line of credit) through the military, from which they have borrowed $10,500. They also have about $11,200 in credit card debts between them. Smith says the couple should stop using the line of credit (at 1% interest) and credit cards (averaging 9.5% interest) and accelerate their debt payments, starting with paying off the lowest balance first ($500). The Parkses final overpayment installment to the government will be May 2003. Afterwards, they should allocate that same amount of money each month toward reducing their existing debts.
REFINANCE CAR LOANS
A major expense for the Parkses is the $889 monthly car notes. James has $12,000 (at 9% interest) left to pay on his 1998 Ford Expedition and Beverly has $12,000 (at 8.75% interest) to pay off on her 1999 Maxima. Smith suggests the couple use the credit union on the military base to refinance the automobiles and amortize them over 60 months at 7%, which would reduce the payments to a total of $554 for the two vehicles.
CONSOLIDATE LIFE INSURANCE
The Parkses are currently paying $135 a month in life insurance policies: universal life, military SBLI (in the event of James’ death during duty), and mortgage insurance. Smith suggests James purchase a 20-year term policy for $500,000. This will cut his insurance payment down to about $65 a month.
CONTRIBUTE TO ROTH IRAS
With the money they save in consolidating their insurance policies, refinancing their car loans, and increasing their rental income, the couple should take the difference and contribute to Roth IRAs for the two of them. They can probably start by investing $120 between the two accounts then increase the amount as they pay down debt. Because of his government pension, James does not qualify for a traditional IRA. Beverly should also continue to contribute 3% of her salary to the hospital’s thrift savings plan. Smith suggests they split the $2,000 contest winnings between their Roth IRAs and invest in the Royce Total Return Mutual Fund (RYTRX).
START 529 COLLEGE SAVINGS PLANS
Smith suggests the Parkses put away $50 a month