Overcoming Life’s Debt

With $158,000 in debt outside their mortgage, Kenric and Christina Brooks of Charlotte, North Carolina, feel they are in a constant state of struggle. “Our No. 1 mission is to get the debt gone,” says Kenric, 33. “We have a great life, we vacation, we pay our bills on time, and we have jobs. But we feel like we are struggling and we want relief,” further explains wife Christina, 30.

Over their 10 years of marriage, the Brookses have had three children (ages 18 months, 6, and 9), purchased two homes and two cars, and have earned three degrees between the two of them. But the bill for most of this lifestyle is still outstanding to creditors. The couple owes $101,000 in student loan debt, nearly $14,000 in auto loans, $3,000 in credit card debt, and $40,000 in a home equity line of credit (HELOC).

“We are in our early 30s and our life is what it is going to be–we have three children and a dog” says Christina. “We just want to free up some of the money that goes to bills so we can live our life normally,”says Kenric.

In addition to the couple’s primary mortgage of $116,000, the couple also purchased a rental property in March with a mortgage of $26,000. But outside of the HELOC, the couple is not as concerned about the mortgage debt because they see their homes as assets that will appreciate.

The couple hopes to sell their primary home, which they purchased in 2006 for $191,000, and buy their dream house in the next couple of years. They also want to better prepare for retirement and save funds for their children’s education. “My oldest son is 9 and there’s not much longer to save for his education,” Christina says, noting that they have only about $1,000 in his 529 plan. The couple has saved about $500 for their 6-year-old and nothing to date for the 18-month-old.

Although saving for a down payment on the family’s dream home is a priority for Christina, retirement planning is key for Kenric. When asked about retirement, Christina quips “It’s not in my focus. I’m just hoping and praying I’m still married to Kenric and can live off his retirement.” She has just under $7,000 in her 403(b) at Winthrop University, where she has been an archeology professor for the last three years.

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Fortunately, Kenric has been diligently contributing 6% of his salary to his company’s 401(k), but he previously borrowed from it to pay down credit card debt. He borrowed $13,400 and still owes $6,500.  Kenric has amassed about $47,000 in his 401(k) at Verizon Wireless, where he’s a store manager.

The Advice
Black Enterprise and Merrill Lynch financial adviser Lisa James devised a plan to help the Brooks family get their priorities right and pay down their debt.

Delay new home purchase. To truly be prepared for the future, the Brookses have to reduce their debt and increase their long-term savings, so James advises that they don’t consider a new home anytime soon. Instead, they need to focus on paying off student loans and car notes, and building retirement income.

Earmark future earnings. The couple’s base household income is $133,000. But James notes that Christina has additional earning potential from archeology research grants–Christina has a grant paying out this year for $23,000; next year Christina estimates she will probably write another for $15,000. “If they split 50% of this income to debt reduction and the other 50% to savings, in 10 years, they can pay off their approximately $158,000 debt,” estimates James.

Pay off debts without tax benefits first. “I suggest they contact their tax professional to identify items on which they can and cannot write off interest,” says James. First, pay off the car loans. The couple were saving $1,000 a month toward their emergency fund. James suggests the couple save just $500 a month and put the other $500 toward the car notes right now, adding any bonuses or extra money toward the cars to pay them down within a year.

Contribute to their IRA. Retirement must become part of Christina’s focus. Both Kenric and Christina’s employers match up

to 6%, so James advises they both contribute at least 6% to their retirement plans. In addition, James advises that the couple take part of their 50% savings from Christina’s grant income and contribute to Christina’s existing IRA every year for the next 10 years. “When I ran the wealth simulation for them, it showed that if they stick to their income projections and their savings projections, they will be able to draw down over $130,000 a year between retirements, investments, and Social Security,” says James.

Increase 529 plan savings. James advises they contribute part of their 50% savings from Christina’s additional income as follows: $464 per month for the 9-year-old; $342 per month for the 6-year-old, and $228 per month for the 18-month-old.

Set up a wealth transfer strategy. “Trusts and wills should be very important to this family because they have three small children,” advises James. She says the couple should look at what they owe in total debt, including the mortgages, and seek to get an insurance policy that would cover that expense if one of them dies.

James advises the couple begin their 50/50 savings/debt reduction split with the contest earnings. “They should put $1,000 toward debt reduction and $1,000 toward savings,” she says. Regarding the Brookses overall plans for reducing debt, James says the Brooks will need discipline. “These are some large numbers. They really have to stick to what they project they are going to do with their income.”