Eliminating credit card debt can be a difficult task, especially with high interest rates and large monthly payments barely making a dent. This week, we look at a single mother preparing for her son’s college expenses and positioning herself financially as best as she can.
THE SITUATION
Kelly, 46, lives in Denver with her 13-year-old son, Mark. She works full time as a firefighter, earning $83,000 annually. Prior to this position, she had a few bouts of unemployment resulting in $30,239 in credit card debt. Their home is worth $160,000, and she owes an additional $92,000 on the mortgage. Kelly owes $12,017 for a home equity line of credit, or HELOC. She also has $158,086 in her 401(k), and she contributes 5 percent every paycheck while her employer contributes 10 percent.
Since Mark was a toddler, Kelly has been financially responsible for the two of them and she has made his future an important focus. Kelly has invested $12,661 in a 529 education savings account to help with school expenses. Mark is extremely bright and his potential for scholarships is very promising. He is also hoping to test out of several prerequisites landing him sophomore status during his first year at an in-state university. Kelly also has $492,000 in life insurance benefits between three different policies to protect him in the event something should happen to her.
Several years ago, Kelly attended a seminar Pam led about finances. Kelly was excited for the opportunity to reconnect through What’s the Plan?
The biggest concern for Kelly was: “How do I get out from under this debt?” Kelly researched several avenues to paying this off but needed an outside perspective to evaluate her financial situation and is hoping to create a roadmap for debt elimination with Pam. When Kelly’s parents pass, she knows she will inherit a “chunk of change,” but she’s unsure how much money it will be and does not want to create a budget including these funds.
RECOMMENDATIONS
Credit-card debt is extremely easy to get into and can be a big pain to get back out of. Kelly will need to do further research to decide what option is best for her. One option is to increase her HELOC and pay off all the credit cards. Another option is with a fixed-rate mortgage and leave the second mortgage alone. This would prevent the interest rate from changing in the event we see a rise in interest rates in the future.
She had not originally planned to stay in this home very long, but has no plans to move until after Mark finishes high school. Kelly will need to make an educated decision on which route fits her family best — and then cut up those credit cards.
In our discussion, the topic of powers of attorneys and wills arose, and Kelly’s and her parents’ documents are not up to date. Her parents’ health has been diminishing over the past few years and she should make it a priority to get all of their documents up to date so she can manage their affairs as their health declines.
Kelly has so much to be proud of and is doing a great job setting herself up for success.
Pam Dumonceau has 22 years of experience and is the principal of Consistent Values, a registered investment advisory firm in Greenwood Village. What’s the Plan? is not a substitute for financial planning or dedicated professional advice.
What’s your plan?
Ask Pam what you should do at whatstheplan@ . Names and identifying information are changed to protect confidentiality.
What’s the Plan? By Pam Dumonceau
